AKD Securities – Pakistan Economy
Karachi, November 24, 2014 (PPI-OT): Single-digit interest rates here to stay
Led by lower food and petroleum product prices, Nov’14 CPI is expected to clock in at the sub-5%YoY range, which will vindicate the SBP’s 50bps cut in the DR to 9.5% particularly as the PkR has gained 1.1%MTD vs. the US$.
While Nov’14 CPI is likely to represent a trough (CPI likely to rebound to 7%+YoY levels in 2HFY15), AKD Securities sees single-digit interest rates sustaining for at least the next 12m with risks to thesis emanating from an uptick in international oil prices and a shift away from the current populist GoP stance.
Within this backdrop, AKD Securities maintains a liking for leveraged plays including MLCF, DGKC, NML and EFERT. At the same time, while AKD Securities’s base-case CY15F EPS estimates for banks trim in the 3%-9% range if the DR averages close to 9% in CY15, the actual impact is likely to be much lower with impetus from loan growth, NPL recoveries and potential capital gains on PIB holdings. Preferred banking plays include UBL, NBP and BAFL.
CPI preview: Led by lower food and petroleum product prices, where SPI depicts a sharp 1.7%MoM drop, Nov’14 CPI is expected to clock in at the sub-5%YoY range. This will also represent the first sequential (MoM) decline in CPI for the first time since May’14 which will vindicate the SBP’s recent 50bps cut in the DR to 9.5% particularly as the PkR has gained 1.1%MTD vs. the US$. That said, Nov’14 CPI is likely to represent the trough for Pakistan inflation where, if the historical sequential trend (+0.6%MoM) applies going forward, CPI may rebound to 7%+YoY levels in 2HFY15.
Interest rate outlook: The previous rate cut cycle lasted for a period of two years (Jul’11-Jun’13) when interest rates came off from 14% to 9%. While this quantum of rate cuts may not repeat considering the DR is already at 9.5%, AKD Securities believes single-digit interest rates are here to stay for at least the next 12m.
AKD Securities sees interest rates coming off by a further 50bps to 9% in the Jan’15 MPS and sustain at these levels across 2015. Risks to thesis include a rebound in international oil prices and a GoP shift away from the current populist stance (PM recently put on hold decision to raise gas tariffs + electricity tariffs reduced by PkR0.46/unit or by more than 5% ex-WAPDA).
What about banks? While the SBP has maintained the floating rate floor on savings deposits, interest rate margins will likely thin in a monetary easing-cycle. Ceteris paribus, AKD Securities’s estimates indicate that AKD Securities’s coverage banks may witness a 3%-9% reduction in base-case earnings estimates for CY15F if the DR averaged close to 9% in CY15. That said, the actual impact is likely to be lower where banks should push loan growth while NPL recoveries may also pick pace.
An added benefit would be the accrual of sizeable capital gains on PIB books where some banks may even end up earning more than base-case CY15F estimates. Accordingly, AKD Securities maintains AKD Securities’s liking for the larger banks which have the potential to outperform on superior asset quality, scale economies, diversified non-interest income streams and the balance sheet strength to swiftly grow the loan book. Preferred banking plays include UBL, NBP and BAFL.