Elixir Insight

Pakistan Banking Sector

Estimating Bank Wise PIB Maturities

· We expect PKR964bn of PIB maturities in 2018, mainly concentrated in the 3Y and 5Y category carrying yields of 7.14% and 12.4%. These mature in 1Q2018 and 3Q2018 respectively.

· We have used a 7 step process for estimating bank wise PIB maturities, with varying degrees of success depending on the number of bank disclosures.

· Majority of the banks have a shorter duration tilt in their PIB books, which favoraubly places the sector as a whole to benefit from interest rate increases.

· We believe further decreases in the yield on investments for the sector is unlikely in 2018 as the yields are already low due to a high concentration of MTBs due to previous maturities, most notably in 3Q2016.

· Of the 9 banks we have looked at, as a % of their PIB book, ABL, BAFL, BAHL, HBL and MCB have roughly 30-40% of their PIB portfolios maturing in 2018, and are thus best positioned to capitalize on interest rate hikes.

PKR964bn of PIB will mature in 2018: Based on the State Bank of Pakistan’s (SBP) auction data we expect roughly PKR964bn of Pakistan Investment Bonds (PIB) maturities in 2018. Of these maturities, half or nearly PKR514bn are 3Y PIBs maturing in 1Q2018, PKR416bn are 5Y PIBs maturing in 3Q2018 and the remaining PKR32bn are 10Y PIBs also maturing in 3Q2018. These PIBs carry a yield of 7.14%, 12.4% and 13.3% respectively.

Our Process For Estimating PIB Maturities: With respect to maturity profiles, banks disclose maturities by year for the total investments book. This includes clubbed maturities for market treasury bills (MTB), PIBs, Term Finance Certificates (TFC), Sukuks and other securities. Since PIBs usually carry the highest yields and form a significant portion of the investments book, it is crucial to estimate the PIB maturity profile of different books to judge which ones will have the liquidity to go into new PIBs once interest rates rise even further (we expect another 100bps interest rate hike in 2018).

We have estimated PIB maturities using a 7 step process:

1. Interest Rate Sensitivity Disclosures: We have started with the Interest Rate Sensitivity disclosure in bank’s financial statements. While the disclosure on “Contractual maturities of assets and liabilities” may be more accurate, this disclosure includes non-interest bearing investments which makes the process more difficult. The former disclosure excludes these securities as they are not interest rate sensitive.

2. Exclusion of Market Treasury Bills: After collating the interest rate sensitivity disclosure for the investments book, we have excluded the bank’s total market treasury bills position from the less than 12 month category (as that is the maximum maturity for an MTB).

3. Excluding Other Securities: Next we have collected data on the respective bank’s investment in particular sukuks, TFCs, sovereign bonds, Ijarah sukuks etc. Disclosures vary by bank in this category. If a bank discloses maturities for every single non – PIB security, it is relatively easy to get an accurate PIB maturity profile.

However this is not the case due to insufficient disclosures. We have tried to get as close of an estimate as possible in each case.

4. Investment Maturities Excluding MTBs and Other Securities: This is arrived at by 1 minus 2 minus 3.

5. Estimated PIB Maturities: We have finally arrived at the estimated PIB maturity by applying the same distribution (in terms of maturity) as calculated for number 4. For example if number 4 is equally distributed across several years, it is reasonable to expect that so are the PIBs.

6. Estimated PIB Maturity in %: For added clarity we have added in a column on the distribution of PIB maturities by year by bank.

7. Estimation Error: The estimation error depends on bank disclosures. The better the disclosures, the easier it is to reverse engineer PIB maturities with a higher degree of confidence.

ABL has one of the shortest duration of PIB portfolios: Allied Bank Limited’s (ABL) total investments book is mainly concentrated in MTBs and PIBs which makes the process relatively simple. Other securities held by ABL include some sukuks issued by Liberty Power which mature in 2021, PKR2.6bn of sukuks issued by Neelum Jhelum Hydropower maturing in 2026 and a PKR4.9bn foreign currency bond maturing in 2025.

Excluding these securities we expect roughly PKR139bn of PIB maturities for ABL in 2018 which constitutes roughly 58.6% of its PIB portfolio, with another 26.3% maturity in 2019. ABL has one of the shortest duration PIB portfolios in our coverage, which will provide ample liquidity to enter new PIBs in 2018-19 when interest rates rise further.

