Equity Analysis /
Pakistan

Pakistan Banks: Strong results to continue, driven by core performance

  • IMS Banks Universe to post 23%yoy growth in 1QCY22. These are high quality earnings, not pushed up by capital gains

  • Margins to expand, going by the unusually large gap between secondary yields and the policy rate during the quarter

  • Pakistan banks offer high EPS growth and improved mid-cycle ROEs. Dividend yields are robust. We remain Overweight

Raza Jafri
Raza Jafri

Executive Director, Research

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
18 April 2022

We expect the banks under our coverage to post combined NPAT of PKR44.0bn in 1QCY22f, up 23%yoy and 5%qoq. These are high quality earnings, not pushed up by capital gains unlike in 1QCY21. There is room for positive surprises on fx income.

Balance sheet growth may sequentially moderate. However, margins should expand, going by the unusually large gap between secondary market yields and the policy rate during the quarter. Asset quality remains intact, with macroeconomic pressures too recent to have an impact. 

Pakistan banks offer high earnings growth and improved mid-cycle ROEs for most. Dividend yields are robust with capital buffers strong enough to withstand the impact of IFRS 9 on private sector assets. We have Buys on all the banks in our coverage, with top picks being HBL, UBL and MEBL. 

Earnings to maintain strong momentum

We expect the IMS Banks Universe to post combined NPAT of PKR44.0bn in 1QCY22f, up 23%yoy and 5%qoq. Key highlights are expected to be: (i) 20%yoy NII growth, (ii) a sub-20bps cost of risk, (iii) flattish non-interest income and (iv) double-digit growth in admin expenses. There is room for positive surprises on fx income, given the volatility in the currency. Earnings are high quality and not dependent on capital gains; excluding capital gains, earnings growth would lift to c 30%yoy. We expect strong cash payouts to continue despite the possible implementation of IFRS 9.

Margin expansion coming through

The first interest rate increase of 2022 only took place after the quarter ended - a sharp 250bps increase in early April - but banks should still be able to experience margin expansion in 1QCY22f. This is due to the lagged asset re-pricing from the interest rate increases of late 2021, as well as the unusually large 160bps gap between secondary market yields and the policy rate during 1QCY22. Margins benefit, all else the same, with the floor on savings deposits (c 35% of the mix) linked to the policy rate, and asset yields driven by market forces.

Softer balance sheet growth

Total assets for our covered banks grew by c 20%yoy in 2021, matched by deposit growth. Loan growth was strong at nearly 30%yoy, with several banks aggressively filling out the ADR to at least 50%, in order to avoid punitive taxation. This purpose having been achieved, sector data shows softer loan growth in 1QCY22. Data also shows sector deposits are sequentially lower by 2%qoq, perhaps due to banks shifting focus to the deposit mix. 

Asset quality is intact and expected to stay that way

We expect our covered banks to register an annualized cost of risk below 20bps in the coming results. The last major provisioning absorbed by the sector was in 4QCY20 - a single large oil marketing exposure - and broader asset quality has continued to be intact. Inflation is rising and fx reserves have quickly come off, but macroeconomic pressures should have limited bearing on asset quality outlook with stabilization efforts underway. Interest rates are expected to start coming down from early 2023. 

A healthy mix of growth and yield

Pakistani banks are poised to show strong profit growth in 2022f, with ROE for most expected to expand through the cycle. The 2022f P/B of 0.9x and P/E of 4.8x stack up well against a mid-cycle ROE of 18.5% (17.3% ex MEBL) and 2yr EPS CAGR of nearly 20%. Multiples are at a c 25% discount to the previous 5yr average and have ample room to rerate. High dividend yield is also a feature, with banks such as MCB, UBL and BAFL easily offering double-digit D/Y. We expect this to remain unchanged even if IFRS 9 is implemented on private sector assets this year. Our top picks are HBL, UBL and MEBL. We also flag our liking for BAFL on its potential to grow earnings quickly given its highly sensitive margins.