AKD Securities Limited Equity Research – Daily Report

Karachi, July 26, 2017 (PPI-OT): Pakistan Banks: 1HCY17F Result Previews

The listed banking space has shed 11.3% CYTD struggling on account of lower for longer interest rate scenario with reversal expectations now pushed forward to 1HCY18. Banking spreads remain at their multi-yr lows while investment yields continue to come off on account of the ongoing PIB substitution. In addition, the continuation of super tax is another strain on earnings in an already challenging operating environment. These factors are likely to manifest in the upcoming 1HCY17F results where we expect earnings deceleration of 9.2%YoY in the AKD Banking Universe. Positive surprise can come from higher utilization of capital gains (as seen in 1QCY17) and lower than expected credit costs. While CY17F is shaping up to be a slow year, we expect earnings to rebound from CY18F led by interest rate recovery and likely higher loan growth. Citing long term triggers and attractive valuations, we highlight HBL (TP: PkR296.1/sh upside:17%), UBL (TP: PkR270.3/sh upside:26%) and MCB (TP: PkR232.5/sh upside:8%) at current levels.

1HCY17 Preview: As a group, we expect the Big-6 banks to post combined NPAT of PkR58.5bn in 1HCY17F compared to PkR64.4bn in 1HCY16- earnings decline of 9.2%YoY. NII is likely to decline by 6.4%YoY as yield on earning assets kept coming off on account of lower banking spreads and PIB substitution, while 6%YoY drop is anticipated in non-interest income on lower realization of capital gains. Sequentially, earnings drop of 22%QoQ is more on account of 4% super tax chargeability on CY16 taxable income.

Investment Perspective: In the backdrop of soft CY17F earnings outlook along with interest rate reversal expectations in 1HCY18, we remain skeptical on banking sector’s performance during the year. That said, long-term triggers remain firm in place with monetary tightening likely to commence in 1HCY18 aiding NIMs and CPEC related activities to fully kick in amid fast growing private sector credit growth (+17.6% as of Jun’17). Focus should be on banks with an aggressive push towards: 1) a growing proportion of current account deposits, 2) a strong non-interest income profile, 3) ability to reach and capture CPEC led growth and 3) adequate CAR buffers. In this regard, we prefer HBL (TP: PkR296.1/sh upside:17%), UBL (TP: PkR270.3/sh upside:26%) and MCB (TP: PkR232.5/sh upside:8%).

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