Assuming the PKR140bn maturity is two thirds 3Y PIBs and one third 5Y PIBs, the maturity will carry a weighted average yield of 8.9%. ABL’s current investment yield is 6.96% and we estimate a 8.1% yield on their PIBs portfolio. If ABL were to channel this liquidity into 5Y PIBs, we would not expect any reduction in the yield on investments for this bank.

49% of BAFL’s PIB Book is estimated to mature in 2018: Bank Al-Falah (BAFL)’s PIB portfolio also tilted towards the shorter maturities like ABL. We estimate that BAFL has a PKR70.8bn PIB maturity in 2018 which constitutes 49.4% of its PIB portfolio followed by smaller PKR20-30bn maturities every year. This is a positive for the bank as it allows it to benefit from the increase in interest rates. BAFL has also a PKR20.5bn Ijarah Sukuk 16 maturity in 2018, which gives it additional liquidity to invest in new papers. We believe BAFL has a ~8% PIB yield as well and as such should not face any material decrease in the yield on investments in 2018.

BAHL has a well distributed PIB Maturity Profile: Bank Al-Habib (BAHL)’s PIB portfolio is well distributed with PKR45bn of maturities in 2018, followed by a PKR14.5bn maturity in 2019 and a PKR43bn maturity in 2020. The bank’s maturities are tilted towards the shorter end and it has one of the lowest PIB / Deposits ratio at ~17% and as such the investments yield should remain flat in 2018 despite maturities, and rise going forward.

BAHL’s 2017 investments yield was 7.4% and we expect this to remain more or less flat in 2018.

FABL – PIB Profile is less relevant: Due to a high proportion of investments held as sukuks, which are undisclosed, we have the least accuracy in our estimates for Faysal Bank (FABL). We expect roughly PKR8.4bn or 37.3% of FABL’s PIB portfolio to mature in 2018. However since FABL only has a 6.1% PIB / Deposits ratio, PIB maturities are more or less irrelevant in estimating the bank’s future investments yield, which will be mainly driven by MTBs and Sukuks, which yield around the same level as KIBOR. FABL’s investments yield in 2017 was 6.7%.

HBL likely to witness PIB maturities of PKR268bn in 2018 : HBL has one of the highest expected PIB maturities of PKR268bn in 2018 which constitutes 43.3% of their PIB portfolio. The bank highlighted in its analyst call that the maturity in 3Q2018 alone is PKR100bn; this would be a 5Y PIB maturity. The majority of the bank’s PIB books is expected to mature within two years.

HMB has one of the Longest Duration of PIB’s: Habib Metropolitan Bank’s PIB portfolio is estimated to have a 56.5% maturity in 2021-22 based on available disclosures. The bank’s PIB portfolio has a longer maturity profile than average with just 8.9% of PIBs maturing in 2018. This is slightly unfortunate as the bank has a significant PIB position at 30% PIB / Deposits. If rates rise faster than expected in the medium term, HMB will be relatively poorly placed to benefit compared to some other banks.

MCB also Well Positioned to Capitalize on Rising Interest Rates: MCB Bank (MCB) has one of the highest PIB maturities at 46.2% of their overall portfolio in 2018 with PKR103bn of PIB maturities. 93.6% of the bank’s investments book is mainly MTBs and PIBs and therefore the bank does not have sufficient disclosures with regards to maturities of the remaining 7.4% other securities.

NBP will have a more Neutral Position with respect to PIB’s : National Bank of Pakistan (NBP) has a relatively equally distributed PIB portfolio with a small PKR32bn maturity in 2018 followed by PKR60-70bn maturing every year thereafter. Therefore the bank has a neutral liquidity position with respect to PIBs.

UBL not too Well Positioned on PIB’s: United Bank Limited (UBL) has a PKR132bn PIB maturity in 2018 followed by a similar maturity in 2019. Similar to NBP, the bank has an equally distributed PIB portfolio and will not particularly benefit (compared to other banks) in relation to its PIB portfolio.

Looking at PIB Portfolios, Its Safe To Say Margin Compression Is Mostly Over: Majority of the banks we have looked at have a shorter duration PIB portfolio, while some have a more equal distribution. In the previous years, PIB maturities such as the one in 3Q2016 was a major cause of concern as investment yields were expected to fall and indeed they did. The investments yield for these 9 banks fell from 8.04% in 2016 to 7.09% in 2017.

Going forward however we expect the yield to remain more or less flat in 2018 followed by an increase in 2019. As such we highlight that ABL, BAFL, BAHL and MCB have a relatively shorter duration portfolio and benefit greatly if interest rates rise faster and these banks choose to build up their PIB portfolios.