The battering of banks

The State Bank of Pakistan will probably not be getting many Eid cards from investors at the local bourses. If the Monetary Policy decision announced some days didn’t rub investors the wrong way, the more recent announcement of higher minimum profit rates on savings deposits has surely irked them.
Although, an interest hike is generally perceived negatively for market returns—it is considered good for the banking sector, for obvious reasons of higher anticipated spreads. This was the very reason that the KSE 100-index stood firm despite the unexpected 50 bps hike as the banking sector was expected to be a beneficiary—holding the index together.
Who would have thought that the joy would be so short-lived? The BR-banking sector index leaped a healthy 11.9 percent in six trading sessions after the MPS announcement. What followed in the next five sessions was a change of similar magnitude, only in the other direction. The last two trading sessions have been nightmarish as the SBP notice has dented the confidence in banks’ profitability going forward—evident by the largest two-day dip of 7.3 percent dip in BR-banking index in as many years.
Sector analysts have trimmed their earnings estimates by 7-8 percent for the remainder of CY13, and 12 percent for CY14. The fair values too have gone down by a similar magnitude, explaining the sharp drop in stock prices.
The sector’s average saving deposits to total deposit ratio stands at 36 percent as at June end 2013. The ratio is well spread amongst the big, medium and small banks—with MCB and Askari Bank appearing as the most affected and National Bank and Allied Bank, the least. But, the sentiment seems to have taken over and the market isn’t sparing any of the banks.
Recall that earlier the central bank had altered the tabulation of return on deposits from month-end balance to average monthly balance, which was viewed as a spread squeezer for the banks. Unless SBP broadens the interest rate corridor, banks will have to deal with flat spreads. The focus will now have to move towards improving the deposit mix, and a lot of efforts would be made to increase the current account deposits.
The message to the banks from the SBP is loud and clear—do what you are supposed to do, i.e lend more. It appears the credit divisions of banks will be putting in extra hours to improve the ADR which has been on a freefall since nearly two years. Increased pressure on spreads will certainly push the bankers out of their comfort zone and look out to lend more. Whether there is enough appetite for advances in the market will be seen shortly—but once again, the sectors’ strategy seems to have been dictated by the apex regulator, instead of the players themselves.