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Morning Briefing – Standard Capital Securities Limited

Karachi :Banking sector NPLs …..pros and cons…..best pick MCB

Elixir Securities sees spate of non‐performing loans (NPL) increasing and it has touched Rs 613bn as at September 30, 2011. In case of public sector banks, the NPL amount is alarming i.e. Rs 193bn, which is in fact 15.1% of total net loans.

According to Standard Capital Securities, the spate of loan losses also entangles local private banks. It has reached Rs 377bn as at September 30, 2011 which represents nearly 4% of total net loans.

Some of the reasons cited for this notorious increase is ‘inter‐corporate debt’ of the energy sector that has also plagued commercial banks. The inability of state owned power sector companies to pay IPPs and then IPPs incapacity to pay oil marketing companies have entangled banks to such as extent that cash rich energy companies are piling up burgeoning running finance. This ‘stuffing’ of short term debt against non‐receivables has affected the operational performance of all energy sector companies i.e. from state owned power transmission companies down to oil and gas explorers are now performing below par thus putting enormous pressure on banking sector lending.

It is being argued that this debt will now be ‘re‐purchased’ against some commercial paper, as being advised by foreign donors (parking the amount as an asset in commercial banks), and hence banks NPL could reduce given this ‘accounting treatment’.

Banking industry and curious market players await such an eventuality. Nearly a fortnight ago, this news was floated to eradicate energy sector ‘circular debt’ of nearly Rs 391bn by above‐mentioned arrangement.

As being covered in previous segment that there are banks who are still maintaining high trajectory net interest margin (NIM) such as MCB’s 8%, HBL’s 7% and UBL’s 6%. Yet Standard Capital also sees accumulated NPL’s of respective banks continue to haunt curious onlookers. For instance total accumulated NPL’s of National Bank (NBP) is reported as Rs 118bn as against their shareholder’s equity (tier1 capital) of Rs104.8 which in a way is not alarming at this juncture since ‘adequate coverage’ of provisioning is still in place. However, investors concern could be the continuation of retarded economic growth even in current and next fiscal. This eventuality of non‐performance of economy could really endanger financial sector’s health. Standard Capital believes country’s apex central bank is not oblivious of this situation and would like to kick start growth via proactive monetary policy. Hence Standard Capital sees SBP may cut further interest rates and bring that at lower level i.e. nearly 10% in 5‐6 months in order to arrest the root cause of NPL.

MCB is the best….

Among banks Standard Capital likes MCB which is at an all time low PE of 5.9x (in recent times). This leading PE is lower than 3‐year average PE of 9x. MCB also yield PBV multiple of 1.4x which is again low. MCB has the best coverage ratio with accumulated NPL’s of 26.4bn as against their tier1 capital of Rs 77.5bn.

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