Karachi: Banks have been conspicuous laggards’ post the 150bps cut in the DR.
According to AKD Securities, while NIMs are in for sharp compression in the near-term and earnings growth will likely decelerate in 4QCYIIF and CYI2F, AKD Securities believes the market is wrongly assuming that asset expansion will remain muted, asset quality improvement will occur with a significant lag and valuation multiples will fail to rerate. In this regard, banks are effectively sitting on 10%+ CRR (liabilities> 1 yr are exempt) vs. a requirement of 5% – aggressive utilization of available balance sheet space can increase sector profitability by as much as 20%. At the same time, SBP data suggests the sector has added provisions of PkR9.75bn in 3QCY11 vs. provisions of PkR11bn in 2QCY11. With anticipated conversion of circular debt exposure into PIBs (asset quality improvement + recognition of suspended mark-up), AKD Securities believes banks will still close out CV11 very strongly (capital gains can surprise on the upside). While earnings growth could conservatively decelerate to single digits in CY12F, this should be compensated by rerating of valuation multiples as banks should be compensated by rerating of valuation multiples as banks play catch up (Big-5 Banks have shed 13.3%CYTD despite 20%+Y0Y earnings growth in 1HCY11). AKD Securities retains its overweight stance on Banks with a six-month investment horizon (banks tend to Outperform in the Jan-Mar quarter when full-year results/payouts are announced).
Big-5 Banks: TP Revision
|CY12F P/B (x)||1.16||0.99||1.27||0.53||0.77|
|CY12F Div Yld||71%||6.8%||8.0%||13.3%||10%|
|*Revised TPs adjusted for new DR Source: AKD Research|
Overweight retained: Following the steep 150bps cut in DR to 12%, AKD Securities tweaks financial models to reflect sharp near-term NIM compression, some alleviation in credit costs and asset expansion. Regarding the latter, while the GoP has retired PkR79bn to the SBP in 1QFY12, it has borrowed PkR260bn from banks in the same period. AKD Securities expects similar dynamics to persist – while private sector credit off-take may receive some impetus, AKD Securities expects the GoP to remain the biggest incremental borrower. Considering prevalent effective CRR (10%+) is significantly above the 5% requirement and that GoP lending is zero-rated from CAR perspective, AKD Securities see banks utilizing available balance sheet space to counter tighter NIMs. As such, AKD Securities believes a static analysis is misleading – banks have enough space on the balance sheet to counter margin contraction, asset quality should depict sequential improvement while non-interest income (dividends-capital gains) should also accelerate. Accordingly, AKD Securities retains its Overweight stance on Banks with a six-month investment horizon. Preference is skewed towards the Big-5 Banks particularly MCB and UBL. Yield hunters may also find NSF attractive in the near-term.