Thursday, April 07, 2011

Equity Research Pakistan

In Focus Banking Sector Profitability to Remain Buoyant

Banks ƒ Despite shift towards low price assets (IDR up by 5% YoY, ADR down
Marketweight by 5% YoY) , banking spreads continue to improve by 20bps YoY.
ƒ 1QCY11 industry numbers indicate an early preview of sector
Omar Rafiq profitability wherein provisions are expected to remain a surprising
omar.rafiq@bmacapital.com factor
ƒ We expect the banking sector to post YoY profitability growth in the
Abdul Shakur
range of 15%-18% in 1QCY11
abdul.shakur@bmacapital.com
ƒ Having incorporated the provision heavy financials for CY10, we expect
strong profitability growth for BAFL going forward and have, therefore,
Sector Performance revised our Dec11 TP to PKR11.8/share from PKR10/share
1M 3M 12M ƒ We reiterate our positive stance for MCB and UBL amid sequential
improvement in asset quality together with a build up of low cost
Absolute % -8.20 -11.40 -11.38
deposits in the recent period
Relative to KSE % -7.64 -9.69 -25.60
ƒ Based on our Dec11 target price of PKR216/share and PKR70/share for
MCB an UBL respectively, these scrips currently offer respective
upside potential of 5% and 9%. ADD
BMA Universe Val. Summary CY-11 Est.
Current Pot. Div. EPS Provision losses continue to remain a key concern for the sector as per provisional
PER
Price Upside Yield Grow. statistics released by the SBP. Mar11 banking indicators reflect growth in
MCB 207 5% 8.9x 7.3% 16% provisioning while advances growth continued to remain stunted. Since
incremental exposure in government securities has been the key growth element
NBP 57 -4% 6.4x 10.5% -15%
for banking assets, we believe restructuring of the loan portfolio together with cost
HBL 122 -24% 7.6x 6.3% 13% consolidation to be the primary determinants for banking profitability during
UBL 65 9% 5.2x 7.8% 35% 1QCY11. Based on these numbers, we expect the sector to post YoY profitability
BAFL 11 10% 4.5x 9.2% 235% growth in the range of 15%-18% in 1QCY11.
SBP borrowing constrained; Banking channels activated
Relative KSE100 vs. Banking Sector Gross advances growth continued to remain stifled during the period under
review, with preliminary growth estimated to clock in at a mere 0.3% on a QoQ
Banks KSE100 basis against over 5% QoQ growth witnessed in the previous quarter. Asset base
130 growth of 2% (QoQ) was primarily fuelled by higher investments (up by 5.1%
120 QoQ).
110
As expected the Government of Pakistan (GoP) remained vigilant on its
100
90
borrowings from the SBP. The central bank had earlier indicated that it would
80
request the government to uphold fiscal prudence by constraining borrowing from
70
the ‘bank of banks’. As a result it was expected that fiscal deficit would be funded
60 by activating banking channels through MTB sales reflected by rising Investment
to Deposit Ratio (IDR) ratio. It stood at 44% as of Mar11 compared to 42% as at
May-10

Nov-10

Mar-11
Apr-10

Jun-10
Jul-10
Aug-10
Sep-10
Oct-10

Dec-10
Jan-11
Feb-11

Apr-11

Dec11. We highlight here that despite shift towards low price assets, banking
spreads continue to improve.
Spreads up by 20bps YoY to 7.51% in Feb11
Monetary tightening since Jul10 led to average secondary market yields for T-bills
and 6M KIBOR to increase by ~135bps and 140bps YoY respectively during
1QCY11. On the other hand, improving monetary aggregates and short term

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, Pakistan
For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111
1 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information
contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as
such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or
solicitation of any offer to buy or sell the securities mentioned.
 Thursday, April 07, 2011

Equity Research Pakistan

liquidity management helped banks to maintain deposit cost – weighted average
In Focus cost of funds for banks declined by a marginal 3bps YoY in Feb11.
Banks Therefore, despite weak loan expansion during 1QCY11, higher exposure to govt.
Marketweight securities and 20bps YoY increase in banking spreads would likely result in
healthy growth in interest based income during 1QCY11.
Provision growth yet remains a concern for some
Provision growth outpaced advances growth by 4% QoQ in 1QCY11 indicating
higher infection ratios for the banking sector. Resultantly, net advances growth
during 1QCY11 took on to a negative note exhibiting a meager decline of 0.08%
on a QoQ basis. Based on SBP’s recent data, we expect higher provisions will
remain a key factor restricting profitability growth on quarterly basis for 1QCY11.
Analysis of banking sector provisions

30
PKR bn

25

20

15

10

-
2QCY08

3QCY08

4QCY08

1QCY09

2QCY09

3QCY09

4QCY09

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11
Source: SBP, BMA Research

On the contrary, higher provision losses booked last year would remain a key
factor to offset the said effect to some extent. Since accelerating NPLs have been
largely associated with public sector banks lately, private sector banks particularly
large banks are likely to remain immune from these delinquencies.
Outlook: Banking profitability to post 15-18% YoY growth in 1QCY11
1QCY11 industry numbers indicate an early preview of sector profitability which is
expected to grow by 15-18% YoY whereas provisions are expected to remain a
surprising factor.
Amongst BMA banking universe, we expect strong profitability growth for BAFL
considering that the bank has already provided for loan and investment provisions
lately. Having incorporated the provision heavy financials for CY10 and better
earning prospects, we have therefore revised our Dec11 TP to PKR11.8/share
from PKR10/sh; upside potential of 10% from current levels.
In addition, we reiterate our positive stance for MCB and UBL amid sequential
improvement in asset quality together with a build up of low cost deposits in the
recent period. Based on our Dec11 target price of PKR216/sh and PKR70/sh for
MCB an UBL, these scrips currently offer upside potential of 5% and 9%
respectively. ADD.

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, Pakistan
For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111
2 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information
contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as
such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or
solicitation of any offer to buy or sell the securities mentioned.