MDR cut in the cards? Research Buy Taurus Securities

MDR cut in the cards? Research Buy Taurus Securities

Since the announcement of last monetary policy, the market is ripe with rumors pertaining to cut/removal of MDR (similar to pre May’08 era). Although banking sector spreads have gone into tailspin, we believe the removal of MDR is unwarranted given low savings to GDP of country, a key

focus of SBP of late. However, slash of 1‐2% in MDR can not be ruled out to favor banks, whose spreads are at multi‐year low at present. Impact of cut in MDR is varied on banks, depending upon the  composition of savings account to their overall deposit mix. Banks with relatively higher saving accounts stand to benefit the most if SBP slashes MDR, while the impact will be relatively muted on banks with proportionately lower savings account in their deposit mix. Banking sector spreads on a free fall

After peaking in July’11, at 7.88%, the banking sector spreads are on a continuous downward spree, thanks to cut in discount rate pulling the asset yields downwards and at the same time the adverse banking regulations, such as hike in MDR from 5% to 6% and calculation of interest on average balance, pushed the cost of deposits higher. As a result, banking sector spreads are at a multi‐year low, whereby the last reported spread clocked in at 6.34%. SBP further slashed discount rate by 50bps in June monetary policy. As the asset book of the bank will be re‐priced, the spreads may be further squeezed below 6%, which were last seen some 8 years back in FY05.

Cut in MDR is not uncalled for

Although market is ripe with rumors that SBP may do away with MDR in the coming days, and let the banks decide for themselves the minimum deposit rate, we consider the possibility of it happening is low. Recall that SBP  imposed MDR of 5% in May’08, to foster savings‐to‐GDP ratio, mobilize deposits and arrest surge in banking spreads in rising interest rate environment. Although sector spreads have declined considerably, but savings‐to‐GDP ratio remains abysmally low, which does not warrant doing away with the floor in MDR. However, we will not be surprised to see a cut of 50‐ 100bps in MDR, to provide respite to the banking sector.

1% cut in MDR will bolster earnings by 10‐15%

Any cut in minimum deposit rate will be positively braced by the industry and investors. For banks with proportionately lower savings accounts in their deposit mix will have limited earnings upside, while others with  relatively higher savings accounts in their mix, the earnings upside will be significantly higher. In our TSL universe, Bank Alfalah and MCB stand to benefit the most for any decline in MDR owing to higher

savings mix, while benefit to UBL will be relatively muted as provided in the table.