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AKD Quotidian about — Banking Sector: How worrisome is NPL accretion?

Karachi, May 02, 2011 (PPI): Systemic NPLs have reached -PkR630bn on Sep 3011 while NPLs for commercial banks have increased by PkR34bn in 3QCY11 to reach -PkR578bn (NPL ratio: 16.9%).

According to AKD Securities, considering the pace of NPL accretion had considerably slowed in 2QCY11, quick NPL slippage in 3QCY11 appears worrisome at first glance. That said, almost 75% of fresh NPLs have emanated from public sector banks (NBP, BOP, BOK, FWBL) while local private banks have together added a contained PkR8bn of fresh NPLs in the previous quarter. As such, it appears that almost 50% of fresh NPLs (PkR16.5bn) in 3QCY11 emanate from BOP alone.

Within this backdrop, AKD Securities retains AKD Securities’ view that asset quality metrics for the banking sector will gradually improve in a lower interest rate environment. This could encourage banks to become slightly more aggressive in terms of private sector lending (growth < 5%YoY at present) although present status of banks’ margin profile/operating environment indicates GoP securities are likely to remain the investment destination of choice.

At current levels, AKD Securities’ top picks within the domestic banking space are UBL (TP: PkR70/share) and BAFL (TP: PkR13.75/share). While severe asset quality and growth risks remain for NBP (TP: PkR54/share), a high dividend yield of 13.5% may lead to improved price performance in the run-up to full – year CY11F results.

Capacity expansions in MENA region to push fertilizer prices lower in 2012

As per FAO’s latest ‘Food Outlook’ report which in turn cites HSBC’s report on global fertilizers, global fertilizer prices (both urea and DAP) are set to decline in 2012 mainly on incremental capacities coming in the MENA region.

As for urea, capacity expansions in low cost producers Qatar (+2.5mn tpa) and Algeria (+1.2mn tpa) should improve global urea supply in 2012, which in recent times has been hit by the Chinese export ban and shutdown of Libyan supplies (0.9mn tpa). As per the report, loss in production, particularly from China would be offset by the higher production from Qatar and Algeria, where the incremental supply would be at a cheaper cost than the displaced capacity, leading to lower prices.

AKD Securities thinks that additional capacity coupled with prospects of lower grain prices should exert downward pressure on international urea. Caveats to lower urea prices in 2012 could be in the form of i) project delays in Qatar and Algeria and ii) volatile Middle East situation that could result in supply bottlenecks.

Saudi Arabia’s Maaden project could be the game changer for DAP in 2012 where the project would have a capacity of 3mn tpa or 25% of DAP merchant supply which could bring DAP prices sharply down to US$465/ton for 2012 compared with the current price levels of US$650/ton-US$670/ton.

In AKD Securities’ view, similar to urea, int’l DAP prices are also likely to soften in 2012, however delays in Maaden could delay the expected decline in price. Note that in Sep’11, Maaden announced the commercial ramp up phase to be extended to 1QCY12. DAP pricing in the domestic market would also likely come down, albeit with a lag, while compared to international market, price fall may be lower due to DAP market being dominated by just two players (FFBL and ENGROL).

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