Karachi, October 08, 2021 (PPI-OT): Pakistan Banks: Banks poised to make a decent rally

Since SBP raised DR by 25bps in the last MPS, yields on various on the run T-bills have gone up by 25bps – 28bps pointing to the burgeoning expectations of another DR hike before CY21.

The expectations of further hikes in interest rates have built up at a time when average book growth for local banks has been reported at 22%, one of the strongest in history.

With headline growth in GDP likely to touch 5% mark in FY22, there is no immediate risk over buildup in NPLs in the short to medium term. Also, with average coverage ratio of our banking universe close to 98%, the provisioning costs are forecasted to remain low in the medium run.

GoP lately made an amendment in the Finance Act, penalizing banks with lower ADR by levying higher tax rates on their income. While this is expected to push banks into growing their loan books, it could also potentially slow down deposit growth with greater emphasis put on cheap deposits.

Despite a robust growth in profitability (AKD banking universe profitability up by 17%) and healthy dividend payouts, banking sector has underperformed the index by 2%CYTD. As a result of this underperformance, the valuations have opened up further and the average P/B of the sector is standing at 0.55x. Our top picks from banking universe are MEBL and MCB, offering total returns of 44% and 60% respectively.