JS Securities Limited – Morning Briefing

Karachi, December 11, 2017 (PPI-OT): Banks: Advances up 13% YTD, strong outlook remains intact

Banking advances in Nov-2017 picked-up by 1.6% MoM to Rs6,280bn, taking YTD 11M2017 growth to 13% – in line with our start-of-the-year estimate of 15% YoY for the full-year 2017.

Investments in Nov-2017 also continued with their upward trajectory, increasing by YTD 17% to Rs8,475bn with banks preferring shorter tenor government papers.

NDA growth has increased to 19% YoY on higher borrowing from commercial banks, while a sharp decline in NFA (-73% YoY) has limited growth in M2 at 12%.

Asset placement (IDR+ADR) has increased to 123% vis-a-vis 117% as at Nov-2016, on the back of higher borrowings.

Going forward, we expect deposits to grow by an average 12% per annum with advances growth to surpass deposit owing to upcoming project expansions and snowball impact of ongoing CPEC projects.

Healthy loan growth continues in Nov-2017

Banking advances in Nov-2017 picked-up by 1.6% MoM to Rs6,280bn, taking YTD 11M2017 growth to 13% – in line with our start-of-the-year estimate of 15% YoY for the full-year 2017. The last month of the year generally witnesses higher growth compared to YTD average, where with the exception of 6% MoM increase in Dec- 2016, the average clocks in at 2.5% MoM. Investments in Nov-2017 also continued with their upward trajectory, increasing by YTD 17% to Rs8,475bn with banks preferring shorter tenor government papers.

NDA growth has increased to 19% YoY on higher borrowing from commercial banks, while a sharp decline in NFA (- 73% YoY) has limited growth in M2, which clocked in at 12% YoY as at Nov 24, 2017. This trend has resulted in asset placement (IDR+ADR) to increase to 123% vis-a-vis 117% as at Nov-2016, on the back of higher borrowings. Repo borrowings have touched record-high of Rs3trn, which bears a cost of 5.8%. As a result, the asset base growth of the sector reached 22% YoY, even though deposits growth remained limited to 14.3% YoY.

Double-digit growth to continue beyond 2017

Going forward, we expect deposits of the banking sector to grow by an average 12% per annum during 2018-2022F, in line with our money supply growth assumption. We expect sector’s advances growth to continue to surpass deposits’ growth during 2018F owing to upcoming project expansions and snowball impact of ongoing CPEC projects. We flag United Bank (UBL, TP: Rs287) as one of our top picks as the bank is trading at a discount to peers generating similar return. We highlight (1) potential of greater NPL accretion and (2) later and lower-than- expected increase in interest rate as key risks to our investment case.

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