Chain reaction: KIBOR drops to six-month low

Lowered interest rates to increase corporate profits: report.

Express August 01, 2011


After a surprise rate cut by the State Bank of Pakistan (SBP) at the weekend, the benchmark lending rate has also declined by 44 basis points.

The Karachi Inter-bank Offered Rate (Kibor), a daily rate of interest at which banks borrow unsecured funds from other banks, touched a six-month low of 13.37%, down from 13.81%. This means that taking their cue from SBP, private banks are also offering lowered interest rates for borrowing, according to a Topline Securities research note on Monday.

The Topline report stated that this bodes well for leveraged sectors as their earnings may improve, assuming this trend continues.

Apart from textile and cement, which are likely to be the major gainers due to the high leverage, a few individual companies like Engro and Pakistan State Oil will also benefit due to the reduction in borrowing cost, the report said.

The report predicted that annualised earnings of Pakistan’s largest textile manufacturer will increase by 1% while DG Khan Cement and Lucky Cement earnings will jump by 3% and 1%, respectively.

The report also stated that a few high leverage companies like Engro and Pakistan State Oil will directly benefit from the lowered price of borrowing.

Engro, which has total debt size of around Rs68 billion, will improve its annualised earnings by Rs0.5 per share. PSO, the giant in the oil marketing sector, will see an improvement of Rs1.3 per share, according to Topline’s estimates.

Regarding the banking sector, the report stated that in the long-term the reduced discount rate will prove beneficial. However, in the short-term, it will reduce the banking spread which is hovering around 7.65%, the report said.

Published in The Express Tribune, August 2nd, 2011.