Pakistan Banks headed for growth again! – Research of the Day by AKD Research
By: Raza Jafri,
Head of Research
AKD Securities Limited
The listed banking sector has gained 42%CYTD, broadly at par with the KSE-100 Index, as tighter regulatory directives on interest rate margins have been countered by strong balance sheet growth and visible improvement in asset quality. We believe similar themes will persist over the next year with growth for our banking universe poised to rebound to 11%YoY in CY14F after a 6%YoY decline in CY13F. That said, considering banking share price performance has been robust and that regulatory risks remain, we have a Marketweight stance on Pakistan Banks particularly as sector ROE is projected to dip in CY14F before it rises over the medium-term. Within this framework, we maintain a selective preference for NBP, ABL, UBL and BAFL, names that are in the midst of a structural turnaround/are relatively shielded from regulatory risks. On the flipside, we fail to find the same allure in MCB and HBL where we believe strengths such as ample CAR cushion in the face of upcoming Basel III requirements are adequately priced in.
Strong NII growth: Despite the SBP recently tying the rate floor on savings deposits to the DR, effectively curtailing NIM expansion in a rising interest rate environment, higher NII is likely to be an important growth driver for Pakistan Banks. In this regard, while NIM expansion will likely be modest, continued double-digit balance sheet growth should lead to 12%YoY NII growth in CY14F for our coverage cluster vs. a 4%YoY decline in CY13F. Furthermore, even if the SBP further tightens the interest rate corridor (+/- 250bps at present), banks should still be inline for growth next year. Strong NII should also counter any potential dip in capital gains after a strong run across the last few years.
Credit costs coming off! The systemic NPL stock peaked in mid-CY12 and has since been coming off to last register at PkR579bn for commercial banks (NPL ratio: 15.7%). At the same time, coverage has steadily climbed to more than 74%, its highest level in 5yrs. Considering a bout of fresh infection over the next few years is unlikely while coverage is adequate, we see our universe banks delivering low credit costs (<0.5%) across the medium-term, exemplified by banks with superior asset quality (MCB/ABL) already posting net provisioning reversals. This should provide key support to the bottomline across the medium-term.
Capital strength provides buffer: Basel III directives come into effect from end-CY13 with minimum CAR set to gradually increase from 10% at present to 12.5% by end-CY19. In this regard, most of our coverage banks are comfortably placed where CAR averaged 16.3% for the Big- 6 banks at the end of CY12. This entails high likelihood of continued strong dividend payouts across the next 2-3yrs, which should negate any potential volatility in earnings. For banks that have a relatively limited capital buffer (UBL/BAFL), we incorporate fresh subordinated debt as CY19F approaches.