JS Securities Limited – Morning Briefing

Karachi, February 09, 2018 (PPI-OT): Banks: Advances in Jan-2018 grow by 20% YoY

As per the latest data released by the State Bank of Pakistan (SBP), gross advances of scheduled banks increased by 20% YoY, to reach Rs6.56trn as at Jan-2018 end.

Investments on the other hand picked up by 4% YoY, though dropped by 11% MoM.

On the liabilities front, Deposits increased by 12% YoY to Rs12.00trn, in-line with our annual Deposit growth assumption for 2018E, resulting in ADR to clock in 3.5ppt YoY higher at 55%, with IDR slipping by 5.3ppt YoY to 64%.

At the same time, banks also increased their Borrowings by 20% YoY to support 12% YoY Asset growth during the period under review.

We remain selectively bullish on Pak Banking sector, where our preferred plays in the sector remain United Bank (UBL, TP: Rs287) and Habib Metropolitan Bank (HMB, TP: Rs50).

Advances continue robust growth during Jan-2018

As per the latest data released by the State Bank of Pakistan (SBP), Gross Advances of scheduled banks increased by 20% YoY, to reach Rs6.56trn as at Jan-2018 end. This can be attributed to (1) ongoing project financing (especially related to power and infrastructure projects) and (2) consistent demand of consumer products. As a result, credit penetration in Pakistan increased to 18% of GDP versus 16% recorded during the same period last year. To note, these growth numbers were witnessed in Jan-2006, clocking in at 23% YoY. On a MoM basis, growth in Advances recorded an uptick of 0.4%, in-line with historic trend. Private sector credit also continued robust trend with 15% YoY growth during the same period. Investments on the other hand picked up by 4% YoY, while dropped by 11% MoM.

Jan-2018 Deposit growth in-line with expectations

On the liabilities front, Deposits increased by 12% YoY to Rs12.00trn, in-line with our annual Deposit growth assumption for 2018E, resulting in ADR to clock in 3.5ppt YoY higher at 55% with IDR slipping by 5.3ppt YoY to 64%. M2 growth also picked up at the same pace, clocking in at 12% YoY as at Jan-2018, which continued to be driven by Net Domestic Asset (NDA) growth of 18% YoY vis-a-vis Net Foreign Asset (NFA) decline of 64% YoY during the same period. Moreover, banks also increased Borrowings by 20% YoY to support 12% YoY Asset growth during the period under review.

Reiterate UBL and HMB amongst favourites

In the scenario of better-than-expected Advances growth for 2018E (JS Banking Universe: 14% YoY), we expect banks with lower leverage and higher Tier II CAR to outperform peers. Amongst JS Banking Universe, we flag Allied Bank (ABL, TP: Rs119) having the highest Tier II CAR of 22.3% as at Sep-2017, followed by MCB Bank (MCB, TP: Rs252) and Habib Metropolitan Bank (HMB, TP: Rs50). We remain selectively bullish on Pak Banking sector, where our preferred plays in the sector remain United Bank (UBL, TP: Rs287) and HMB. 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.

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