Pakistani Banks Spreads surprise in May'13

Banks: Spreads surprise in May'13 Weighted average banking sector spreads have depicted a surprising rebound of 15bps MoM to 6.34% in May'13, the highest since Dec'12. In this regard, deposit rates have come off by 8bps MoM to 5.15% while lending yields have gone up by 7bps MoM to 11.49%. That said, industry spreads will likely trend lower in 2HCY13 to ~6% considering the SBP has recently cut the Discount Rate by 50bps to 9% and no relief has been given on the rate floor on savings deposits. Following the cut in DR, although banks will clearly be affected by tighter interest rate margins (preliminary workings suggest AKD Banks Universe CY13F/CY14F EPS estimates will be trimmed by 5% on average), we see limited impact on target prices and our investment case remains intact given the lower risk free rate. As such, although banking sector shares may remain under pressure in the immediate-term, we believe their valuations, for the most part, are very attractive which should cushion further downside while being supportive of a rebound before too long. Importantly, even though banks earnings across CY13F/CY14F will likely be soft, their dividends should remain stable given strong capital bases. This underpins our selective preference for the larger banks where we like UBL, BAFL and NBP.