AKD Quotidian about

Karachi: Listed banks profits were up 5%QoQ in 2QCY1I and AKD Securities expects overall banking sector profits to continue showing a similar growth trend in the ongoing quarter.

According to AKD Securities, this should occur due to modest NII growth (despite NIM compression) and likely higher non-interest income. Although AKD Securities expects asset quality to improve after a lag, immediate respite may arise from proposed conversion of circular debt exposure into PIBs. In this regard, considering that monetary easing has recommenced, AKD Securities flags NBP, HBL, UBL, HMB, BAFL and AKBL for book value gain (on their heavy PIB holdings). While AKD Securities remains cognizant of fresh challenges to the economy, AKD Securities believes there is an opportunity for near-term gains in banking sector, particularly as 1) banks have shed 15%CYTD to trade at highly attractive valuations and 2) banks tend to return their best price performance in the Jan- Mar quarter. At current levels, AKD Securities retains its preference for the Big-5 Banks (MCB and UBL in particular).

Nil to grow despite tighter N1Ms: Sector deposits were up 16%YoY at Aug’11 while funds flow continued to channel into government securities (investments up 48%YoY; advances up 3%YoY). While NIMs will likely contract in 3QCY11 (weighted average Jul’11 spreads of 7.88% represent a peak), Nil should continue to show modest sequential growth due to growth in earning assets.

Asset quality to improve with a lag: Some fresh NPLs may arise post Sindh floods. SBP data indicates sector provisions are up a relatively high PkR95bn in Jul-Aug’11 (largely due to ageing in AKD Securities’ view) while fresh slippage in Sep11 may lead to further provisioning. That said, some respite to asset quality should arise following successful conversion of circular debt exposure into PIBs, where this should lead to declassification of NPLs, improvement in NPL/coverage ratios and recognition of suspended markup.

Fx income could surprise: Sequential growth should be driven by 1) higher dividend income (most companies in Pakistan follow the fiscal financial year and announce payouts alongside full-year results) and 2) higher Fx income, as gains on this front tend to enhance with currency volatility (the PkR/US$ has shed 2.1%FYTD). However, capital gains may be lower/impairment may be higher given the KSE-100 Index has shed 9%FYTD. NBP and ABL maintain large equity portfolios relative to their capital base.

The +ve side of interest rate risk: With the SBP reducing the DR by 50bps in Jul’11, banks stand to gain on their fixed income portfolio particularly the long-term PIBs. Among the Big-5 Banks, AKD Securities flags NBP, HBL and UBL as likely key beneficiaries while HMB, BAFL and AKBL frorri within the medium banks space are also heavy on PIBs. Continued monetary easing should lead to higher book values for these banks, which should compensate for lower NIMs.

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