DESPITE their initial hue and cry, representatives of the manufacturing, power, industry and allied sectors can take heart from the FY16 budget, which contains many sector-specific proposals that would, hopefully, act as a boon for the economy.

But bankers should probably be allowed to vent some disappointment, as their sector has been at the receiving end of some harsh regulatory and fiscal measures of late.

The FY16 budget marked the second time in less than a month that the industry was forced to rethink the way it does business. After the State Bank of Pakistan effectively reduced their margins by introducing a target rate, the budget proposed a 4pc ‘super tax’ on banks earning over Rs500m in FY15.

The budget also introduced a uniform tax rate of 35pc on all sources of banks’ incomes, effectively penalising firms that over-rely on capital gains from their equity dealings.

Given this double whammy, many bank investors and analysts alike had become a bit downbeat about the sector’s expected stock market performance for the rest of the year. Virtually every analyst who was ‘overweight’ or ‘market weight’ on banks switched over to ‘underweight’ in a matter of 1-2 weeks.

While virtually all bank stocks are down from their levels at the start of the year, they have proved to be remarkably resilient these past few weeks, in the absence of any real positive news flow for the sector

But “investors have very short memories,” as remarked Russian oligarch Roman Abramovich.

While virtually all bank stocks are down from their levels at the start of the year, they have proved to be remarkably resilient these past few weeks, in the absence of any real positive news flow for the sector.

An analysis by this writer of the stock market performance (till last Thursday) of the 10 largest banks by assets shows that a majority of them had hit their year-low levels in March, i.e. before the introduction of the target rate and the budget announcement.

But March was also the worst-performing month (since May 2010) for the benchmark index, which dropped over 10pc from the previous month. So the dip was not just limited to banks.

Multiple factors were at play that contributed to this broader meltdown in March, including foreign selling (including by a foreign fund that imploded and was forced to wind up) and forced liquidity shortages alleged caused by some big brokers as the regulator tried to introduce some reforms into the capital markets.

Regardless, many bank stocks have rapidly regained lost ground over the past two months. For instance, after dropping almost 22pc to a low of Rs169.4 a share in March from the start of the year, Habib Bank Ltd’s stock has since gone up 20.7pc and reached Rs201.92 a share by last Thursday.

Similarly, Askari Bank is another financial firm whose stock has recovered significantly (19.5pc) from its year-low level in March.

This seeming resilience of some bank stocks has confused sector watchers to some extent. Talking to Dawn over phone last week, Kasb Securities analyst Farid Aliani said bank stocks in general have underperformed the broader market this year.

But he admitted that the quantum of the drop in the stock prices of banks, particularly the mid- and small-tier ones, has not been as big as expected given the negative headwinds facing the sector in the short- to medium-term.

“One reason for this can be that the market generally prices in a lot of developments before they actually happen. For instance, bank stocks have stayed subdued throughout probably due to expectations of continued monetary easing and some changes on the regulatory front,” he said.

That seems to be borne by the fact that the SBP had issued its white paper regarding the introduction of a target rate in February; so the market had ample time to process the information before the changes were actually introduced in the May 23 monetary policy announcement.

Meanwhile, there are some inherent advantages available to the bigger banks that would allow them to weather any short-term disruptions. And this is ultimately reflected in their recent stock market performance. Apart from MCB Bank, stocks of all the top five banks are up double digits percentage points from their respective yearly lows.

Banks with sizable incomes from their overseas operations, like HBL and United Bank Ltd, will be only partly hit by the shrinking margins at home, and would also stand a better chance to deal with them by going for higher lending owing to their relatively better risk-adjusted capital cushions.

By end-March, the big five banks enjoyed a cumulative capital adequacy ratio of 16.9pc — against 13.5pc for the next five large banks and 14.4pc for banks ranked 11th to 20th, according to SBP data. The big banks also have better access to cheap customer deposits, having a 57pc share in the industry’s total current and savings accounts (Casa) deposits.

Besides, they are also likely to play a more prominent role in financing various infrastructure, housing and power projects etc that are expected to come online over the next few years as the economy enters its growth phase.

Published in Dawn, Economic & Business, June 22nd, 2015

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