As maturities of PIBs near, easy-going banking set to take a hit

Analyst says it will result in drop in unrealised capital gains in 2016

KARACHI:

Pakistani banks have had a long, profitable run. But their earnings have less to do with core banking, as a major chunk of their bottom lines originates from their investments in risk-free government securities.

However, their days of easy-going banking seem to be over, as massive maturities of Pakistan Investment Bonds (PIBs) are due in the current year.

Banks have three riskless investment avenues, namely market treasury bills, PIBs and Ijara Sukuk. According to the State Bank of Pakistan (SBP), scheduled banks held 79.9% of the outstanding stock of the three instruments while non-banking entities held the rest of 20.1% stock at the end of February.

Although banks’ PIB holdings are relatively lower than their holdings of the other two instruments in percentage terms, the absolute value representing their investments in PIBs alone was Rs3 trillion at the end of last year. This means PIBs reflected 48% of listed banks’ investments at the end of 2015 as opposed to just 18% two years earlier.

“Banks realised total capital gains of Rs56 billion mainly from PIBs, which were up 85% year on year in 2015. This, coupled with higher net interest income (NII), drove the profitability of listed banks in 2015,” according to Topline Securities analyst Umair Naseer.

Their unrealised gains increased to Rs206 billion at the end of 2015 from Rs121 billion in 2013, he added. The banks started accumulating PIBs after 2013, as the benchmark interest rate has come down around 400 basis points to 6%.

Naseer says Rs1.2 trillion of PIBs are maturing in July. The massive maturity of long-term PIBs will result in a drop in the banks’ unrealised capital gains in 2016, he added.

“Since bond prices converge to their face value near maturity, we expect unrealised gains to go down sharply in 2016, assuming the SBP maintains its policy rate at 6% in the upcoming monetary policy,” Naseer said.

Analysts believe that banks have been choking credit for businesses and entrepreneurs by diverting funds disproportionately to riskless government securities. Banks increased their total investments 29.6% to Rs6.8 trillion in 2015. While the absolute net increase in banks’ advances over 2015 was just Rs369 billion, the corresponding surge in their investments equalled more than Rs1.5 trillion.

“With the expected fall in capital gains along with the reinvestment risk, once high-yielding PIBs mature, earnings of banks during 2016 are anticipated to remain under pressure,” Naseer said.

Published in The Express Tribune, March 25^th, 2016.

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