KARACHI: Contrary to common perception, earnings of Pakistani banks will not be substantially affected due to falling interest rate, said a report of Topline Securities issued on Tuesday after the release of the fresh monetary policy.
The monetary policy was announced on Saturday with a cut of 50 basis points setting the policy interest rate at 8 per cent. However, a fear that falling interest rate would slash the profit of banks depressed its trading in the equity market.
The falling interest rate will not affect banks profits because cost of deposits and lending rates have been re-priced within a few months due to falling rates.
“In fact, locking investment in high yielding PIB in 2014 will support profit growth amid falling yields,” said the report.
According to the report, Pakistan banks stocks are underperforming and are down 22pc from its peak in the last six weeks.
“After reducing the rate by 200bps in the last four months (including latest 50bps cut on March 21, 2015), policy rate has reached 13-year low of 8pc. Considering lower inflation and stable external accounts, we expect 50bps further cut in policy rate in 2015.
“Based on the assumption that benchmark interest rate will further fall 50bps to reach and bottom out at 7.5pc, our sample banks earnings will grow by 24pc in 2015 after witnessing an abnormal growth of 30pc in 2014,” said the report.