CY21 marks a year of strong SBP regulatory actions: report

The calendar year 2021 (CY21) marks yet another year of strong regulatory actions on part of the central bank in a sharp contrast to CY20 where State Bank of Pakistan (SBP) put all its resources to stimulate growth.

However, this time focused on supplementing the government’s intent to promote the housing and construction sector, rolling back incentives allowed during Covid-period, besides introducing tangible actions to put growth on sustainable footing.

According to a research-based report issued on Tuesday by AKD Securities, some of the major changes to regulatory framework are, i) Ease in requirements for availing low-cost house financing, ii) Enhancing regulatory limit of investment in REIT to 15pc of bank’s equity vs. 10pc previously and lowered applicable risk weight for calculation of capital ratios to 100pc from 200pc previously, while reduced restrictions in existing regulations for financing against shares of listed group companies, iii) introduction of refinance scheme for SME sector with partial credit guarantees from government to participating banks for a period of three years, and iv) tightened regulation on consumer financing and re-imposing cash margin on certain imported items to clamp down unwarranted demand side pressures.

The SBP also tightened its grip on FX transactions in the country placing per person limits on currency flows. “Return-to-normal” phenomenon was most visible in SBP policy-making where the Central Bank remained pro-active to risks to fragile economic fundamentals and re-adopted inflation targeting approach for monetary settings in the latter part of the year.

It increased its policy rate by 275bps in the last 4M of CY22 to 9.75pc while also increased Cash Reserve Requirement (CRR) for banks to 6pc from 5pc previously. In terms of interest rate hike’s impact, we expect MEBL to record the largest gain with interest rate sensitive assets / liabilities standing at 1.85x, followed by UBL (due to conversion of Fixed PIBs into floating ones).

The authorities also detracted fee waiver on IBFT transactions, limiting zero transaction fees for amounts up to PKR25K/month (MEBL stands to be the major beneficiary from such measures).

Lastly, SBP realigned itself to Pakistan’s tech-wave, introduced a framework for EMI (Electronic Money Institutions) licensing mainly for development of the payment ecosystem in the country, and establishment of Digital Banks which would further the objective of the Central Bank of financial inclusion.

The report said that housing credit to further gain traction as credit for housing and construction has grown by PkR100bn only in the past 6M to PkR355.4bn with banks yet to disburse 67.5pc of approved amount under the government’s housing project.

With tightened regulations on other consumer financing products possibly materializing in the next three months, housing credit is likely to further take precedence on other products particularly with regulatory targets in place. Establishment of digital banks is another interesting proposition in our view (SBP has placed a limit of 5 banks as of last update) and can fascinate traditional banks given its immense potential in Pakistan’s landscape.

From an investment perspective, we have a strong preference for the sector in CY22 with interest rate tightening potentially continuing in 1HCY22 but at a gradual pace allowing for faster translation of interest rate curve into sector’s earnings profile. Additionally, with the authorities capping growth, a move to value stocks is likely with the banking sector at an attractive levels being the major beneficiary.

DailyTimes, 19 Jan, 2022
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