AKD Quotidian about — Banks: 1QCY13 results highlight underlying strengths

Karachi, April 30, 2013 (PPI-OT): Banking sector IQCYI3 results are predominantly in, where combined NPAT for the Big-6 banks is PkR23.3bn, down 1O%YoY but up by 11%QoQ with banks making up for tighter NIMs through non-funded income and a tighter control on costs.

According to AKD Securities broadly speaking, results for MCB, UBL and ABL beat consensus expectations, HBL and BAFL were inline while NBP disappointed. Although IQCYI3 earnings were for the most part lower on a YoY basis, AKD Securities flags 1) the contained impact of the SBP’s latest directive on savings a/c, 2) an apparent inflection point in asset quality dynamics and 3) strong prospects for capital gains as key positives that will shape the rest of CYI3. In this regard, AKD Securities believes initial concerns regarding a steep drop in full-year CY13 profitability appear to be overblown and that banks may post positive surprises going forward. AKD Securities continues to like the bigger banks, with a selective preference for UBL (TP: PkRI12.5/share) and BAFL (TP: PkR2O/share).

IQCYIS results review: As a group, the Big-6 banks (MCB/UBL/NBP/ HBL/ABL/BAFL) have posted combined NPAT of PkR23.Sbn in 1 QYI 3 vs. combined NPAT of PkR2S.9bn in 1QCY12, translating into a 1O%YoY decline (ex NBP: 7%YoY decline). Broadly speaking, results for MCB, UBL and ABL beat consensus expectations, HBL and BAFL were inline while NBP disappointed. Key highlights of combined 1QCY13 results include: 1) 9%YoY decline in NIl due to NIM compression, 2) a 19%YoY increase in total provisions (ex NBP: 55%YoY decline), 3) strong 17%YoY non- interest income growth and 4) non-interest expense growth of 8%YoY.

Key takeaways: With three out of six covered banks beating consensus estimates, AKD Securities believes investor community concerns regarding a steep drop in full-year CY1 3 profitability appear to be overblown. In this regard, going by UBL’s conference call yesterday, the impact of SBPs recent directive to calculate interest on savings a/c on average balance basis may be a contained 2%-3% reduction in bottom-lines on an annualized basis.

The other key takeaway is net loan provisioning reversals by MCB and ABL where AKD Securities believes this may represent an inflection point for asset quality dynamics, with other banks to follow suit with a lag. Finally, as the strong uptick in capital gains shows, banks retain the capacity to smoothen earnings and prevent negative shocks.

Investment perspective: Banks have consistently underperformed the KSE-1 00 Index over the last year on investor concerns that CY1 3 profitability could be severely lower. In AKD Securities views, while 1QCY13 earnings are lower, AKD Securities flags improving asset quality and prospects for capital gains as key positives that may lead to banks surprising on the upside going forward. AKD Securities continues to like the bigger banks, with a selective preference for UBL (TP: PkR1I2.5/share) and BAFL (TP: PkR2O/share).