Pakistani Banks: TP Revisions post DR cut

Pakistani Banks: TP Revisions post DR cut

Pakistani banks, particularly the larger ones, are not unduly concerned about the latest 50bps cut in the DR to 9% where continued decline in NIMs is expected to be neutralized by balance sheet growth, lower credit costs and opportunistic realization of capital gains. While we are compelled to trim the AKD Banking Universe CY13F/CY14F EPS estimates by ~5% on average, we keep target prices largely intact in view of a lower discounting rate (ABL and HBL see higher TPs with model rollover). At the same time, we maintain our dividend estimates. As a result, while banking shares have taken a hit this week, we advocate a buy on dips stance as valuations remain un-stretched. In this regard, we retain faith with the larger banks where we reiterate that UBL and BAFL are preferred plays. Moreover, we believe hitherto underperforming NBP and ABL are now overdue for catch-up price performance.

Strong EA growth: As per data updated till Jun 14'13, sector earnings assets have increased by 15%YoY, primarily led by continued funds flow to GoP securities (investments up 23%YoY/ADR down to 51%). As per banks managements, despite spreads at an 8yr low (6.2%) and further monetary easing taking place, investing in GoP securities will likely continue to remain in vogue. Private sector credit offtake continues to be affected by low demand as well, which remains impeded by the energy crisis.      .

Lower credit costs: With NPL stocks stabilizing, banks are witnessing a sharp reduction in credit costs (CY12: 0.9%, CY13F: 0.3%) with superior asset quality plays such as MCB and ABL recording net provisioning reversals in 1QCY13. We expect this trend to take root going forward and extend across the medium-term even if legacy FSV benefits come in for expiry. 

Higher capital gains: Banks/DFIs have recorded Net Sell of PkR8.3bn in 2QCY13TD, easily the highest since NCCPL data is available. One-off gains from ULEVER share sales aside (which largely impact MCB), it appears banks are increasingly booking capital gains to counter tighter NIMs. At the same time, we believe it is likely that opportunistic booking of capital gains on fixed income securities is accelerating as well.          .

Investment perspective: While banking shares have taken a hit this week, we advocate a buy on dips stance as valuations remain un-stretched while likely high capital gains may lead to positive earnings surprises from banks in 2QCY13 results. We retain faith with the larger banks where we reiterate that UBL and BAFL are preferred plays. At the same time, we believe hitherto underperforming NBP and ABL are now overdue for catch-up price performance