Banking Sector: New regulations call for portfolio adjustments
The banking sector has been active participant in equity markets as depicted by their volumetric activity. The sector on average contributes 5% of the total daily trading volumes. The recent revision in the prudential regulations may force the banking sector to revisit their approach towards stock market. The central bank has revised the aggregate investment exposure limits of Banks/DFIs creating a room for some banks such as MCB, UBL and BAFL to increase their equity investments exposure. On the flip side, the inclusion of strategic investment within the capped limit would call for adjustment of investments portfolios of ABL, NBP, HBL and FABL, we believe.
Though the adjustments of portfolio may exert pressure in the market, we highlight the event as an opportunity for investors to increase their exposures in many blue chip companies. We maintain a positive outlook towards the market as we read to our theme of economic revival could result in re-rating of the sector.
Revision in Investment Exposure Limits
The State Bank of Pakistan has recently revised the prudential regulations for corporate and commercial banking system. As per the fresh regulations, the aggregate investment limits of the banks and DFIs (which are mobilizing funds as deposits/COIs from general public/individuals) are capped as 30% of their equity (excluding surplus on revaluation of assets). The said limit also includes exposure as a result of strategic investment and investment in units of all forms of Mutual Funds, (excluding NIT units till its privatization). Previously, the banks were required to obtain maximum exposure up to 20% of their own equity, while DFIs which are mobilizing funds as deposits/COIs from general public/individuals were required to limit their exposure to 35% of their equity. Moreover, as per the previous regulations the strategic investments were excluded from the above limit of 20% and 35% respectively.
Position of Banks under new regulations
As per our understanding, the revised regulations coud provide additional room for some banks to increase their exposure if they opt to benefit from booming returns of the stock market. A glance at the books of MCB, UBL and BAFL reveal relevant exposures standing at 9%, 25% and 28% respectively. On the flip side ABL, FABL, NBP and HBL carrying these limits as 78%, 43%, 40% and 35% respectively, drawing a scenario of investment exposure adjustments of these 4 banking entities. Moreover, in order to be compliant within the revised limits, we also expect capital gain event could arrive in these 4 banking entities within the time line granted by SBP i.e. Jun 30’15.