SBP tightens the noose as MDR on savings linked to Repo rate – Taurus Research
By: Hassan Raza,
Taurus Securities Limited
In a bid to foster savings and to keep exorbitant spreads of banking sector in check, SBP has linked the minimum deposit rate on savings accounts with the repo rate such that the MDR will now be 50bps below the prevailing SBP Repo Rate (interest rate corridor floor, which is presently 7%). The above rate will be applicable from Oct 1. 2013. The directive holds negative implications for banking sector, given that reversal in monetary easing just started and sector spreads were about to augment. With deposit rate now pegged with SBP Repo Rate, sector spreads will only see limited expansion, as saving deposits constitute around 40% of the total banking sector deposits.
In our banking sector universe, MCB will bear the brunt of floating MDR on savings rate as it has the highest CASA ratio in our universe, with savings deposits comprising around 50% of its total deposits. Although UBL also maintains significantly higher domestic CASA ratio, around 83%, it draws some comfort from its overseas operations, which represent around 33% of its total deposits.
As BAFL and BAHL are operating at relatively lower NIMs, earnings of these banks are more sensitive to small changes in spreads. Consequently, their earnings will also compress by 7-12%, despite having lower proportion of savings in their total deposits. Incorporating the aforesaid impact in our model, we have a Buy stance on BAHL & BAFL, while UBL & HBL have been downgraded to Sell. On MCB we reiterate our Sell stance.