AKD Securities Limited – AKD Daily (September 06, 2022)

Karachi, September 06, 2022 (PPI-OT): Pakistan Banks: Gauging the impact of floods

With floods disrupting lives up and down the country, the business environment for banks is also deteriorating. To this end, the credit off-take is likely to deteriorate where we may see the headline growth in advances to miss our target of 10% for CY22.

The cost of credit may also see a spike in the aftermath of floods. Country’s banking sector’s exposure to agriculture and commodity business stood around PkR1.6trn and represented about 14% of the banking industry’s total loan book. The lending made to these sectors will be directly impacted and may see accretion in toxic loans.

Floods have induced a new wave of inflationary pressures in the country as major food crops like rice and sugarcane along with various other minor crops like onions, potatoes and tomatoes have all been damaged. Resultantly, the prices of various food items have shot through the roof and we may see inflation posting higher highs in coming months.

As inflation will likely keep elevated in the coming months, we may see SBP being forced to move interest rates once again. Governor State Bank in the previous meeting said that the central bank will remain data driven when deciding on its future course of action. We expect the floods to materially impact SBP’s inflation outlook and therefore be forced to revise its inflation forecast for FY23 of 18% – 20%.

With interest rates likely to rise by 50bps – 100bps in the coming months, the banking sector may remain under pressure. Higher interest rates and difficult business environment may not only result in higher cost of credit but will also cap book growth and valuations. We highlight MEBL and BAFL as the likely outperformers from our AKD Banking Universe.