- We expect the IMS Banking Universe to post 4QCY19 consolidated NPAT of PKR28bn, up 25%yoy. NII growth is expected to continue, led by strong asset repricing. This, coupled with likely lower impairment on equities, is expected to offset a possible spike in year-end in loan provisions, normalized fx gains due to a stable PKR, and possible pick-up in admin expenses.
- We expect MEBL and HBL to deliver the strongest yoy earnings growth; MEBL benefits from a very strong NII growth while HBL rebounds from a low base as one-offs diminish. MCB may depict a yoy decline due to the absence of one-off exchange gain in 4QCY18 and higher expected year-end provisions.
- Recent inflationary pressures have noticeably altered expectations for monetary easing - which has been pushed forward to 2H20. Higher for longer interest rates sit well with our margin expansion theme and while fresh NPL infection may occur, this should be more than offset by strong NII push across 2020. We expect sector ROEs to expand over the medium-term, where we retain our liking for Pakistan Banks which trade at a median 2021f P/B of 1.0x and P/E of 6.3x.
Strong growth in 4QCY19 profitability
We expect the IMS Banking Universe to post combined 4QCY19 profits of PKR28bn, up 25%yoy (+7%qoq). This should be led by a strong pickup in NII (c. 30%yoy, +3ppt qoq), owing to continued margin expansion, which should more than offset year-end increase in provisioning charges. To recall, banks witnessed nascent asset quality deterioration on the domestic front in 3Q, with some recoveries in the overseas portfolio. Moreover, impairment on equity portfolios should now largely subside, while Fx income should also moderate given a stable PKR during 4QCY19. This is particularly positive for HBL which has earlier suffered from large fx losses and is expected to have narrowed its open loan position by 30%.
Margin expansion should continue
Recent inflationary pressures have noticeably altered expectations for monetary easing, which has been pushed forward to 2H20. Higher for longer interest rates should see yields sustaining at peak levels (cut-off yields – PIBs: c.11.3%, T-Bills: c.13.3%) amid strong participation in recent government paper auctions. This sits well with our margin expansion theme for Pakistan Banks. We expect lagged asset re-pricing should allow margin expansion to continue into 4Q19, (albeit at a sequentially moderate pace). This should be the case across 2020f as well, even if interest rates begin to come off from 2H20. We expect 4QCY19 NIMs for our universe to expand to 5.7%, up from 5.3% in 3QCY19. Sequentially, MEBL should deliver the highest lift to margins in 4QCY19, in our view. That said, overall loan growth is likely to further decelerate to 3%yoy vs. 6%yoy in 3QCY19.
NPL provisioning may accelerate in 4Q
Banks witnessed nascent asset quality deterioration on the domestic front in 3Q (mostly concentrated in the OAEM category, similar to peers), largely led by selective names in the Sugar/Power industry. Now, as per SBP sector data, there appears to be a lift in year-end provisions in 4QCY19 (c. PKR15bn, vs. PKR11bn in 3Q). For our universe, the cost of risk is expected to rise to 52bps in 4QCY19 vs. 38bps in 3QCY19. We expect asset quality pressures likely to increase over the medium term, some more than others (UBL, BAFL), but should remain largely manageable, in our view.