AKD Quotidian about — Banks: Spreads surprise in May’13

Karachi, June 25, 2013 (PPI-OT): Weighted average banking sector spreads have depicted a surprising rebound of 15bps MoM to 6.34% in May’13, the highest since Dec92.

According to AKD Securities in this regard, deposit rates have come off by 8bps MoM to 5.15% while lending yields have gone up by 7bps MoM to 11.49%. That said, industry spreads will likely trend lower in 2HCVI3 to -6% considering the SBP has recently cut the Discount Rate by 50bps to 9% and no relief has been given on the rate floor on savings deposits.

Following the cut in OR, although banks will clearly be affected by tighter interest rate margins (preliminary workings suggest AKD Banks Universe CYIZFICYI4F EPS estimates will be trimmed by 5% on average), AKD Securities sees limited impact on target prices and AKD Securities investment case remains intact given the lower risk free rate.

As such, although banking sector shares may remain under pressure in the immediate-term, AKD Securities believes their valuations, for the most part, are very attractive which should cushion further downside while being supportive of a rebound before too long. Importantly, even though banks earnings across CYI3F/CYI4F will likely be soft, their dividends should remain stable given strong capital bases. This underpins AKD Securities selective preference for the larger banks where AKD Securities likes UBL, BAFL and NBP.

Textile Exports May’13
According to trade data released by Pakistan Bureau of Statistics (PBS) the textile sector posted an overall sequential exports growth of 5%MoM to US$1.l8Smn. Pakistan’s textile sector resumed growth in exports after posting a decline in Apr13.

The growth in exports during May’13 were driven by higher value added segments as well as cotton yarn. In this regard, knitwear increased by a significant 19%MoM to clock in at US$1.8Omn followed by bed wear 1O%MoM, readymade garments 5%MoM and towels 4%MoM.

This increase in exports of the higher value added segment can be attributed to the improvement in the power and gas supply situation to the textile industry, where AKD Securities believes that textile manufacturers were better able to avail the opportunities presented by the EU Autonomous Trade Preference (ATP), increased international demand and PkR/US$ depreciation.

Yarn exports increased 5%MoM to US$196mn following a recovery in the demand for imported yarn from China (Chinese yarn imports increased by 5%MoM to 171 .88k tons during May’13) after witnessing a decline in Apr13 (-18%M0M). During the 11MFY13 period yarn exports remained the star performer, increasing 25%YoY to US$2.053mn.

Overall exports from the textile sector for the IIMFYI3 period clocked in at US$11.9bn (up 6%Y0Y). Going forward, if the cotton prices, already facing downward pressures (-5%WoW), continue to fall the resultant decline in the yarn prices may hamper growth of yarn exports.

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