Rate Cut Impact on Sector and Stocks; KIBOR Further

Islamabad..Staff Report
The central bank of Pakistan in its decision taken on Monday announced a rate cut of 150bps, taking the policy rate down to 20.50% effective June 11, 2024. Practically speaking, the market was already expecting a rate cut as the benchmark lending rate, 6M KIBOR, was trading at 20.68% as of June 10, 2024, 132bps lower than the policy rate. However, KIBOR is further down today by 56bps and is currently trading at 20.12% as of 11:25 am, according to Bloomberg. Similarly, the 6M T-bill is currently trading ~68bps lower than yesterday’s closing of 20.38%, now at 19.60%.CCP Approves Product Supply Deal between Aramco and GO Petroleum

Banks: We believe banks will be hit on their returns on current account deposits, which will result in narrowing their spreads. On average, we expect banks to have a negative impact of 8% as a percentage of their profits. Banks like UBL Bank (UBL) and National Bank (NBP) have high repo exposure, causing negative NII growth of 20% and 11%, respectively, during 1Q2024. We believe this decline in interest rates will be positive for these banks.

Cement: Due to the capital-intensive nature of the business, cement companies are highly leveraged at PSX due to their frequent expansions. The sector is currently trading at a Debt to Equity ratio of 0.53x. Theoretically, we believe companies like DG Khan (DGKC), Pioneer Cement (PIOC), Bestway Cement (BWCL), and Fauji Cement (FCCL) will have a positive impact of 3-5% per annum.

Steel: The steel sector is currently trading at a Debt to Equity ratio of 0.70x. Among the companies, we believe companies like Mughal Steels (MUGHAL), Agha Steels (AGHA), and Amreli Steels (ASTL) will benefit in the range of 5-22%.

Textiles: The textile sector has a Debt to Equity ratio of 0.89x. We believe this sector is among the top beneficiaries as their fixed rate/subsidized loans were repriced to market rates in December 2022. Companies like Gul Ahmed (GATM), Nishat Chunian (NCL), Nishat Mills (NML), and Interloop (ILP) will benefit by 3-6%.

Pharma: Select companies in the Pharma sector are highly leveraged, such as Searle Pakistan, which acquired OBS Pharma through a leveraged buyout. We believe Searle Pakistan (SEARL), Ferozsons (FEROZ), and AGP Pharma (AGP) will benefit by 10-35% to the bottom line.