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AKD Securities Limited – AKD Daily (December 08, 2022)

Karachi, December 08, 2022 (PPI-OT): Pakistan Banks: Banking spreads – On the rise still

The fresh spreads of the country’s banking sector posted another sequential uptick in the month of Nov’22, inching up to 3.9% during Nov’22 from 2.4% during the previous month. The yields on fresh lending and the cost of fresh deposits moved in the opposite directions which resulted in the increase in spreads.

As for the overall spreads, they clocked in at 2.4% during Nov’22 as against 2.2% they clocked in the previous month, posting a nominal jump of 26bps. The uptick in overall spreads come as a result of better yields on assets, which jumped by 26bps. The cost of deposits meanwhile remained stable.

The banks have continued to focus on cost free deposits which has helped the AKD banking universe contain its markup expenses. Consequently, the average CA/TD ratio of our coverage universe has gradually improved from 38% during 3QCY21 to reach around 40% during the last quarter.

With SBP raising interest rates by another 100bps in the last MPS, the ground has been set for further hikes in the coming days. With there being a mismatch in repricing of assets and liabilities, where liabilities get repriced first, the banking sector spreads may squeeze a little before increasing again. Support may however come from increased weight of current accounts in the total deposit mix.

With country facing a serious economic challenges, the economic activities are likely to slow down and the central bank may be forced to increase interest rates even further in order to curb the inflationary pressures. Consequently, the market performance may take a beating as the risk free yields go up even further. We advise investors to maintain exposures to high dividend yields scrips in this scenario. In this backdrop UBL and MCB may be primed to outperform, offering dividend yields of over 20% each.