JS Securities Limited – Morning Briefing

Karachi, January 04, 2019 (PPI-OT): Banks: 4Q2018E profit growth to remain flat, core income to improve

We preview 4Q2018 earnings of JS Banking Universe (88% of the banking sector), where we expect profitability to broadly remain unchanged compared to 4Q2017, keeping cumulative profits for 2018E at minimal YoY growth as well.

However, we expect core income to improve during 4Q2018, driven by (1) asset base growth and (2) partial impact of the ongoing rise in interest rates.

Mid-tiers are expected to continue to outperform the Big 5, with NII growth of 14% YoY, while the Big 5’s NII are expected to cumulative increase by 1% YoY only.

With 29% return by mid-tiers during 2018, vis-a-vis -17% by Big 5, both segments now trade at par, while mid-tiers have begun to generate a higher ROE than the later.

4Q2018E earnings likely to witness minimal growth

We preview 4Q2018 earnings of JS Banking Universe (88% of the banking sector), where we expect profitability to broadly remain unchanged compared to 4Q2017, keeping cumulative profits for 2018E at minimal YoY growth as well. Burden on the profits can likely stream from (1) absence of quantum of capital gains that were witnessed during 4Q2017 and (2) higher effective tax rate accounting for quarterly Super Tax as compared to flat corporate tax during 4Q2017. Moreover, we also incorporate anticipated provisioning expenses under investments derived from the declining local equity markets during the quarter.

NII expected to increase by 5% YoY

However, we expect core income to improve during 4Q2018, driven by (1) asset base growth and (2) partial impact of the ongoing rise in interest rates. To recall, the sector’s revenue is likely to reflect the impact of 275bps higher benchmark rates (rise till Sep-2018) compared to 425bps hike (rise till Dec-2018) impact on the Interest costs. As a result, we expect growth in Net Interest Income (NII) to limit to 5% YoY. Asset base growth is expected to go back to double-digit growth, on account of Rs2trn MTB auction executed during Dec-2018 and consistent ~20% YoY loan growth (highest since 2005). Asset deployment is expected to be funded by (1) Deposits, that have been witnessing a relatively sluggish growth and (2) Repo Borrowings that spiked towards the end of 4Q2018.

Mid-tier banks to outshine the Big 5 again

Mid-tiers are expected to continue to outperform the Big 5, with NII growth of 14% YoY, while the Big 5’s NII are expected to cumulative increase by 1% YoY only. Higher growth by the mid-tier banks can be reasoned by the respective banks’ asset growth and higher sensitivity to interest rate increase. Amongst our covered banks, we expect Meezan Bank (MEBL), Askari Bank Ltd (AKBL), Habib Metropolitan Bank (HMB) and Bank Al Habib to remain top outperformers in terms of NII growth, given similar reasons cited above. Moreover, we flag the spike in PIB yields during 4Q2018 (3yr: +2.5%, 5yr: +2.9%, 10yr: +3.2%) will likely further dent 2018E book values of Pak banks. As at 3Q2018 end, United Bank Ltd (UBL), HMB and AKBL stood among banks with higher exposure to PIB investments. With 29% return by mid-tiers during 2018, vis-a-vis -17% by Big 5, both segments now trade at par, while mid-tiers have begun to generate a higher ROE than the later.