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Karachi, May 16, 2013 (PPI-OT): The listed banking sector has underperformed the KSE-100 Index by 8%CYTD but recent price performance suggests banks are in the midst of a catch-up rally where banks such as MCB, SNBL, and BOP have gained in the 26%-45% range over the last month.
According to AKD Securities in this regard, AKD Securities believes anticipated priority focus on economic/energy issues with consequent positives for asset quality has sparked the ongoing rally. Within this backdrop, there are several laggards that have the potential to now outperform given their deeply suppressed valuations.
In AKD Securities views, these include all of the larger banks (ex-MCB), HMB and FABL in particular from among the medium-sized banks and BOK from the small banks group. Although yesterday’s T-bill auction (marked shift to 12m tenor) suggests the money market’s expectations for no immediate reversal in the monetary policy cycle, AKD Securities retains faith with the banking sector. AKD Securities preferred plays are UBL (TP: PkRI 20/share) and BAFL (TP: PkR2O/share).
Room to catch-up! A subdued interest rate environment has led to 8%CYTD under performance for the listed banking sector. That said, recent price performance suggests banks are in the midst of a catch-up rally where MCB, SNBL, and BOP have gained 26%-45% over the last month.
AKD Securities attributes this to anticipated priority focus on economic/energy issues with consequent positives for asset quality alongside a selective post-elections rally (e.g. preference for Nishat Group stocks).
Based on 1QCY13 results, AKD Securities believes relatively undervalued banks that can now outperform include all of the larger banks (ex-MCB which trades at a trailing P/B of 2.6x), HMB (P/B; O.65x) and FABL (P/B: O40x) from among the medium-sized banks and BOK (P/B: O.56x) from the small banks group. Moreover, despite robust recent price perform lance, AKD Securities believes banks such as SNBL and BIPL can deliver further gains as their valuations are by no means stretched.
Shifting trends in the earnings breakdown: In general, 1 QCY1 3 results for AKD Securities coverage’s banks tagged in above expectations (by 5% on average) as lower provisions and capital gains countered the effect of a lower interest rate environment. AKD Securities expects this ongoing improvement in asset quality and realization of capital gains backlog to continue going forward, which should provide a cushion to the bottom-line despite tighter NIMs.
In this regard, yesterdays T-biIl auction (two-thirds of bids in 12m tenor) suggests the money market’s revised expectations for no immediate reversal in the monetary policy cycle which would stand to subdue NIMs across the rest of CY13F. In AKD Securities views, the impact on investment cases for banking sector scrip’s would likely be minimal in the event of any cut in interest rates, with a lower discounting factor to counter slightly trimmed EPS estimates.
Investment perspective: While not under AKD Securities formals coverage, AKD Securities believes banks such as HMB, FABL and BOK have substantial room to depict a catch- up rally. Within AKD Securities coverage’s universe, although uncertainty on interest rates understandably keeps earnings outlook relatively opaque, AKD Securities believes the larger banks’ strong balance sheets should keep dividend payouts intact. AKD Securities preferred plays are UBL (TP: PkR12O/share) and BAFL (PkR2O/share) while MCB appears ripe for profit taking.