AKD Quotidian about — Banks: Headwinds on NIMs

Karachi, May 27, 2013 (PPI-OT): A tougher operating environment continues for Banks with lower asset re-pricing and tighter regulations on deposit costs combining to drive down the industry’s weighted averaged spread to 6.19% in Apr13, down by 103bps YoY/5bps MoM. As a result, with lower NIMs driving down Nil, banks are having to rely on balance sheet growth, asset quality improvement, capital gains and cost control to shore up bottom lines.

According to AKD Securities at the same time, although banks are lending more to the private growth, overall credit growth of 5%YoY remains sluggish and exemplifies both a continued risk averse stance by banks as well as severe energy shortages with several key industries running significantly below peak utilization levels.

Going forward, although contingent on several factors that are yet to materialize, any further reduction in interest rates poses the key risk to banking sector profitability across 2HCYI3/CY14 unless the 6% rate floor on savings deposits is reduced at the same time. For now, AKD Securities reiterates a more cautious stance on the sector with a selective preference for IJBL and BAFL.

Tighter margins: Weighted average banking sector spreads for Apr’13 have clocked in at 6.19%, down by a hefty 103bps VoY. That said, spreads are only off about 5bps on a MoM basis despite new regulations on savings deposits (interest to be calculated on average balance basis) coming into effect from Apr 113.

This brings 4MCY1 3 spreads to average 621% vs. an average of 7.30% in the corresponding period last year. While margins are dearly under pressure (NIl for Big-6 down by 9%YoY in 1QCY13), banks are relying on balance sheet growth, asset quality improvement, capital gains and cost control to shore up bottom lines.

Nascent positives for credit off take: In consequence to tighter interest margins, SBP data suggests that banks are depicting a shift away from their entrenched risk averse stance – but only very slightly. In this regard, there is encouraging funds flow into the agri credit cycle (+12%YoY), food and beverages (+15%Y0Y), finished textiles and made-ups (+13%YoY), power and allied sectors (+6%YoY- 29%Y0Y) and auto financing (`-7%YoY). That said, the ongoing energy deficit appears to be having a significant impact on broader manufacturing credit growth where loans for manufacturing purposes are up just 5%YoY.

Investment perspective: While AKD Securities retains base-case expectations of an early entry into an IMF program and interest rate hikes by the end of the year, any emergence of foreign flows (e.g. Saudi Oil Facility) nay alleviate PoP concerns and allow the 555 to cut rates again. This poses the key risk for banking sector profitability across PSCT13/0Y14 unless the 6% rate floor on savings deposits is reduced at the same time. For now, AKD Securities reiterates more cautious stance with a preference tar SSL nod SOPL