KARACHI - After enjoying robust growth, the banking spreads are likely to face tough time during the remaining months of 2009 in response to 100bps cut in discount rate. Banking spread after touching its peak of 7.78 percent in January 2009 is already on downward trajectory and it fell to 7.62 percent growth in February 2009. With the fall in discount policy rates, Karachi Inter-Bank Offer Rates (KIBOR) is expected to decline by 150-170bps, to 12.5-12.28pc. A cut in KIBOR results in an immediate downward re-pricing of lending rates and vice versa. However, some experts are not expecting quick major change in banks lending rates. It must be recalled here that from March 2009, KIBOR had started to trade in a range of 12.5 percent. After T-Bill auction on April 8, 2009, it went up to 13.5pc. Analysts are of the view that the fall in KIBOR and T-bill rates, resulting from easing of 100bps in discount rate would be neutral for banks. The Non Performing Loans (NPLs) could see some improvements in the coming months of CY09. Nevertheless, advances growth momentum of the banking sector is likely to remain sluggish at least in the short term as overall lending rates are still very high. While the decline in KIBOR will lead to a downward re-pricing of the lending rates, the minimum obligation of 5pc return on saving accounts (highest share in the deposit mix of the sector) will hold the cost of funds. Due to this phenomenon, downward trend in spread is likely to be witnessed in the aftermath of the rate cut by SBP. The decline in discount rate will not drive the volumetric growth in the banks loan book in the wake of subdued performance of the real sector. Besides, the mere reduction of 100bps is not likely to arrest the rising pattern of the Non Performing Loans (NPLs). The interest rate cut bodes well for the future course of the stock market as investors now expect further rate cuts in going forward. The market however had already incorporated the expected cut in policy rate, taken a clue from the recent PIB auction in which cut off yields were down by 100-195bps. Nonetheless, scrip wise buying will be observed specially in the stocks which have near term growth in earnings and better dividend yields. The rate cut is positive for auto assemblers in particular as car financing rates would be lowered hence improving car sales outlook especially in the medium term when further rate cuts materialise. Moreover, heavily leveraged sectors like cement and textile, whose loans are floating (linked with KIBOR), will benefit from lower interest charges. Interest rates cut improve the overall investor sentiment on the greater channelling of funds towards the stock market considering the comparative attractiveness of equity investments vis-a-vis other avenues. However, the decline in interest rate has already been incorporated in the prices of the securities. Thus, experts recommend profit taking at current levels. The higher leveraged sectors (like textile, cement and few fertilizer companies) cost of borrowing will reduce as they are mostly linked with KIBOR. On the other hand, the resultant decline in deposit rates would be slightly negative for E&P and Auto assemblers as their return on bank deposits would be reduced. The step to lower the discount rate by 100bps will reduce the cost of equity due to expected decline in bond yields. IPPs are ideal investment alternative to fixed income schemes due to their predetermined dividend stream. The decrease in interest rates improves the attractiveness of the IPPs for investors. Therefore, a 100bps decline in PIB yield improves the fair value of Kapco and Hubco by 5-6 percent.