AKD Quotidian about — Banks: What’s behind recent outperformance?

Karachi, December 10, 2012 (PPI-OT): The listed banking sector has gained 8% over the last two weeks, outperforming the KSE-100 Index by 5% in the process.

According to AKD Securities attributes this ongoing rally to 1) improving asset quality where systemic NPL stock has come off by 3%QoQ in 3QCY12, 2) possible reduction in the savings a/c rate floor which would ease pressure on NIMs and 3) excitement over full-year results where banks tend to outperform the market over the Dec-Feb period. Banks have underperformed the broader market by 1%CYTD but AKD Securities expects the former to lead the market over the next two months. AKD Securities continues to like the larger banks, particularly UBL, NBP and BAFL. Within the mid and small sized category the most attractively valued banks appear to be FABL and BOK, both of which trade below 0.6x on trailing basis even after adjusting book value for non-distributable earnings.

Improving asset quality: Systemic NPLs has come down to PkR636 billion on Sep 30’12, flat on a YoY basis and down by an 3%QoQ. At the same time, provisioning coverage has inched above 70% after two years. Although incremental provisions over the next few quarters may appear relatively high due to expiring FSV benefits, banks’ risk averse stance coupled with ongoing monetary easing is now translating into tangible improvement in asset quality. For some large banks particularly MOB and ABL that are not reliant on the FSV benefit, this trend may manifest into provisioning reversals.

Reduction in savings a/c floor? With Nov’12 CPI at 6.9%YoY vs. the DR at 10%, monetary easing is likely to continue. This time around however, AKD Securities believes any policy rate cut could potentially be accompanied by a reduction in the savings a/c rate floor. AKD Securities estimates that every 1ppt reduction in the floor rate could up Elixir Securities Limited’s EPS estimates by 8%-10%. Factors supporting such a move include 1) sharply tighter NIMs, 2) recent removal of rate floor for Islamic banks and 3) nascent pickup in private sector credit offtake particularly towards food, agri allied industries and even consumer financing.

The year-end rally! Banks tend to outperform the market during the Dec-Feb period, driven by prospects of year-end payouts. Although several large banks have recently shifted to a quarterly payout policy, AKD Securities believes excitement regarding payouts will continue to lead a banking sector rally particularly as bonus issues tend to be exclusively left for full-year results. Moreover, earnings have the potential to post positive surprises going by robust capital gains potential – both on equities and fixed income instruments.

Investment Perspective: Banks have underperformed the broader market by 1%CYTD but AKD Securities expects the former to lead the market over the next two months. AKD Securities continues to like to larger banks, particularly UBL (TF: PkR100/share), NBP (PkR55/share) and BAFL (TP: Pk120/share). Within the mid and small sized category the most attractively valued banks appear to be FABL and BOK, both of which trade below 0.6x on trailing basis even after adjusting book value for non-distributable earnings.