Karachi, January 20, 2021 (PPI-OT): Pakistan Banks: Payouts propel ‘bull-cycle’ expectations
The strong rally in UBL (+10.6%CYTD) can be taken as an indicator of long-awaited structural bull phase in the banking sector likely triggered by dividend payout expectation (c. DY of latest payouts stand at 6.0%) and receding foreign positions (net sell CY20/cumulative since CY14: US$162mn/US$603.1mn).
We expect interest to prevail in near term as valuations (CY21F P/B of 0.8x, at a discount of 13.0% to historical multiples) take center stage and expectation of interest rate hikes (AKD Est. Dec’21-end interest rate of 8.5%) gain ground resulting in possible multiple re-rating as seen in CY17-18 (sector re-rated by 12.7%).
With modest expectation of interest rate hikes in CY21, onus lies on earning asset growth (CY20-23F CAGR: 15.0%) and non-funded income to drive earnings forward whereas normalization in administrative costs would exclusively favour HBL’s earnings growth (C/I: 60.3% avg. CY21-23F vs. +70% in previous 3y).
We continue to like HBL (TP: PkR177/sh – on valuations, strong earnings profile), MCB (TP: PkR223.4/sh – earnings profile, prudent buildup of PIB book with 4.1% unrealized gains on PIB holdings vs. 1.5% of our universe), and BAHL in mid-tier (TP: PkR91.5/sh – on aggressive branch deployment).