Karachi, December 29, 2017 (PPI-OT): Pakistan Banks: Double digit loan growth is encouraging
The latest banking sector data indicates that banks’ balance sheet continues to grow in double digits (up 15%YoY in Sep’17). While the sector continues to retain its preference for government securities (IDR at 68%), we have seen an encouraging 20.6% YoY uptick in advances in Sep’17. In this regard, private credit off-take has improved significantly with noticeable growth in consumer (+19.5%YoY) and SME (+12.2%YoY) segments. Despite increasing exposure in these segments, asset quality continues to improve with overall infection ratio coming down to 9.3% in Sep’17 vs. 11.3% in Sep’16 and coverage improving to 85%.
While spreads have stagnated at 4.90% in Nov’17, we expect gradual improvement in CY18 as interest rate cycle reverses (AKD estimates 50bps increase in TR in CY18F). In this backdrop, we retain our liking for those names in the banking space that have: 1) the room to benefit from loan growth without compromising on the capital adequacy ratio, 2) growing proportion of CA deposits and 2) diversification through strong non-interest income. Our preferred plays include UBL, BAFL and MCB.
Spreads averaged at 4.94% in 11MCY17: With Nov’17 spreads at 4.90% (lower by 7bps YoY), 11MCY17 spreads averaged at 4.94%. The downtick in spreads is on account of a 25bps drop in lending yields to 7.81% as banks scramble to get more loans. Going forward, spreads are likely to hover around the same level until interest rate cycle reverses (AKD estimates 50bps uptick in TR in CY18).
BS growth set to gain momentum: Latest banking sector data indicates that banks’ balance sheet continue to grow at strong levels (+13%YoY in Sep’17) to PkR17.56tn. Despite industry’s continued preference for risk-free GoP securities (investments up 12.7%YoY), there has been an encouraging 20.1% YoY uptick in private credit off-take (loan to deposit ratio at 48% in Sep’17) in Sep’17. In this regard, selected sectors such as food and beverage, electricity and agriculture have been the key recipients of industry’s credit disbursements. Furthermore, consumer financing grew by 20%YoY in Sep’17, as banks continue to focus on auto finance and personal loans, a segment that constitutes a meagre 8.5% of private sector loans. Going forward, we expect business activity to pick up providing space for continued double digit growth in advances.
Asset quality at comfortable levels: The SBP data for Sep’17 indicates that cumulative NPLs of the sector have come down by 3.1%YoY to PkR612bn. This is despite increasing exposure in consumer and SME segments with NPL ratio improving to 9.3% (down 20bps) against 11.3% and coverage ratio at 85%.
Investment perspective: With improvement in spreads likely to be gradual, we continue to prefer banks that have the room to benefit from any uptick in advances with a decent CAR buffer, hedged against interest movements through strong non-interest income (fee, commissions, dividends, capital gains) and a growing proportion of CA deposits. At current levels, our preferred plays are UBL (TP: PkR 238.61/share), BAFL (TP: PkR 48.43 /share) and MCB (TP: PkR232.3/share).