By: InterMarket Securities Limited
Moody’s has upgraded outlook for Pakistani banks from ‘Negative’ to ‘Stable’ on (i) uptick in macro cycle underpinned by SBP’s accommodative monetary policy and (ii) GoP commitment to the IMF program. Risks include trimming of capital buffers as asset mix shifts from zero‐risk weighted GoP securities towards private sector lending.
The outlook upgrade is cognizant of pressures to banking profitability on NIM compression; with ROA projected at 1.4%‐1.5% next year vs. 1.6% in 1HCY15. We concur, where we see IMS Banks Universe profit growth at 6%YoY for CY16F.
That said, Moody’s outlook upgrade could result in valuation rerating for Pakistan Banks. For illustration purposes, a 50bps reduction in the discounting factor raises our TPs for coverage banks by 6% on average. At current levels, our top picks are ABL (TP: PkR130/share) and UBL (TP: PkR195/share) while we flag NBP (TP: PkR60/share) as an attractive short‐term play.