46% of our sector coverage has now reported Q1 19 results. Median earnings growth has been 17%, 9% ahead of expectations for these names, and above our FY 19 sector forecast of 15% earnings growth. The biggest positive surprises have been delivered by the Pakistan banks. On balance, Ghana and Nigeria have also been better than expected. In contrast, Vietnam banks results have fallen slightly short.
UBL PA and HBL PA delivered the biggest positive surprises. HBL results were boosted by higher than expected net interest income, while UBL benefited from lower than forecast operating and risk costs. Among tier 1 Nigeria names, UBA delivered the biggest positive surprise (higher interest income from treasury bills).
Pakistan: Positive surprises all round. Q1 results were universally strong, with key drivers being better volumes (MCB PA, HBL PA), higher margins (HBL PA, MCB PA and BAFL PA), lower than forecast operating costs (UBL PA) and better risk costs (BAFL PA). Our top pick is UBL (balance sheet improvement and superior earnings growth).
Nigeria: A mixed bag, but broadly positive. UBA (higher net interest income and fee income), Zenith (lower funding costs), GTB (higher non-interest revenues and unexpected recoveries) and Fidelity (higher fees and net FX gains) all surprised positively. In contrast, FBNH (increased operating costs) came in below our expectations. Our top pick is Zenith (14% dividend yield, robust CAR of 22.3%, provisions coverage > 150%).
Vietnam: Slight negative skew. VCB (margin expansion, lower provision costs) and STB surprised positively, ACB, MBB and BID were in line, while HDB (stagnation in margin and consumer finance lending) and VPB (lower FE Credit margins) fell short. Our top pick is MBB, given healthy asset quality, strong margin and scope to grow consumer lending and bancassurance.
GCC: Saudi results better than Kuwait, Oman. RJHI surprised positively (lower impairment costs), while ALINMA and NBK were in line. Both SAMBA and BKMB were below forecast on higher impairment charges. Our top pick is BKMB (strong balance sheet, healthy operating metrics).
Ghana: Q1 numbers support our positive view. Both GCB and CAL (strong loan growth) came in ahead of our expectations. SCB was broadly in line. Our top pick is GCB (merger synergies, balance sheet growth).
Top picks: Among our larger cap coverage, we prefer KNCB KN (good retail franchise, growing revenue channels), MBB VN (robust margins, asset quality), UBL PA (solid medium-term earnings growth) and ZENITH NL (healthy capital ratios, rising technology adoption). Small cap names we favour include BRAC BD (good corporate governance, solid balance sheet), CIEB EY (high margins, strong retail franchise), GCB GN (high loan growth, merger synergies) and HNB SL (superior margins, asset quality).
Valuation: Our sector universe trades at an undemanding 6.1x 2019f median PE, 0.87x PB and offers 4.6% dividend yield. We forecast median 2019f ROE of 15.4% and see 15% earnings growth. Median YTD stock performance has been c1%.