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Pakistan Banks: Banks with High PIB Holdings and their Implications

 

• In a rising interest rate environment (policy rate up by 475bps since Jan 2018), Banks with significant longer duration Pakistan Investment Bonds (PIBs) holding, yielding 8-10%, will likely lose out because current yield of PIBs have reached up to 12-13%.
• For our analysis, we have selected those banks that have 10% or more PIBs on their books as percentage of their deposits (as of end Dec 2018). We have then delved into greater detail and estimated PIBs that are maturing in 2019 and onwards, based on their annual accounts and channel checks.
• As of Jan 31, 2019, total outstanding PIBs were Rs3.2tn (~Rs1tn maturing in 2019 with weighted average yield of 9.8%), out of which banks own 60.4% or Rs1.9tn, which is 14.6% of banks deposits.
• Among big Banks that may lose out the most due to exposure in longer term bonds are NBP, UBL and HBL as per our working and channel checks. Other banks like HMB, JSBL, AKBL, BOK and SBL, having significant maturities post 2019 will also have funds stuck up in lower yielding PIBs, thereby affecting NIMs.
• We believe that remaining PIB auctions in 2019 will likely see strong participation from banks especially those having short term duration of 3 & 5 years. Similar trend was seen in 2014 when banks exposure in PIBs increased to 30% of deposits in 2014 as compared to 9% in 2013. 
• Moreover, with clarity over Pakistan’s entry into IMF program by Jun 2019, it is likely that the Govt. may amend its debt profile with higher weight age in longer maturities.
• It should be noted that one of the IMF conditionalities would be to borrow from banking sector and also to extend the maturity of its debt repayment profile, similar to the large issues of PIBs post IMF program in 2013. The govt. raised cumulative Rs2.5tn in PIB in 2014.
• Thus banks having short duration investment book can reap maximum benefit if they invest in PIBs at the right time in 2019.
• Those banks that have PIBs to deposit ratio of less than 10% and are not part of above table include BAFL, SILK, ABL, FABL, SCBPL, and BOP.