AKD Quotidian about — Banks: Buy on Dips

Karachi, September 25, 2013 (PPI-OT): Foreign investors sold stocks worth US$11.0mn (net) yesterday, the highest single day selloff in 2.5yrs. In this regard, as per market murmurs a sizeable chunk of this selling was concentrated in banking sector shares (the listed sector shed 3.3% yesterday).

According to AKD Securities considering the AKD Banking Universe had gained 48.5%CYTD (vs. 36.6%CYTD gains for the Index), AKD Securities believes a correction was in the offing particularly as upcoming 3QCY13 results may be weak with spreads continuing to contract (Aug’13: 6.28%, down by 3bpsMoM/67bpsYoY) and capital gains likely to be sequentially lower.

That said, based on a strong outlook for CY14F, AKD Securities would be buyers in banking shares on dips where within AKD Securities coverage, AKD Securities preferences is skewed towards BAFL and ABL. Among non- covered scrips, AKD Securities flags names such as FABL, AKBL, JSBL, SBL and BIPL as banks that trade at trough P/B multiples AND that have failed to perform CYTD.

3QCY13 may disappoint: In general, banking sector profitability in 2QCY13 came in line with consensus estimates (banks such as MCB and HBL surprised on the up) with the market correctly anticipating that NIM contraction would be countered by realization of higher capital gains. In 3QCY13 however, AKD Securities expects profits for the most part to be sequentially lower considering NIMs will have continued to contract (Aug’13: 6.28%, down by 3bpsMoM/67bpsYoY) while choppy market performance of late may reduce the quantum of capital gains. Note that the impact of the recent 50bps rate hike will likely not have an impact in 3QCY13.

Room for profit taking: Considering the listed banking sector gained a robust 11.6% since the 50bps hike in discount rate earlier this month, thereby exceeding target prices in the process, AKD Securities felts there was room for a correction to take place. This came to pass yesterday, with the banking sector losing 3.3% in market capitalization.

That said, the strong outlook for CY14F remains unchanged where higher NII on the back of rising interest rates should not be accompanied by a proportionate increase in credit costs. In this regard, combined profitability of the AKD Banking Universe is projected to rise by 16%YoY in CY14F. Within this backdrop, AKD Securities advocate a Buy on Dips stance.

Bottom fishing: As highlighted earlier, AKD Securities advocates a more selective stance among coverage banks where AKD Securities retains a liking for BAFL (TP: PkR24.5/share) and ABL (TP: PkR95/share). Further dips may also open up upside potential in UBL (TP: PkR145/share). At the same time, although not in AKD Securities formals coverage, AKD Securities flags names such as FABL, AKBL, JSBL, SBL and BIPL as banks that trade at trough P/B multiples AND that have failed to perform CYTD. Although their fundamentals are relatively weaker, these could potentially depict a catch-up rally going forward while recent lacklustre price performance implies any downside is likely to be limited.