Equity Analysis /
Pakistan

Pakistan Banks: Strong results can extend rally

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    10 October 2019
    • We expect the IMS banking universe to post Q3 CY 19 consolidated NPAT of PKR26.2bn, up by 52% yoy. NII should depict a strong pick-up as asset re-pricing comes though more meaningfully, which is more than expected to offset a possible lift in loan provisions. Earnings growth should also be helped by a likely absence of impairment on equities portfolios after large charges in the previous quarter.
    • We expect HBL and MEBL to deliver the strongest yoy earnings growth; MEBL benefits from very strong NII growth while HBL rebounds from a low base as one-offs diminish. On a sequential basis, UBL may be the only bank to depict a decline given it had one-off exchange gains in Q2 CY 19.
    • While yield curves have begun to invert as expectations of monetary easing build up, the NII push should continue into 2020f, in our view. With the cost of risk expected to stay at manageable levels, the sector's ROE should expand across the medium-term. We continue to like the Pakistan banking sector, which trades at a median 2020f P/B of 1.0x and P/E of 6.1x, having lifted by 7% in the last 30 days.

    Strong growth in Q3 CY 19 profitability

    We expect the IMS banking universe to post combined Q3 CY 19 profits of PKR26.2bn, up 52% yoy (+21% qoq). This should be led by a strong pickup in NII (+30% yoy, +5% qoq), owing to continued margin expansion, which should more than offset a possible pickup in provisioning charges. NPL formation was restricted to a few banks in the previous quarter, but may be more broad-based in Q3 CY 19. After large charges in Q2 CY 19, impairment on equity portfolios should now largely subside. FX incomes should also moderate given a stable PKR during Q3 CY 19; this is positive for HBL, which suffered from large FX losses earlier. 

    Margins should continue to expand

    Strong participation in T-Bill auctions continues while interest in PIBs is also beginning to see traction. Despite maintaining the status quo in the last monetary policy (Sep’19), lagged asset re-pricing (100bps hike in DR in Jul’19 to 13.75%) should allow margin expansion to continue. This should be the case across 2020f as well, even if interest rates rates begin to come off early next year. We expect Q3 CY 19 NIMs for our universe to expand to 4.70%, up from 4.50% in Q2 CY 19. Sequentially, ABL, MEBL and BAFL should deliver the highest lift to margins in Q3 CY 19, in our view. That said, loan growth is expected to further decelerate to 6% yoy vs. 8% yoy in Q2 CY 19. 

    NPL provisioning could pick up

    Domestic asset quality held up in Q2 CY 19 – a few banks saw a lift in NPLs, but this was not a sector-wide phenomena. Now, as per SBP sector data, there appears to be a lift in provisions in Q3 CY 19 (PKR7-8bn). For our universe, the cost of risk is expected to rise to 38bps in Q3 CY 19 vs. 12bps in Q2 CY 19. Pressures on asset quality are likely increase over the medium term, but within acceptable ranges, in our view. 

    We reiterate our liking for Pakistan banks

    Normalising one-offs should lead to a stronger pickup in ROEs in Q3 CY 19. We expect ROEs to expand across the medium-term for our banking universe, rising from 13% in 2019f to 17% in 2023f. This should lead to continued valuation re-rating. With interest rates likely to come off over the medium-term, we advocate a gradual shift from medium banks into the large banks (HBL, UBL, MCB). This is because the larger banks have more diversified revenue streams while the medium banks are heavily reliant on NII to drive profits.

    Risks: (i) Greater-than-expected asset quality deterioration and impairment on equity portfolios, (ii) regulatory risks such as the Single Treasury Account and higher taxation on income from  government securities, and (iii) higher-than-expected admin costs.