Earnings Report /
Pakistan

Pakistan banks: Q1 CY 20 preview – Earnings to represent a peak in the year

  • We expect the IMS Banking Universe to post Q1 CY 20 consolidated NPAT of PKR29.5bn, up 38% yoy but down 8% qoq

  • We expect 3% sequential pick-up in NII, backed up by higher NPL provisioning and impairment on equity investments

  • Impact of the Covid-19 lockdown and 425bps cut in the policy rate to 9.0% will reflect more prominently in Q2 20

Yusra Beg
Yusra Beg

Senior Investment Analyst

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Intermarket Securities
22 April 2020

We expect IMS Banking Universe to post 1QCY20 consolidated NPAT of PKR29.5bn, up 38%yoy but down 8%qoq. While we expect a modest 3% sequential pick-up in NII, this is likely to be moderated by higher NPL provisioning and impairment on equity investments. A weaker PKR should lead to strong fx gains while fee income may remain flat.

We expect UBL and MEBL to deliver the strongest earnings growth in 1Q on discernible jump in NII and a strong fx gains (fx loss in the case of HBL). This is likely to be the best performing quarter for Pakistan Banks in CY20. Reverberations of the Covid-19 lockdown (from end-March’20) followed a 425bps cut in the policy rate to 9.0% will reflect more prominently in 2QCY20 results.

Banks are likely to err on the side of caution due to an inevitable squeeze in margins/revenues and deterioration in asset quality in the remainder of CY20. This may lead banks to preemptively trim dividend payouts ahead of deteriorating macroeconomic climate.

Earnings to decline sequentially – The worst is yet to come 

We expect the IMS Banking Universe to post combined 1QCY20 profits of PKR29.5bn, up 38%yoy but down 8%qoy. While remainder of the asset-repricing is likely to result in a 3%qoq pickup in NII (+24%yoy), this is likely to be moderated by rising provisioning charges (+33%qoq). We expect sharp impairment on the equity portfolios due to a weak market (-28%qoq in 1Q), alongside higher fx income (losses in the case of HBL) given c 7% PKR depreciation during 1QCY20. UBL and MEBL should deliver the highest growth in our coverage, to be led by strong NII pick-up and fx/capital gains which may overcome higher provisioning. ABL has posted 1QCY20 results of PKR3.9bn (EPS: PKR3.40), up 26%yoy, where we note capital gains (likely on legacy bonds) are a feature. Provisioning expenses are lower than expected where the bank may have booked lower LLP provisions and impairment on equities portfolio. NII has however, come off sequentially.

Margins to flatten out from here, while NFI may come off

The SBP commenced monetary easing at the end of March’20 (-225bps) which should reflect in 2QCY20. We therefore expect a marginal pick-up in NII with an expected flattening in NIMs. As per SBP, commercial banks witnessed a sharp 64%yoy growth in investments (mostly in longer tenure instruments), while loan growth decelerated to 5%yoy due to a slowing economy. Sequentially, MEBL should deliver the highest lift to margins in 1QCY20, in our view. Non-markup income is expected to decline due to pressure on fee income in a slowing economy, seasonally lower dividend payouts in 1Q but which may be moderated by higher fx gains and higher capital gains, (taking cue from ABL’s announced results).

Higher sequential NPL provisioning 

We expect further asset quality deterioration in 1Q20 where sector provisions rose c. 10%yoy/3%qoq in March’20 to PKR503bn. We expect impact of volatile PKR on overseas NPLs to further add to overall provisioning while domestic asset quality may have seen early signs of deterioration. For our universe, the cost of risk is expected to rise to c. 70bps in 1QCY20 vs. 58bps in 4QCY19. Pressures on asset quality are expected to substantially increase in the next few quarters.