AKD Securities Limited Equity Research – Daily Report

Karachi, December 06, 2018 (PPI-OT): Pakistan Bank: NIMs to overshadow provisioning costs

Current market capitalization implies a sector ROE of 12.3% vs. expected 13.1% in CY19F. ROE is forecast to recover from 10.3% (CY18F) led by interest rate gains (CY19F NIMs: 3.9% vs. 3.4% in CY18).

While the recent pace of interest rate hike (+4.25% in CY18F) is likely to result in higher provisioning cost (CY19/20F: 0.5/0.9% vs. 0.3% in CY18F), concerns over deteriorating asset quality ala CY08-09 are unfounded, in our view.

Banking sector is better placed this time around with asset mix tilted towards investments (CY19F IDR: 58.0% vs. 39.7% in CY09) whereas economic growth is expected to remain around 4.8% (AKD Est., with downside risks) vs. 0.4% in CY09. Additionally, at that time, Textile sector led asset quality depletion in which Global economic scenario played its part.

Hence, on NIMs net of provisioning basis, the sector is likely to reach close to CY12-13 level (CY19F: 3.4% vs. CY12-13avg. 3.5%) at which time the sector traded at 1.16x. We have preference for interest rate sensitive plays (BAFL, ABL) while we like UBL on cheap valuations.

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