AKD Quotidian about — Higher CPI in FY14 points to higher interest rates

Karachi, July 10, 2013 (PPI-OT): Having registered at 5.85%YoY/O.72%M0M in Jun’13, AKD Securities expects CPI to increase by 1.8%MoM which will lead Jul’13 CPI to clock in at -8%YoY.

According to AKD Securities this is corroborated by the SPI trend which suggests a steep MoM increase of 3% which AKD Securities attributes to uptick in price pressures on the back of 1) increased prices of food and clothing during Ramadan, 2)1% increase in OST, 3) increase in petroleum product prices and 4) the impact of house rent.

Going forward, AKD Securities sees inflationary pressures sustaining as structural reforms ensue and if the NcR weakens. Where AKD Securities full-year CPI estimate stands at -9.5%YoY. In this regard, within the backdrop of a fresh IMF program, secondary market yields have begin to inch up with 10yr PIB yields up by 57bps to 11.5%. This potentially points to a reversal in the monetary policy cycle where AKD Securities flags banks as key beneficiaries.

AKD Securities banking models already incorporate interest rates averaging 10% across CYI4F where a 25bps increase in this assumption will, all else the same, lead to an average uptick of 6.5% in base-case earnings estimates. AKD Securities retains preference for UBL and BAFL while flagging that NBP is likely to continue its ongoing rally.

CPI Preview: Having registered at 5.85%YoY/O.72%MoM in Jun13, AKD Securities expects CPI to increase by 1.8%MoM which will lead Jul’13 CPI to clock in at -8%YoY.

This is corroborated by the SPI trend (+3%MoM) which AKD Securities attributes to uptick in price pressures on the back of 1) increased prices of food and clothing during Ramadan, 2)1% increase in GST, 3) increase in petroleum product prices by 2%MoM and 4) the impact of house rent in the first month of the quarter. AKD Securities sees CPI averaging at 9.5% across FY14.

Interest Rate Outlook: The Discount Rate at 9% impales positive real interest rates of 1.6% going by the average FY13 CPI of 7.4%.

That said, real interest rates may not remain in positive territory for long considering uptick in price pressures as structural reforms ensue (e.g. power tariffs are raised) and if the PkR weakens (AKD Securities sees the PkR weakening by 8% vs. the US$ in FY14 to reach PkR1O68/US$ at end-Jun’14).

Within the backdrop of a fresh IMF program, AKD Securities sees the interest rate cycle reversing by 2HFY14. In this regard, secondary market yields have begin to inch up with 10yr PIB yields up by 57bps to 115%

Banks in the limelight: Over the last week, the listed banking sector has gained 7.5%, ostensibly driven by expectations that interest rates have bottomed out as well as by potential relief on the rate floor on savings deposits.

Regarding the former, AKD Securities banking models already incorporate interest rates averaging 10% across CY14F where a 25bps increase in this assumption will, all else the same, lead to an average uptick of 6.5% in the AKD Banking Universe base-case earnings estimates for the next year.

Similarly, 1 ppt cut in the savings a/c rate floor to 5% will likely lead to an increase of 5%-1O% in earnings estimates across AKD Securities forecasts horizon. Within this backdrop, AKD Securities retains preference for UBL and BAFL while flagging that NBP is likely to continue its ongoing catch-up rally.