Macro Analysis /

Pakistan Economy – Regulatory tightening hits auto financing

  • The SBP once again revised Prudential Regulations (PRs) for auto-financing to moderate imports and demand growth

  • The revised PRs are negative for the Auto Industry and for PSMC especially due to the impact on lower income class

  • The PRs further dampen the sales outlook; according to channel checks sales are expected to decline by at least c 15%

Abdul Ghani Mianoor
Intermarket Securities
24 May 2022

SBP revises Prudential Regulations for auto financing once again  

The State Bank of Pakistan (SBP) has revised Prudential Regulations (PRs) for auto-financing to moderate imports and demand growth. This is the second time the SBP has revised the Prudential Regulations on auto-financing (September 2021), in order to curb demand from CKD imports (10MFY22 CKD imports clocked in at c US$2.0bn). This follows measures already taken which includes the 400bps policy rate increase from April 2022 and c. 20% FY22td PKR devaluation. These measures are aimed to further moderate demand, which has not slowed down since the last revision. 

Implications on Auto demand

Despite the measures taken to reduce the overall demand of the sector since September 2021 (increase in policy rate and revision in PRs), industry sales failed to slow down, and 10MFY22 volumes clocked in at c 228,000 units. The impact will be negative for the whole industry and especially for PSMC, in our view, as the company’s targeted income audience is likely to be impacted the most (refer to the table below).

The revised PRs are aimed at reducing auto-financing, which is likely to impact HCAR and PSMC the most due to the high share of auto financing contribution to overall sales (c 40-50%), while INDU’s auto-finance-led sales are c 30%, due to the greater share of sales in the rural centers. The revised PRs further dampen the bleak sales outlook for the Industry, which according to channel checks is expected to decline by c 15% in FY23 (prior to recently revised PR).