Changing PIB yields to bring down banks’ book value

Yields on bonds have gone up 257 basis points since June .


Kazim Alam October 24, 2013
The banking sector has been a major holder of PIBs with holding of Rs681 billion as of August 31, comprising 53% of total PIB holdings. PHOTO: FILE

KARACHI:


The results season has already kicked in, with at least four banks’ financial accounts for the first nine months of 2013 already out.


Although the rather unimpressive results can be blamed on a number of reasons, one of them is certainly the erosion of revaluation gains that the banks have suffered in the third quarter of 2013.

According to research carried out by Foundation Securities, Pakistan’s banking sector has placed most of its investment in government papers – approximately 45% of total investments. A majority of these investments is placed in their “Available for Sale” (AFS) portfolios.

As opposed to held-to-maturity, available-for-sale securities are purchased with the intent of selling before they reach maturity. Hence, they are recorded at their fair value.

In view of the increase in the key policy rate by the central bank, the yield on Pakistan Investment Bonds (PIBs) has gone up as much as 257 basis points since June.



Considering the fact that yields on bonds are inversely related to their market prices, the sharp increase in the PIB yield is going to eat into banks’ revaluation surplus on fixed income instruments.

According to Foundation Securities, top-tier banks held significant investments in PIBs in their AFS portfolios at the end of June. For example, United Bank had Rs88 billion in its AFS portfolio, MCB Bank Rs70 billion, National Bank of Pakistan Rs51 billion, Habib Bank Rs52 billion, Bank Alfalah Rs15 billion, Bank Al Habib Rs13.4 billion and Allied Bank Rs150 million.

“Our back-of-the-envelope calculations show big banks may lose Re1-Rs5 per share in book value with UBL receiving the biggest hit. The only exception is Allied Bank, which has negligible investment. Our preferred choice remains the mid-sized banks including Bank Alfalah and Bank Al Habib,” according to Syed Asad Ahmed of Foundation Securities.

The banking sector has been a major holder of PIBs with holding of Rs681 billion as of August 31, comprising 53% of total PIB holdings.

The last auction of the PIBs for three, five, 10 and 20 years’ maturity was held on October 23. Although bids were filed amounting to the face value of Rs46.5 billion, none of them were accepted.

Speaking to The Express Tribune, Topline Securities CEO Mohammed Sohail said the rejection of the bids shows that the Ministry of Finance does not want to borrow at high rates. This may dampen banks’ earnings growth.

Global Securities research analyst Umair Naseer seems to be in agreement with Sohail. “Banks are expecting interest rates to go up in the future. So they are a bit reluctant to invest in PIBs at current levels,” he told The Express Tribune in an email on Thursday.

“They will be better off investing at a later stage, as they will get higher returns. Therefore, they may have demanded higher rates, which eventually got turned down,” he added.

While the recent hike in PIB yields has lowered banks’ book value, inflationary pressure expected in coming months has also forced the banking sector to stay cautious in the recent market treasury bills’ auctions.

The State Bank of Pakistan (SBP) invited tenders for sale of three-month, six-month and 12-month market treasury bills on October 14. Against the auction target of Rs225 billion, auction participants responded with bids of Rs160.48 billion only.

Moreover, not a single bid was received for six- and 12-month treasury bills, as investors expected higher inflation in November. Banking sector analysts believe that higher inflation will pave the way for another hike in the discount rate, which will further dampen the surpluses that banks hold in the PIBs.

Published in The Express Tribune, October 25th, 2013.

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