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Karachi, November 17, 2014 (PPI-OT): SBP delivers 50bp rate cut, KSE to react positively
In a somewhat surprise move for the market but largely inline with JS Securities Limited’s expectation, the State Bank of Pakistan (SBP) elected to lower the discount rate by 50bp (JS expectation: 50-100bp cut) to 9.5% in its latest Monetary Policy Statement (MPS).
As far as the equity market goes, JS Securities Limited believes the KSE will receive SBP’s decision positively where JS Securities Limited believes the 50bp rate cut is not yet fully factored into KSE-100 valuations.
JS Securities Limited highlights leveraged companies (Cements, ENGRO, EFOODS), yield-plays (IPPs and FFC) and Banks (heavily invested in PIBs) as emerging plays at the KSE from the rate cut.
JS Securities Limited expects at least another 50bp cut from the SBP in FY15; however timing of the same remains uncertain.
JS Securities Limited believes key triggers for SBP will be Government of Pakistan successfully (1) raising US$1.0bn (base case: US$500mn) from Sukuk issue and (2) divesting its shareholding in ABL and HBL. Meanwhile, oil prices do not see a sharp reversal from these levels.
SBP surprises market by 50bp cut
In a somewhat surprise move for the market but largely inline with JS Securities Limited’s expectations, the State Bank of Pakistan (SBP) elected to lower the discount rate by 50bp (JS expectation: 50-100bp cut) to 9.5% in its latest Monetary Policy Statement (MPS) on Saturday, November 15, 2014.
This is the first rate cut from the SBP since June 2013. SBP cited (1) limited impact of floods and (2) favorable trend in global commodity prices as the key drivers of its decision to cut the policy rate.
SBP cuts rate; valuations rise in tandem at KSE
As far as the equity market goes, JS Securities Limited believes the KSE will receive SBP’s decision positively where JS Securities Limited believes the 50bp rate cut is not yet fully factored into KSE-100 valuations. Hence a 50bp lower risk free rate for JS Securities Limited’s equity universe valuation, delivers 1-7% upside to Target Prices of JS Securities Limited’s JS Universe.
JS Securities Limited highlights leveraged companies (Cements, ENGRO, EFOODS), yield-plays (IPPs and FFC) and Banks (heavily invested in PIBs) as emerging plays at the KSE from the rate cut by the Central Bank.
Another 50bp cut on the cards, but when?
Recall despite steadily softening inflation, the Central Bank held rates unchanged over the last few MPS citing concerns on the (1) fiscal and external accounts and (2) sustainability of lower inflation readings. SBP directly attributes Saturday’s decision to cut rates to attaching higher weight to declining inflation and fiscal consolidation.
JS Securities Limited expects at least another 50bp cut from the SBP in FY15, however timing of the same remains uncertain. JS Securities Limited believes key triggers for SBP will be Government of Pakistan successfully (1) raising US$1.0bn (base case: US$500mn) from Sukuk issue and (2) divesting its shareholding in ABL and HBL. Meanwhile, oil prices do not see a sharp reversal from these levels.
KASB Bank placed under six-month moratorium
The State Bank of Pakistan (SBP) on Friday put six-month moratorium on KASB Bank, allowing only small depositors to withdraw their money.
The bank has been in trouble for more than a year as it failed to meet SBP’s criterion for capital adequacy ratio (CAR). Payment to the depositors of the bank having account balance of up to Rs300,000 on the date of placing of the bank under moratorium will not be affected. In this manner, more than 92.33% of total account holders will be able to operate their accounts.