Lahore - Extreme volatility was seen in the Karachi market this week following the trend in regional equities and commodities markets.

The KSE-100 after falling by 4% on Monday recovered to close down by 0.2% WoW. Rate cut and change in reserve requirement ratios by China on Wednesday were the catalyst for recovery in global markets in the later part of the week. Foreigners remained net sellers in Pakistani market during the week as they sold shares worth US$42.2mn. Their total net selling for the month has now reached US$79.9mn while their 2015YTD net selling has reached US$175.7mn.

During this week, major selling by foreigners was seen in Banks (US$12.2mn), Oil & Gas (US$10.9mn), and Electricity (US$7.2mn) sectors.

Local mutual funds were other net sellers in the market during the week as they sold shares worth US$15.0mn.

Following decline in international crude oil prices, Oil & Gas sector fell by 9% during the mid part of the week. However, sharp recovery in international prices on Friday helped oil sector to recover, thereby closing down at 3.1% WoW.  

During the week, meltdown in global equities and currencies sparked a firestorm at the Karachi Stock Exchange (KSE) as well, as the benchmark KSE-100 index shed 6.1% during the last two trading sessions.

Selling from foreigners remains a concern for local investors as investors continue to withdraw money out of emerging markets.

At the KSE, foreigners hold $7.4bn worth of equities that is ~32.4% of the free float capitalization and 9.6% of the total market capitalization.

In YTD 2015, foreigners have been net sellers worth US$137mn at the KSE vis-a-vis net buying of US$386mn in 2014, with net US$43mn offloaded in August 2015.

Sector-wise breakup shows foreigners preference for commercial banks with net US$6mn investment in August 2015.

Experts bullish long-term outlook on KSE remains intact, where we believe local bourse will ride out the current storm on the back of (1) strong liquidity and profitability and (2) nonexistence of margin trades relative to other markets.

According to experts, weighted average banking spreads clocked in 37bps YoY lower in 7M2015 at 5.71%, as lending rates dropped by 104bps YoY vs. 67bps YoY fall in deposit rates. 6M KIBOR slipped 237bps YoY to 7.79% in 7M2015, however lending spreads expanded to 230bps vis-à-vis 97bps in 7M2014, minimizing the brunt of sliding interest rates. Lending rates in July 2015 averaged 21bps MoM lower at 9.42%, while deposit rates went up by 6bps MoM to 3.95%. As a result, July 2015 weighted average banking spreads clocked in at 5.47%, down 27bps MoM and 48bps YoY. Fresh spreads in July 2015 depicted the same trend, clocking in at 2.88%, a decline of 73bps MoM & 155bps YoY on declining lending rates and reverse trend in deposit rates. Average fresh spreads in 7M2015 were 105bps lower at 3.82%.

According to the recently released data by SBP, banking sector spreads have shrunk by 32bps MoM to 5.47% during Jul’15 compared to 5.79% in Jun’15. Lending rates declined by 21bps to 9.42% while deposit rates rose by 11bps to 3.95%.

That said, fresh spreads during Jul’15 declined by massive 74bps to 2.87% mainly due to 37bps dip in lending rates and a contrary 38bps surge in deposit cost. Cumulatively, in 7MCY15, weighted average spreads have compressed by 36bps to 5.72% compared to 6.08% in SPLY.

 According to another data released by SBP, credit to private sector declined by PKR57bn to PK3.3trn. Major retirements were witnessed in food and textile sectors. Cumulatively, during 7MCY15, loans to private sector declined by PKR52bn compared to fall of PKR8bn in SPLY and PKR86bn in similar period in last five year.

During the week, Karachi Stock Exchange (KSE), Lahore Stock Exchange (LSE) and Islamabad Stock Exchange (LSE) have signed an MOU (Memorandum of Understanding) to integrate the 3 stock exchanges to form uniform exchange called Pakistan Stock Exchange (PSE).

Indus Motor Company (INDU) announced 4QFY15 earnings of Rs2.7bn (EPS Rs34.2), up 73% YoY. Earnings increased, despite 43% effective tax in 4QFY15, due to 130% YoY increase in sales revenue and 174bps increase in gross margins.

Kot Addu Power Company (KAPCO) posted earnings growth of 6% YoY to Rs2.7bn in 4QFY15. Earnings increased on the back of 1) 369bps increase in Gross Margins to 16.7% and 2) 46% decline in admin cost to Rs151.9mn. Although PBT rose by 23% YoY, 927bps rise in effective tax rate to 39.4% dented bottom-line growth.

Bank of Punjab (BOP) also declared its 2Q2015 consolidated results. Earnings increased to Rs1.4bn (EPS Rs0.9), up 55% YoY, mainly on the back of 438% increase in non-interest income. Non-interest income rose as the bank realized capital gain of Rs1.7bn versus just Rs65mn in similar period last year.