Pakistan Banks_Higher yields - a double edged sword! (AKD Daily, Dec 06, 2021)
AKD Daily
Pakistan Banks: Higher yields - a double edged sword!
- Amid rising inflation, higher CAD and building expectations of further rate hikes in the coming months (150bps hike already in the bag), the secondary market yields have increased by 185bps—335bps during 4QCY22.
- While the higher yields are expected to finally be picked in the banking sector NIMs for 4QCY21—thereby increasing the funded income of the banks—this will also trim the book value of the investments owing to mark-to-market loss arising due to the change in revaluation rates.
- With banks classifying 86.2% of their GoP investments as AFS, the impact of revaluation losses will be picked up in the equity values where a one-time loss will decrease the book values of the equity but bypassing the profitability statement.
- The loss will be smoothed somewhat by the presence of floating rate PIBs in the portfolios of the banks. While the banks carrying investment portfolios concentrated at the lower end of maturity (BAHL and MCB) are likely to outperform those where the maturities are more spread-out or are concentrated at higher spectrum of maturity profile.
- The negative impact of fall in book value will also have an impact on the respective capital adequacy ratios of the banks. However, this impact will likely be smoothed by currency depreciation and potentially lower payouts.
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