April 12, 2022 (MLN): The latest 250 bps increase in policy rate to 12.25% will impact banking sector somewhat differently than usual monetary tightening.

While all banks would benefit from the ongoing monetary tightening, banks with a higher ratio of loan and variable-rate investment instruments, zero-cost deposit mix, leverage and higher contribution from core income to bottom line would witness a higher impact than peers, a report by JS Global highlighted.

Higher inflation readings have led to market participants anticipating continuation of monetary tightening, leading to upward movement in market yields and KIBOR seen since Feb-2022.The 3M to12M PKRVs have increased by 150 bps – 200 bps, where KIBOR has also moved upward by around 200 bps.

The higher asset prices even before any increase in the benchmark policy rate is likely to re-price banking sector’s assets by 2QCY22, which would otherwise have been reflected with a lag of one to two quarters from the policy rate hike announcement (3Q and 4QCY22), the report said.

Similarly, the change in shorter tenor yields would not only re-price the banking sector’s T-Bill investments earlier, but also the Floater PIB Investments (following weighted average yields of T-Bill auctions). To note, weighted average yields of 3M and 6M T-Bills have increased by 175 bps – 200 bps during CY22 to date.

The report underlined that the sector has shifted its investment portfolio tilt towards shorter tenor (T-Bills) and variable priced Investments (Floater PIBs), now accounting for 65% of the Investment book.

On the deposits front, increase in the minimum deposit rate to 10.75% would be effective from May-2022, while re-pricing of term deposits will reflect during 2HCY22, given the current maturity.

To take the most of the unprecedented spreads between the Policy Rate and asset yields, the banking sector had been increasing borrowing from SBP through Repo borrowing, which is another Monetary Policy instrument and linked to the Policy Rate. Hence, with no revision in Policy Rate until last week, banks had been borrowing on a fixed rate, albeit, at a shorter tenor, to invest in T-Bills and Floater PIBs that were witnessed spike in yields. This has also led to the sector’s asset base growth to remain above 20%, where deposit growth pace falls in mid to late teens.

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