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Karachi, March 18, 2013 (PPI-OT): The SBP has notified that from Apr 1’13 onwards, all banks will be required to pay interest on savings deposits on average monthly balances.
According to AKD Securities considering that some savings products calculate interest on the minimum balance in the month, this regulatory change will serve to increase cost of funds and compress spreads further (already at a 5yr low of 6.21% in Jan’13). In this regard, channel checks indicate that about 25% of all savings deposits pay interest on minimum balance and these should on average see an uptick of 100bps in effective cost.
This translates into a reduction in overall banking sector profitability by 3.5% on an annualized basis, although the impact for individual banks will vary. Among the larger banks, MCB and HBL have the highest proportion of savings deposits. Alternatively, reliance on savings deposits is relatively less for ABL and UBL where the latter’s geographical dispersion (-20% of deposits are outside Pakistan) provides a buffer in this scenario.
SBP gunning down Spreads: After imposing a 5% floor on savings deposits in mid-CYO8 and later increasing it to 6% in Apr’12, the SBP has now mandated that effective Apr 113 all banks will be required to pay interest on savings deposits on average monthly deposits. With sector spreads already at a 5yr low (6.21% in Jan’13) this move will serve to compress interest margins further considering savings deposits comprise -40% of banking sector deposits. In AKD Securities views, other than the obvious hit on spreads, SBPs motivation appears to be encouraging banks to focus on higher-yielding private sector credit (stagnant over last few years).
Impact on Banks: Impact on banks is a function of 1) the proportion of savings deposits presently calculating interest on minimum balance basis and 2) the average difference between the minimum balance and average balance. In this regard, channel checks indicate that about 25% of all savings deposits pay interest on minimum balance basis and these should on average see an uptick of 100bps in effective cost.
This translates into a post-tax annualized impact of about PkR42bn for the sector i.e. 3.5% of estimated CY12 sector profitability. Impact on individual banks will vary for which sensitivity is provided below. Impact on the Big-6 banks is also provided (base-case) where AKD Securities will update readers with a more accurate impact as managements get back with their respective deposit mix.
Impact on Banks Profitability (% of CY12 Profits)
Impact on Banks Profitability (% of CY12 Profits)
Effective increase in bps
|
25 |
50 |
100 |
150 |
200 |
|
| 10% |
0% |
-1% |
-1% |
-2% |
-3% |
| 20% |
-1% |
-1% |
-2% |
-3% |
-4% |
| 25% |
-1% |
-2% |
-35% |
-5% |
-7% |
| 35% |
-1% |
-2% |
-5% |
-7% |
-10% |
| 50% |
-2% |
-3% |
-7% |
-10% |
-14% |
| Source AKD Research | |||||
Investment Perspective: Among the larger banks, MCB and HBL have the highest proportion of savings deposits while reliance on savings deposits is relatively less for ABL and UBL. That said, impact for individual banks depends on the proportion of savings deposits presently under the minimum balance regime and the typical consumption pattern of savings deposits holders. While banking shares could see kneejerk downward reaction today, AKD Securities selectively prefer UBL where its geographical dispersion (-20% of deposits are outside Pakistan) provides a buffer in this scenario.