The State Bank of Pakistan (SBP), in its latest Monetary Policy Statement (MPS), reduced the Policy Rate by 50bps to 6%, from 6.5% previously, taking the Minimum Deposit Rate (MDR) down by the same to 4%. We believe banks with (1) a higher ADR, (2) investments in shorter duration T-Bills and (3) higher administrative expenses are likely to be adversely affected the most. On the other hand, banks with (1) higher investments in PIBs coupled with longer maturity profile and (2) higher share of Non-Interest Income are expected to be affected the least from changes in short-term interest rates. As a result, we cut our JS Banking Universe’s earnings forecast for 2015E by 0.2% and 2016F by 2.5%, where higher earnings impact on 2016F profitability is due to (1) full-year impact of trimmed topline and (2) maturation of hefty PIB investments in mid-2016. In tandem our Banking Universe valuations decline by an average 1.2% only, as we revise our risk free rate from 7.5% to 7% for valuation puirpose.
Average -1.2% -2.5%