National Bank of Pakistan: Restricted NPLs to potentially unlock ROE – Foundation Research
By: Foundation Securities Pvt. Ltd.
We reinitiate our coverage on National Bank of Pakistan (NBP), largest public sector bank, with a Neutral rating and set our Jun-15 target price at PKR69.3/sh, implying upside of 2.7% and D/Y of 8.9%. While we favorably view the reduced risk of asset contamination and aggressive investment in PIBs by NBP, lower ROE is a restricting factor for our valuations, in our view. Improving ROEs owing to contained NPLs may potentially allow a reduction in the trading discount to its peers.
Reduced risk of asset contamination
We see the risk of asset contamination to subside on the basis of (1) govt’s increased focus to improve Public Sector Enterprises’ performance and (2) improved borrowers’ capacities in lieu of further monetary easing. Hence we see reduced infection ratio would restrict provisioning going forward. We have incorporated the lower infection ratio which would gradually improve from 17% in CY13 (highest among top 5 banks) to ~14% over investment horizon of 5yrs. Simultaneously improving coverage ratio would lower the risk of surprise NPLs going forward. In this regard, we remain conservative regarding recovery levels and any positive surprise would warrant a case revisit.
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