THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated November  01, 2003

 

MARKET THIS WEEK

The index declined by 4.2% WOW with volumes remaining incredibly low throughout the week. Except for Monday, the rest of the days of the week saw volumes remain below 200mn shares, and in fact fell below 100mn on Friday. The reasons for these low volumes seem to be the upcoming massive and potentially profitable OGDCL offering, the start of Ramazan that traditionally brings with it low volumes and the liquidity pinch felt by the banks during the week as depositors tried to avoid Zakat especially on Friday wherein the reserve requirement for the weekend is 5% vs. 4% on a daily basis.

 

 

 

 Monday started off strongly only to close with the index showing slight gains after massive selling just before end of trading hours. The selling was aided by the SECP's announcement that COT transactions would be limited to 30 companies as of December-03. Tuesday brought with it heavy selling as investors sought to deal with exposure problems, with PSO hitting its lower breaker on heavy liquidations. This was also the first day of Ramazan and so brought with it low trading volumes. Wednesday brought more bad news to a market in which investors were already low on confidence, with the SBP announcing new changes to Prudential Regulations that would restrict banks from investing more than 20% of their equity in shares. Most investors believed that banks would start offloading their excess holdings and so they sought to square their positions. At the same time, there were rumours of a few large players who were forced to sell to avoid margin calls. The better than expected PTCL, NBP and Faysal Bank results did not seem to have any significant influence on market sentiment. On Thursday, volumes were slightly higher than the day before, boosted slightly by the previous days results announcements, whereas Friday brought the lowest volumes of the week and declines as investors avoided new positions before the weekend.

OUTLOOK FOR THE FOLLOWING WEEK

Volumes are the key. Currently investors seem to be unable to figure out the direction of the market and therefore have chosen to sit on the sidelines. Next week depends therefore on whether these investors choose to enter the market or choose to continue staying out. Whilst most of the major results have already been released, the direction of the market will depend entirely on investor sentiment and expectations. This week banks, who have been feeling a liquidity pinch due to the Zakat effect, can be expected to find themselves with excess liquidity as the Zakat effect wears off and so may enter the market to take advantage of the now cheaper offerings. We expect a boring week ahead.

 

 

SBP'S INITIATIVE TO CURB BANKS' EXPOSURE IN STOCKS

An unstable market throughout the last week can be attributed to the central bank's latest initiative to put restrictions on the banks' exposure into the stock & TFC investing. Reportedly, the State Bank of Pakistan has restricted bank's exposure into these two categories to upto 20% of their total equity, whereas a bank cannot take an exposure of more than 5% in a single stock. Moreover, the bank now cannot even own more than 30% in any company's paid up capital. The banks will have about a year to adhere to these rules. We favor the central bank's move to regularize the stock investing by the banks. The new limits are substantially better than earlier speculated figure of 10% of banks' capital base in the equities. Having said that, we also would like to change our earlier view that these regulations will have negligible impacts over the stock market. Our discussions with various bankers and a detailed analysis of the banks' latest financial statements indicate that most of the larger banks would fall pray to this change in regulation. However, the central bank has given adequate time to the bankers to streamline their operations within the new regulations. We believe that these changes will have negative repercussions for the market in both the short term as well as the long term. This initiative will also affect the government's efforts to raise funds through divestment plan over the next few months.

THE CHANGE IN THE RULE AND ITS BACKGROUND

The central bank's tampering with the stock related rules is not something that is new. A similar speculative wave was seen in the recent past when the central bank sought bankers' opinions on stock investing along with a proposal that such investments should be around 10% of the capital base. The market over-reacted while the issue was eventually calmed down after the clarification that these were just proposals and nothing is being implemented. Most of the bankers are of the opinion that they have been under the impression that central bank would be announcing a few measures to regularize the stock investing in early next year. And all the violating banks would be given adequate time to adhere to the new rules. However, the central bank took them by surprise by making this announcement at least 3 months earlier though it has given almost a year to fully implement this.

 

 

THE BANKS' CURRENT POSITION

Our discussions with the bankers and a detailed analysis of the financial statements of most of the banks indicate that most of the larger banks are sitting on investments substantially higher than the limit set by the central bank. Average ratio of the banks investments to their equities come to around 25% whereas the higher range is 71% and 4% being the lowest. These ratios look worse if we add banks' investments in the NIT units. Average ratio is close to 49% whereas 136% and 6% are the upper and lower ranges. Most of these numbers may see changes as the market has come down significantly from the June 30th 2003 levels, however, our view is that still most of these ratios are well above the SBP's desired level.

KASB VIEW ON THESE CHANGES

We favor SBP's initiative and are of the opinion that this will be an effective long-term measure which will help both the banking sector and the capital markets. From banks' perspective, this will eventually force the banks to concentrate their core function of financial intermediation with less focus on speculative money making tactics. Capital markets will also be better off in the longer term as the banks' treasuries usually are hot money providers, and generally lead to higher price volatility in the stock market. A more disciplined approach from banks would reduce this volatility and will provide stability to the market performance. In our view, the timeline given to the banks is adequate and banks can plan a gradual sell-off.

MARKET IMPLICATIONS

Undoubtedly the initial negative reaction from the market is understandable. We are of the opinion that this initiative will have negative repercussions for the market in the short to medium term. Instead of making further allocations to the market, the banks would first be streamlining their existing investments in the stock market. At the same time, the government's current divestment plan through stock exchange will suffer owing to this development. Here we would term newspaper reports regarding a potential loss of US$1bn as clearly baseless. In our view total divestment plan is well below this figure and banks' maximum potential investment in these divestments would not have been more than US$100mn

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

14.60

14.00

-4.11%

Avg. Dly T/O (mn. shares)

183.75

149.70

-18.53%

Avg. Dly T/O (US$ mn.)

195.87

182.25

-6.95%

No. of Trading Sessions

5

5

 

KSE 100 Index

3945.40

3781.03

-4.17%

KSE ALL Share Index

2496.41

2393.29

-4.13%

 

 

Source: KSE, MSCI, KASB