Karachi: In a bid to resolve the circular debt issue (at least to settle accumulated balance est. at PkR280bn), the GoP will convert outstanding banking facilities provided to Power Holding Pvt. Ltd and NTDC into PIBs.
According to AKD Securities, for banks, this should lead to 1) improvement in asset quality metrics and CAR, 2) potential space for further exposure to the energy chain, 3) recognition of suspended interest income – est. PkR10bn for the industry, 4) better liquidity due to a more active PIB secondary market and 5) lower repricing at current PIB rates vs. – 6M KIBOR +2% earlier. Regarding the latter, anticipated interest rate declines going forward should again lead to book value gains (although the GoP may choose to delay the swap post the Oct 8′ll monetary policy statement). That said, this is a temporary solution which does not preclude the need for further power sector reforms and tariff increases. Nevertheless, AKD Securities sees net benefits for the banking sector at large, particularly for NBP, HBL, UBL and BAFL. The energy chain may also benefit, provided banks are willing and able to enhance exposure.
PIB Conversion: Over the last few years, banks have acquired sizeable exposure to the power sector through both direct loans and TFCs. However, repayments have faced delays although government guaranteed funding is exempt from provisioning, interest income on overdue facilities is held in suspense. Now, the GoP will convert outstanding banking facilities provided to Power Holding Pvt. Ltd and NTDC into PIBs (3yr: 20% of amount. Syr: 30% of amount, l0yr: 50% of amount). While this transaction should succeed in erasing accumulated circular debt (or at least the bulk of it), it does not address the root cause of circular debt. Nevertheless, most banks are likely to be pleased with the outcome.
Impact on Banks: Circular debt (including suspended markup) is estimated to stand above PkR28Obn of which AKD Securities understands that facilities of about PkR50bn had become overdue. As such, AKD Securities estimates that suspended markup for the industry is about PkR10bn where beneficiaries would include NBP (susp. markup: ~PkR1bn; EPS impact: PkRO.39), HBL (susp. markup: PkR600mn; EPS impact: PkR0.35) and UBL (susp. markup C PkR500mn; EPS impact: C PkRO.27). Medium-sized banks like BAFL and AKBL may also be able to realize material markup recognition considering their exposure to Power Holding (Pvt) Ltd TFCs on Dec 3110 stood at PkR18.4bn (83% of equity) and PkR7.2bn (43% of equity), respectively. That said, a drawback is that the PIBs are likely to be priced at yields which are lower than the existing rate on circular debt-related TFCs (~6M KIBOR + 2%) – the GoP may also choose to delay this swap transaction post the Oct 811 monetary policy (expected DR cut of at least 50bps) to lock-in a lower rate. While this may lead to some NIM compression going forward, the flipside is stronger balance sheets (improvement in CAR and asset quality metrics).