JS Securities Limited – JS Research (27-01-2020)

Karachi, January 27, 2020 (PPI-OT): Banks: Spreads on fresh lending turn positive in 4QCY19

It seems lending portfolio re-pricing of past several interest rate hikes has been reflected in 4QCY19 as average spread on fresh lending rates turn positive after four quarters.

Weighted average banking spreads were 94bps YoY higher at 6.07% during 4QCY19 as growth in lending rates outpaced increase in deposit rates.

This reiterates our estimates for 4QCY19 where Net Interest Income growth for the sector is expected to reflect the 150bps/100bps interest rate hike announced during 2QC19/3QCY19, leading to positive impact on 6M/3M tenor loans and investments.

Re-pricing of lending portfolio reflects in 4QCY19
As per the State Bank of Pakistan (SBP) data, it seems lending portfolio repricing of past several interest rate hikes has been reflected in the last quarter of the calendar year as the average spread on fresh lending rates (fresh lending rates minus 6M KIBOR) turn positive after four quarters, while fresh banking spreads witnessed 83bps/212bps QoQ/YoY jump during 4QCY19. However, fresh spreads during the month of Dec-2019 sequentially declined by 110bps MoM as fresh lending rate remained flat while deposit rates increased by 110bps MoM. During the month, higher MoM deposit rates were witnessed in the private banks segment, which we believe were offered to attract year-end deposit volumes. Lending rates remained flat, despite MoM decline in 6M KIBOR, leading to average spread on fresh lending rates increasing to 59bps, highest in almost two years. To recall, KIBOR has been slipping since Aug-2019, while lending rates have continued north-bound.

CY19 banking spreads clock in at 5.85%, up 95bps YoY
On the other hand, weighted average Banking Spreads clocked-in 94bps YoY higher at 6.07% during 4QCY19 as growth in lending rates outpaced increase in deposit rates. This took CY19 banking spreads to 5.85%, up 95bps YoY on similar trend. This reiterates our estimates for 4QCY19 where Net Interest Income growth for the sector is expected to reflect the 150bps/100bps interest rate hike announced during 2QC19/3QCY19, leading to positive impact on 6M/3M tenor loans and investments. We expect JS Banking Universe’s 4QCY19E NIMs to clock in 50bps YoY higher at 3.88%, taking CY19E NIMs to 3.56% (+50bps YoY). Amongst our covered banks, we expect Meezan Bank (MEBL), Bank Alfalah Ltd (BAFL) and MCB Bank (MCB) to remain top outperformers in terms of NII growth, continuing the trend seen in 9MCY19. However, banks with a higher PIB investment such as United Bank (UBL) and Habib Metropolitan Bank (HMB) are expected to witness lower NII growth than peers.

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