AKD Securities Limited Equity Research – Daily Report (30-03-2020)

Karachi, March 30, 2020 (PPI-OT): Pakistan Banks: Feb’20 spreads slip; Regulatory relief a lifeline

Banking sector spread for Feb’20 stood at 5.37% (down 33bps MoM), lowest since Apr’19, partly as banks deliberately push volumetric growth to counter the effects of monetary easing and seasonal maturities compress lending yield.

Recent regulatory actions (225bps cut in interest rates and narrowing floor to 100bps below policy rate from 150bps previously to establish Interest Rate Corridor (IRC) symmetrical around the policy rate) bodes negatively for spreads, where just the change in floor rate translates to a 30bps reduction in spread (annualized) for our banking universe.

The sector has lost 32.3% since Feb 26’20 (first case of COVID-19 was diagnosed in the country) following rapid emergency rate cuts and concerns on asset quality in the aftermath of measures taken to curtail the spread of the pandemic, and significant selling pressure. Our banking universe is trading at a CY20F P/B of 0.6x, lowest since CY12.

We continue to advocate for investors to remain on the sidelines given unprecedented nature of COVID-19 implications. That said, relaxation on loans classification and Capital Conservation Buffer (CCB) boosts risks absorption, easing concerns in the short term.

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