We estimate the IMS Banking Universe to report a 21% YoY and 95% QoQ rise in earnings in 3QCY22 as we incorporate a lower taxation charge (52% average effective tax rate) vs. 75% in the previous quarter. Banks with Gross ADR above 50% will again stand out.
We expect margin expansion to continue, assets continue to reprice, while strong balance sheet growth continues. Credit costs are likely to remain soft but Fx gains may moderate sequentially.
Our covered banks have shed c.20% CY22td. Valuations are attractive - CY23f P/B of 0.6x and P/E of 2.8x, where earnings growth and clarity on economic outlook should usher in improved price performance. Best-in-class names are MEBL and UBL.
A lower tax charge in 3QCY22
We expect the IMS Banking Universe to report cumulative profits of PKR48bn in 3QCY22, up a sharp 21% YoY and 95% QoQ. We estimate the effective tax rate will register at 52-56% for MCB, UBL and HBL, and in the 49% range for MEBL, BAFL and BAHL. These include corporate tax rate of 39%, 10% super tax and additional tax on income from federal government securities for banks with Gross ADR below 50%. The large banks are expected to deliver a large sequential lift in earnings. Dividend payouts should remain on track.
Strong rebound in profits
Net interest income of our covered banks is projected to grow 42%YoY and 9%QoQ. We expect strong margin expansion as the impact of the last two rate hikes fully reflects in the asset base. That said, SBP maintained the Policy rate at 15.0%, indicating that rates may have peaked, and interest rate cuts may not be too far away. Balance sheet growth is strong, with sector data showing a 21%YoY rise in loans and a 17%YoY growth in deposits. This should be accompanied with strong growth in fee income (up c.25% YoY, albeit flat sequentially) on rising trade commissions and card related fee. Asset quality is expected to remain in control, but potential impairment on equities may keep overall provisions sequentially elevated. Fx income can surprise given the volatility in the currency. We estimate cost to income of c.40% in 3Q. MEBL, BAFL and UBL are expected to deliver the strongest YoY lift in earnings.
Credit costs are on the rise but largely contained
We expect our covered banks to register an annualized cost of risk of c. 35bps in the coming results – a slight rise but broader asset quality remains largely intact. Inflation has spiked and importers have faced constraints, but it is early for broader asset quality pressures to emerge (the floods may have impacted microfinance banks more).
Strong growth ahead
Pakistani banks are poised to show strong growth in 2022/23f, with ROE expected to expand through the cycle. The 2022f P/B of 0.7x and P/E of 4.1x stack up well against a mid-cycle ROE of 19% (17% ex MEBL) and 2yr EPS CAGR of c. 25%. 2022f P/B and P/E multiples are at a c 31%/43% discount to the previous 5yr average with ample room to rerate. Our thesis of attractive valuations should still hold even if high taxation repeats (e.g. a flood-tax may come through). High dividend yield is a key feature for most large banks, with banks such as MCB, UBL and BAFL easily offering double-digit D/Y. Our top picks are MEBL (high ROE and margin sensitivity) and UBL (relatively defendable cash payouts).