As SBP enforces minimum deposit rate, banks expect hit on earnings

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SBP Diary - SBP News

Bank stocks fell across the board in Monday’s trading on the Karachi Stock Exchange, the first working day after the State Bank of Pakistan (SBP) sent out a notice late last Friday that would effectively raise the cost of funding for commercial banks, eating into their profit margins.

In April 2012, the SBP had raised the minimum interest rate that banks were required to pay out to depositors on savings accounts, and said that the payable interest would be calculated using the average deposit amount, not the minimum deposit amount as was market practise. The banks heeded the first part of the new regulations, but pretended not to hear the second part, hoping that the central bank would not notice. It noticed.

“While [Friday’s] circular is little changed from the previous one in April 2012, the key difference is explicit mention by the SBP that banks are to pay the minimum deposit rate on average monthly balance,” wrote Farah Marwat and Bilal Qamar, research analysts at JS Global Capital, in a note issued to clients on Friday. “We believe [the] circular is yet another sign that the SBP is in no mood to go soft on banks.”

Over the weekend, banking analysts appear to have crunched the number to figure out the impact of the implementation of this rule. The picture they came up with is bad, and it is worse for the Big Five banks that had hitherto been able to rely on a comfortable cushion of low-cost savings accounts for their funding.

The consensus seems to be that among the Big Five, Habib Bank will see the worst impact of between 7% and 9% of its expected 2013 net income, depending on which analyst one speaks to. The least affected appears to be Allied Bank, which may see as little as a 3% hit on its 2013 earnings.

The central bank’s motivations appear to be clear: moving the banks away from their addiction to lending to the government. “We believe this is another attempt by the SBP (through regulatory changes) to encourage the banking sector to actively start extending credit to the private sector,” said Umer Pervez, a research analyst at Shajar Capital, in a note issued to clients on Monday.

The SBP’s “squeeze the banks” strategy appears to have investors worried, as they dumped banks stocks in a sector-wide rout that Sibtain Mustafa of Elixir Securities described as “Bloody Monday”.

“Almost all banks ended lower with Bank Alfalah churning the highest volume to close at its lower price circuit, down 5.36% for the day,” wrote Mustafa.

The reason for the carnage on Monday, however, appears to go deeper than just the short-term earnings hit. “The symbolic message [of the regulations] is very negative for banks,” said Imtiaz Gadar of KASB Securities. “There had been hopes that the SBP might consider providing some relief on minimum deposit costs if low interest rates persist longer. However this move douses any such hopes of relief in the near term.”

Yet while the State Bank has considerable power to make life uncomfortable for the banks, they are not entirely helpless in the matter. Many analysts expect them to fight back.

“The banks are not completely out of ammunition and may make representations to the central bank for possible relief in the future,” said Fawad Khan, a research analyst at Foundation Securities.

Ultimately, however, the State Bank may well get its wish: shareholders appear to be voting with their feet about the banks’ current business model that relies on taking in cheap deposits and lending at low rates to the government. That shareholder revolt, long predicted by State Bank Governor Yaseen Anwar, may well force bank managements to change their long term strategy, rendering any lobbying efforts with the central bank moot.

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