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Karachi, November 17, 2014 (PPI-OT): Economy: DR cut by 50 bps; a positive for equities
Discount rate cut by 50bps: SBP slashed Discount rate (DR) by 50bps eyeing substantial slowdown in inflationary pressures in the backdrop of falling international commodity prices (particularly oil), lower administered prices, smooth food supplies and high base effect.
SBP assesses improvement in overall economic outlook: The central bank encouraged the performance of the government and acknowledged improvement in macroeconomic landscape highlighting factors like slowdown in inflation (4MFY15: 7.1%), curtailment of fiscal imbalances (FY14: 5.8% of GDP) and improvement in FX reserves (USD13.3bn).
Risks pertaining to inflation still prevail: Despite optimism, SBP points several risks pertaining to CPI inflation: 1) Volatile nature of perishable food items, 2) Materialization of cut in electricity subsidy and GIDC levy imposition, and 3) Prevailing pressures on core inflation to persist.
Elixir Securities Limited expects policy rate cut to buoy credit disbursement: Elixir Securities Limited anticipates credit disbursement to somewhat pick up owing to monetary easing, increased growth momentum and optimism with respect to energy investment projects. Materialization of these energy sector investments would further boost economic growth in the medium term.
Sector wise impact: Cut in policy rate would result in NIMs reduction and accordingly earnings attrition across Elixir Securities Limited’s banking universe. Rate cut would result in upward revision in earnings and PTs of Elixir Securities Limited’s ex-banking universe while companies with cash rich balance sheet will face earnings attrition.
Market sentiment to remain positive: With lower than anticipated inflation for Oct-14 and expectations for lower inflation in Nov-14 (high base effect) as well, KSE-100 index has already gained 3% during Nov-14. Elixir Securities Limited believes that this decision would further sustain positive sentiment. Factoring in lower earnings growth for E and Ps, Elixir Securities Limited revises Elixir Securities Limited’s Jun-15 index target to 36,000 which offers an upside of 15% from current levels.
Discount rate cut by 50bps
SBP slashed Discount rate by 50bps in its recent monetary policy decision on November 15,2014. This was done in anticipation of slowdown in inflationary pressures in the backdrop of falling international commodity prices (particularly oil), lower administered prices, smooth food supplies and high base effect. The DR cut is in line with market consensus and might be followed by another 50bps cut during 1HCY15 as FY15 inflation is expected to remain in the range of 7.5- 8.0% YoY assuming impact of easing oil and commodity prices.
SBP assesses improvement in overall economic outlook
The central bank in its MPS decision encouraged the commendable performance of the Government. SBP acknowledged the curtailment of fiscal deficit to 5.8% of GDP in FY14 against 8.8% in FY13 (1QFY15: 1.2% of GDP, Target: 4.8% of GDP), and emphasized on the importance of tax reforms. Inflation showed notable improvement and fell to 7.1% YoY during 4MFY15 from 8.3% YoY during the same period last year.
SBP also highlighted that 11% YoY expansion in 1QFY15 current account deficit is primarily due to weak commodity prices, which gives rise to increased imports and shall slow down going forward. FX reserves have increased from USD9.5bn in Oct-13 to USD13.2bn (+39% YoY).
Risks pertaining to inflation still prevail
Despite optimistic economic outlook, SBP highlights the following risks pertaining to CPI inflation:
1. Volatile nature of perishable food items which have the highest weight (29.8%) in the benchmark index.
2. Materialization of cut in electricity subsidy and levying GIDC which can push upward pressure in on inflation.
3. Underlying pressures on core inflation persists.
Elixir Securities Limited expects policy rate cut to buoy credit disbursement
Although credit growth has remained lacklustre since 2008 regardless of movement in interest rate cycle, Elixir Securities Limited expects credit disbursement to somewhat pick up owing to monetary easing, increased growth momentum and optimism with respect to recent energy investment projects.
Materialization of these energy sector investments would also boost economic and business activity in the long run.
Sector wise impact
Cut in policy rate would result in NIMs reduction and earnings attrition across Elixir Securities Limited’s banking universe. However, Elixir Securities Limited continues to maintain Elixir Securities Limited’s ratings on Elixir Securities Limited’s banking universe except MCB. Rate cut would result in upward revision in earnings and PTs of Elixir Securities Limited’s ex-banking universe while cash rich companies would likely face earnings attrition.
Market sentiment to remain positive
With lower than anticipated inflation for Oct-14 and expectations for lower inflation in Nov-14 (high base effect) as well, KSE-100 index has already gained 3% during Nov-14. Elixir Securities Limited believes that this decision would further sustain positive sentiment. Factoring in lower earnings growth for E and Ps, Elixir Securities Limited revises Elixir Securities Limited’s Jun-15 index target to 36,000 which offers an upside of 15% from current levels. Elixir Securities Limited provides Elixir Securities Limited’s revised CY/FY15 EPS estimates and PTs (factoring in 50bps cut) for Elixir Universe below:
Source: Elixir Research
Risks pertaining to inflation still prevail
Despite optimistic economic outlook, SBP highlights the following risks pertaining to CPI inflation:
1. Volatile nature of perishable food items which have the highest weight (29.8%) in the benchmark index.
2. Materialization of cut in electricity subsidy and levying GIDC which can push upward pressure in on inflation.
3. Underlying pressures on core inflation persists. Elixir Securities Limited expects policy rate cut to buoy credit disbursement Although credit growth has remained lacklustre since 2008 regardless of movement in interest rate cycle, Elixir Securities Limited expects credit disbursement to somewhat pick up owing to monetary easing, increased growth momentum and optimism with respect to recent energy investment projects.
Materialization of these energy sector investments would also boost economic and business activity in the long run.
Sector wise impact
Cut in policy rate would result in NIMs reduction and earnings attrition across Elixir Securities Limited’s banking universe. However, Elixir Securities Limited continues to maintain Elixir Securities Limited’s ratings on Elixir Securities Limited’s banking universe except MCB.
Rate cut would result in upward revision in earnings and PTs of Elixir Securities Limited’s ex-banking universe while cash rich companies would likely face earnings attrition.
Market sentiment to remain positive
With lower than anticipated inflation for Oct-14 and expectations for lower inflation in Nov-14 (high base effect) as well, KSE-100 index has already gained 3% during Nov-14.
Elixir Securities Limited believes that this decision would further sustain positive sentiment. Factoring in lower earnings growth for E and Ps, Elixir Securities Limited revises Elixir Securities Limited’s Jun-15 index target to 36,000 which offers an upside of 15% from current levels. Elixir Securities Limited provides Elixir Securities Limited’s revised CY/FY15 EPS estimates and PTs (factoring in 50bps cut) for Elixir Universe below: