JS Securities Limited – Morning Briefing

Karachi, January 05, 2018 (PPI-OT): Banks: More on the table in spite of recent price run up

In spite of recent price run up in the banking sector, we believe Pak Banks offer further capital upside of at least 17% alongside 2018F D/Y of 7%.

The sector trades at 2018F P/B of 1.20x (up from 1.03x from a month ago) vis-a-vis our justified 2018F P/B of 1.45x.

Our argument of higher exit P/B from last 5-year average of 1.2x is backed by (1) higher forward sustainable Tier I ROE (18% compared to last 5-year average of 16%, excluding capital gains), (2) improved asset quality and (3) consistent asset growth.

We highlight United Bank (UBL, TP: Rs287), Allied Bank (ABL, TP: Rs118), Bank Al Habib (BAHL, TP: Rs72) and Habib Metropolitan Bank (HMB, TP: Rs50) as attractive value plays on our ROE to P/B matrix.

We expect National Bank of Pakistan (NBP, TP: R52), BAHL and HMB to garner investors’ interest in the near-term on the back of their annual dividend payout policies.

We also expect Faysal Bank (FABL, TP Rs24), Bank Alfalah (BAFL, TP Rs53), BAHL and NBP to attract investors’ interest on potential higher gains-than-peers on upward movements in benchmark rates.

The banking sector close the year 2017 impressively with asset base increasing by 16% YoY, where Advances for the year jumped by 17% YoY (9-year high) to Rs6,530bn with ADR rising to 53% (+310bps YoY).

Banks have more to offer

In spite of recent price run up in the banking sector, we believe Pak Banks offers further upside as valuations remain attractive. The sector in the past one month has rallied by around 15%, beating the local bourse by 7%. Mutual Funds (US$14.7mn), Insurance companies (US$8.7mn) and Companies (US$8.4mn) emerged as key net buyers during this period. Mutual Funds (non-islamic stock funds) had an exposure of ~14% in Commercial Banks as at Nov-2017 end vs. sector’s weight of 23% in KSE-100 index and 27% in KSE-30 index. We believe Pak Banks offer further capital upside of at least 17% alongside 2018F D/Y of 7%, as the sector trades at 2018F P/B of 1.20x (up from 1.03x from a month ago) vis-a-vis our justified 2018F P/B of 1.45x.

Our argument of higher exit P/B from last 5-year average of 1.2x is backed by (1) higher forward sustainable Tier I ROE (18% compared to last 5-year average of 16%, excluding capital gains), (2) improved asset quality and (3) consistent asset growth. We highlight United Bank (UBL, TP: Rs287), Allied Bank (ABL, TP: Rs118), Bank Al Habib (BAHL, TP: Rs72) and HMB (TP: Rs50) as attractive value plays on our ROE to P/B matrix. We highlight that Habib Bank (HBL) also trades at a relatively low P/B, however we remain cautious given potential downside risks on the regulatory front.

Payouts and interest hikes to keep banks in focus

We expect National Bank of Pakistan (NBP), BAHL and HMB to garner investors’ interest in the near-term on the back of their annual dividend payout policies; however, clouds of ~Rs48bn pension expense continue to hang over NBP. The aforementioned banks currently offer an average dividend yield of 8%, which is likely to yield in the next 3-4 months. We expect potential interest rate hikes to bring banks with higher (1) ADR, (2) proportion of MTBs in total investments, (3) share of core income mix in bottom-line, (4) leverage ratio and (5) zero-cost deposits mix into focus as well.

We highlight Faysal Bank (FABL), Bank Alfalah (BAFL), BAHL and NBP to witness higher gains than peers on upward movements in benchmark rates. Our base case incorporates 50bps increase in interest rates in May-2018 and 25bps increase in Nov-2018. We flag past two MTB auctions participations have remained under government’s cumulative target of ~Rs1.4trn, where participation was only seen in the 3M papers and cumulative amount of Rs588bn was accepted (~42% of target). Key risks to our investment thesis include (1) failure to comply with regulations resulting in material penalties, (2) delays in anticipated interest rate increase and (3) higher-than-expected increase in NPLs.

Impressive close to year 2017

The banking sector’s asset base increased by an impressive 16% YoY, where Advances for the year jumped by 17% YoY (9-year high) to Rs6,530bn with ADR rising to 53% (+310bps YoY). Investments for the period were reported at Rs8,542bn (+18% YoY), taking IDR to 69% from 65% during the same period last year. Deposits growth softened to 10% to Rs12,362bn, though MoM growth remained robust at 3% during Dec-2017. We expect 2018F deposit growth to clock in at 13% YoY, with ADR and IDR to remain around current levels. We expect BAHL to outperform peers deposit growth on the back of aggressive expansion strategy.

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