December 05, 2013
Pakistan Banking Sector
MORNING BRIEFING
Bilal Qamar + 9221 111-574-111 Ext: 3099 [Link]@[Link]
Banks: Possible impact of sharper than eyed DR hikes
KSE100 Index: Closing 24,445.38 (143.09)
With CPI inflation reported sharply higher at 10.9% YoY in November 2013 (resulting in 5MFY14 CPI at 8.8% YoY), we believe the KSE is readying itself for potential sharper-than-earlier-anticipated Discount Rate (DR) hikes by the SBP during the remaining part of the fiscal year. While linking the Minimum Profit Rate (MPR) on Savings Deposits for banks to the DR has limited banks spreads accretion from higher interest rates, the sector will emerge a beneficiary of any earlier or higher than expected DR hikes. We have already built in 11% DR by June 2014 into our banking models. Every 50bp change in DR beyond 11% is likely to result in 1-6% earnings upside for our Banking Universe. Bank Alfalah Ltd (BAFL), Allied Bank Ltd (ABL) and National Bank of Pakistan (NBP) are key likely winners as savings deposits as a percentage of total deposits stand low at 24-37%. With our base-case 11% DR view in place for now, we maintain our Under-weight stance on Pak banks with Sell calls on MCB Bank (MCB) and Habib Bank Limited (HBL). The sector is trading at 2014 PE and PBV of 10.2x and 1.5x respectively.
Banking sector performance vs. KSE-100
150% 140% 130% 120% 110% 100%
Banking sector KSE-100 Index
Above-eyed rate hikes? BAFL, ABL & NBP the winners
CPI inflation in November 2013 clocked in at 10.9% YoY with 2QFY14-to-date number averaging at 10.0%. Going forward, with inflation numbers in sequential quarters expected to keep heading higher, we re-iterate our call of a further 100bp interest rate hike by the end of FY14 (June 2014) to the 11.0% DR mark. The same is built into our base-case for Pak banks. Meanwhile, with inflation rising faster than expected, we flag the risk of sharper and/or earlier than expected rate hikes. Though linking the MPR on Savings Deposits to the DR has limited banks spreads accretion from higher interest rates, any tightening beyond the 11.0% mark is likely to change our earnings expectations for Pak banks. For every 50bp higher DR beyond the 11.0% mark, JS Banking Universe earnings are likely to clock in 1-6% higher. Banks which have a high CASA (more tilted towards Saving Accounts) are likely to lose out compared to banks with low percentage of savings deposits.
Banks: Impact of incremental 50bp higher DR (Rs bn) Rating ABL NBP UBL BAFL HBL MCB AKBL Hold Hold Hold Hold Sell Sell Hold TP 78 48 134 24 108 264 14 2014F EPS (Rs) Base case 50 bp higher DR 10.67 6.02 15.18 3.31 15.82 22.18 0.79 11.22 6.33 15.33 3.51 15.96 22.31 0.82 5% 5% 1% 6% 1% 1% 3% * Savings 137 293 271 90 553 309 180 * Total 571 1,021 773 247 1,184 584 304 Savings as 24% 29% 35% 37% 47% 53% 59% % Deposits Deposits % of [Link]
Source: KSE
Source: Company accounts & JS Research, * as per September 2013 accounts
JS Research is available on Bloomberg, Thomson Reuters, CapitalIQ and [Link] Please refer to the important disclaimer on the last page
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13
90%
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December 05, 2013
MORNING BRIEFING
As far as the big five banks are concerned, MCB and HBL fall in the category of high saving deposits with 53% and 47% respectively of total deposits parked in saving deposits. Hence a 50bp incremental DR would result in 1% upside to 2014E earnings. We highlight BAFL, ABL and NBP as clear winners of DR hikes going forward as their concentration of savings deposits stand low at 24-37%. Incremental 50bp hike in DR is likely to result in 5-6% higher than anticipated earnings in 2014E.
Pakistan market statistics (Dec 04, 13) KSE-100 Index Previous KSE-100 Index Change from last closing Change from last closing (%) KSE Market Cap. (Rs. bn) KSE Market Cap. (US$ bn) Total Volume (Shares mn) Traded Value (Rs. bn) Traded Value (US$ mn) KSE-30 Index Change from last closing Change from last closing (%) KSE Futures Volume (Shares mn) KSE Futures Value (Rs. mn) KSE Futures Spread Source: KSE 24,445.38 24,588.47 -143.09 -0.58% 5,914.81 54.47 200.11 12.01 110.64 18,383.98 -102.31 -0.55% 27.26 2,949.78 6.31%
Overall outlook on banks remain bleak
Although monetary tightening is likely to bode well for the banking sector, with the MPR on savings deposit linked to the DR, growth in banking spreads will now be slower than in previous monetary tightening cycles. That said, we could see greater upside to earnings if banks opt to focus more on building up their Current Account deposits base and lowering the share of Savings Accounts in their deposit mix. Meanwhile, we also do not see private credit offtake picking up pace in a high DR scenario, where so far in 2013 gross advances have only grown by 3% (despite the fact that DR came down to 9% in Jun 2013). On the other hand, poor law and order situation in the country is likely to make it difficult for banks to lend money. We maintain our Under-weight stance on Pak Banks eyeing limited near term triggers.
Also in Focus
Government unlikely to receive US$800mn from Etisalat
News reports have suggested that the government is unlikely to receive US$800mn outstanding from Etisalat on account of privatization of Pakistan Telecom Company Limited (PTC) as no progress has been made in the mutation of remaining properties. Etisalat has held up the amount because titles of around 131 properties have not been transferred in its name. Note that the inflow of this amount has been budgeted for by the government in this years budget.
KSE valuations 2013A/E 2014F 2015F P/E (x) P/BV (x) Div. Yield (%) Earnings growth Source: JS Research 9.5 2.0 5% 8% 8.3 1.8 6% 15% 7.8 1.7 6% 6%
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