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Bulls take lead, SBP’s steady rate policy likely to follow positive impact

The trading on the last day at the Pakistan Stocks Exchange (PSX) delighted after the news of State Bank Monetary policy statement and rupee depreciation since the start of the week, which anticipated as a healthy sign for the confidence boost for the investors. KSE-100 Index, which led with gain of 70.68 points closed the week at 45,560.30 level. Moreover due to day earlier trade after foreigners turned buyers bought stock worth $9.36m. This led into a jubilant mood in the trading and supported the Index to gain 316.63 points to close at 45,489.62, while higher global crude oil prices, revision in local auto and cement prices and SBP announcement led to gain in stock exchange.

As expected, State Bank of Pakistan (SBP) has decided to keep the discount rate unchanged at 6.0 percent for the next two months, on 30th March 2018. Last time, the central bank had increased discount rate by 25 bps in January 2018. Reportedly, the central bank has chosen to follow wait and see approach. It believes some time is needed to witness the impact of recent impact of policy rate increase in January this year, depreciation of Pak rupee against US dollar and rising prices of oil in the international markets.While highlighting the external sector challenges, the central bank believes that GoP’s plan to timely mobilize external inflows both official and commercial will play a pivotal role in maintaining adequate level of foreign exchange reserves held by the central bank.

The central bank also expressed confidence that maintaining the discount rate will have positive impact on the economy, particularly the banking industry and sectors like textile, cement and fertilizer enjoying high leverage. Over the years experts have been saying that Pakistan suffers from cost pushed inflation and increase/decrease in discount rate has little impact on rate of inflation in the country.

According to a report by Pakistan’s leading brokerage house AKD Securities, despite rising international oil prices, inflation for the month of March is expected to remain low primarily on the back of high base effect along with downward trend in the prices of perishable food items. It is estimatedthat March 2018 CPI inflation may fall to around 3%YoY as against 3.8% for February 2018 and 4.95% for March 2017. Having sad that it is feared that inflationary pressures may start to build up towards end FY18 with CPI averaging around 4%YoY, well below the SBP target of 6%. The real interest rate is likely to hover at comfortable levels, along with promising growth in LSM (6.5%YoY in 7MFY18). Additionally, the impact of interest rate differential in the backdrop of an increasing Fed rate has been somewhat countered by local currency depreciating by 8.7% FYTD. Taking these factors into account, decision to leave the discount rate unchanged seems logical.Certain quarters anticipate that the central bank may opt for another 25bps hike as a preemptive measure keeping in view the risk of an overheating economy as well as to finance widening fiscal imbalance. Hiking interest rate is a remedy often recommended by International Monetary Fund (IMF), to which many of the local economists don’t subscribe. They say the Government of Pakistan (GoP) being the biggest borrower emerges as a loser with each hike in interest rate.

Analysts believe that inflationary pressures is likely to buildup going forward on the back of: 1) increasing international oil prices, 2) the lust of incumbent government to collect extra revenue by increasing levies on energy products, 3) seasonal increase in food prices during Ramazan/Eid) uptick in education index and house rents due next month and 5) delayed impact of passed through inflation.


In the past, MCB Bank enjoyed the lowest cost of fund, but this comparative advantage seems to have diluted after the acquisition and merger of NIB Bank. According to a research report, asset quality deterioration and increase in expenses characterized MCB’s earnings performance in CY17. NIB Bank acquisition brought Rs29 billion additional infected loans while cost inefficiencies were a function of the bank’s small size.

Impairment charge during the year was another drag on earnings with the bank booking provisions worth Rs3.5billion – highest-ever as the benchmark index lost 15% during the year. Having said that the Bank is encouragingly focusing on: 1) building its loan book (17%YoY growth) particularly in the consumer finance, 2) targeting current account growth to support NIMs alongwith concentration towards the shorter end of maturity and 3) increasing its fee income base (+22%YoY). While earnings are anticipated to grow from CY18, improvements on the cost front and provision should become more visible by CY19.

Analysts believe both the operating environment and MCB’s own dynamics will take a turn for the positive CY18 onwards. In this regard, they expect an uptick in interest rates, while MCB should be in a much stronger position to reap acquisition benefits of NIB. While the impact of the ongoing PIB substitution is likely to dilute the benefits of an upward adjustment in interest rates, MCB’s strategic focus on building its low cost current account base along with the keen urge to grow its advances should counter pressure on NIMs. Additionally, the Bank’s timely shift towards shorter end maturity profile is likely to benefit.

After an impressive start to CY18 (fertilizer/urea offtake posted growth of 30%/33%YoY during January 2018), country’s fertilizer offtake growth remain robust in February 2018 as well, where not only urea but cumulative fertilizer sales remained promising. In tandem, urea sales jumped by 44%YoY to 370.000 tons. Furthermore, DAP sales also registered growth of 25%YoY/33%MoM to 122.000 tons during the month. However, on a monthly basis, total fertilizer/urea off-take expectedly came down by 20%/31% on account of seasonal slowdown (end of Rabi season). After correcting sharply in 1HCY17, the fertilizer sector has posted a strong recovery (up 19% since August 2017 and +7%CYTD) on improving fundamentals.

Going forward, analysts anticipate further improvement on the back of: 1) continuous lowering of inventory levels, 2) higher international prices and 3) upward trend in local product prices (discount levels reduce to Rs10-25/bag.

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