Earnings Report /
Pakistan

Pakistan banks 1QCY21 preview: Lower provisions to lift earnings growth

  • We expect the IMS Banks to report 5%yoy growth (flat qoq) in 1QCY21 results

  • Lower general/subjective provisioning and rebounding NFI should offset pressure on NIMs

  • HBL and MEBL will deliver the strongest growth in our coverage

Yusra Beg
Yusra Beg

Senior Investment Analyst

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Intermarket Securities
9 April 2021

We expect the IMS Banking Universe to report 5%yoy growth (flat qoq) in 1QCY21 results. Lower general/subjective provisioning and rebounding NFI should offset pressure on NIMs. Ample revaluation surplus (4% of SHEQ) leaves room for capital gains.

HBL is coming off a low base (fx losses and high admin expenses last year) and is likely to post strong earnings growth. UBL will follow on abating asset quality concerns in the GCC. BAFL may see improved earnings on a qoq basis, but lower NII compared to last year may drag the reported yoy performance sharply.

MCB, UBL and ABL are expected to pay out the highest within our universe (1QCY21f DPS: PKR5.0, PKR3.0 and PKR2.0, respectively). Banks have underperformed the Index by c10% CYTD. As ROEs expand over the medium-term, there is significant room for valuations to fill out (CY21/22f P/B: 0.82x/0.77x). Our top picks are BAFL and HBL. 

Tail-end margin compression

We expect the IMS Banking Universe to report cumulative profits of PKR29bn in 1QCY21, up 5%yoy but flat sequentially. Ex-HBL, which is coming from a low base, Universe profits are expected to be lower by 6% on both yoy and qoq basis. Overall, we expect NII to come off by a modest 5%yoy and 6%qoq as tail-end asset re-pricing comes through. In addition, we believe further additions to general provisions are unlikely (already c.1% of total loans), and that provisioning reversals in the case of MCB and ABL are possible. This, together with strong fx income, capital gains realization and cost control, are likely to lend support to the bottom line. HBL and MEBL will deliver the strongest qoq earnings growth in our coverage due to sequentially lower provisioning expenses.

NIMs to remain under pressure, NFI expected to rebound

The asset base will continue to re-price, where we expect NII to contract by 6%qoq and 5%yoy; we expect NIMs to come off from c. 4.3% in 4QCY20 to c. 3.95% in 1QCY21. That said, non-markup income is expected to rise 7%qoq on potential realization of capital gains (AFS surplus on Govt. Securities: 4% of SHEQ- excl. UBL). Banks are also likely to book strong Fx gains in 1QCY21, similar to 4QCY20 levels, with HBL particularly benefitting from the PKR appreciation during the quarter under review. This, together with normalizing fee income (+5%yoy), can support revenue. On the costs side, we expect banks to remain generally prudent but the C/I may to rise to 56% in 1QCY21 vs. 55% in 4QCY20.

Asset quality is in control

Although the true NPL picture is likely to emerge after SBP relaxations for borrowers end, we are encouraged by (i) strong corporate profits and (ii) the higher provisioning coverage (+90% on average). We do not see a further buildup in general provisions (already c.1% of loans), while subjective downgrades should also taper off. It is possible that banks such as MCB and ABL post net provisioning reversals in 1QCY21 (ABL has already reversed its unencumbered general provisions in 4QCY20).

We reiterate our liking for Pakistan Banks

MCB, UBL and ABL are expected to pay out the highest cash within our universe (1QCY21f DPS: PKR5.0, PKR3.0 and PKR2.0, respectively). Banks have underperformed the benchmark index by c10% CYTD; as earnings lift over the balance of CY21f and as ROEs start to expand, we expect valuations to fill out as well. At current levels, our top picks are BAFL and HBL.