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Karachi, March 27, 2015 (PPI-OT): Banks: 1-7% drag on valuations by 50bps discount rate cut
JS Securities Limited continues to like Pak Banks despite another 50bps cut in discount rate by the State Bank of Pakistan (SBP). JS Securities Limited believes recent underperformance of the banking sector remains unjustified given a muted 1-7% valuations impact driven by -2.2% to +0.9% earnings revision for 2015E and -5.3% to +0.6% for 2016F. JS Securities Limited flags the magnitude of monetary easing impact on Pak Banks has shrunk post linkage of Minimum Deposit Rate (MDR) to the interest rate corridor.
JS Securities Limited’s top picks amongst Pak Banks are United Bank Limited (UBL, TP: Rs248) and Allied Bank Limited (ABL, TP Rs148), as they trade at 2015E P/B of 1.24x and 1.22x, respectively. Introduction of the Target Rate (TR) remains a key risk for the sector, which can potentially wipe out banks’ 2016F profitability by an average 16%.
Monetary easing concerns overplayed, TR remains a risk
JS Securities Limited continues to like Pak Banks despite another 50bps cut in discount rate by the State Bank of Pakistan (SBP). JS Securities Limited believes recent underperformance of the banking sector remains unjustified given a muted 1-7% valuations impact driven by -2.2% to +0.9% earnings revision for 2015E and -5.3% to +0.6% for 2016F on the back of shift in sizable high-yielding assets to low-yielding assets during 2016.
JS Securities Limited flags the magnitude of monetary easing impact on Pak Banks has shrunk post linkage of Minimum Deposit Rate (MDR) to the interest rate corridor. JS Securities Limited’s top picks amongst Pak Banks are United Bank Limited (UBL, TP: Rs248) and Allied Bank Limited (ABL, TP Rs148), as they trade at 2015E P/B of 1.24x and 1.22x, respectively.
However, introduction of the Target Rate remains a key risk for the sector. Contrary to expectations, SBP did not mention the Target Rate in its Monetary Policy Statement (MPS), which can potentially wipe out banks’ 2016F profitability by an average 16%. However, SBP still has three more MPS announcements before its deadline to introduce the Target Rate.
Varying impact of monetary easing on banks’ profitability
JS Securities Limited believes monetary easing affects Faysal Bank (FABL) profitability the most relative to peers as the bank (1) has a lower share of PIBs in total assets, (2) a higher ADR and (3) a low savings to deposit ratio (resulting in lower cost savings). On the other hand, JS Securities Limited expects UBL and NBP to be the least affected due to their (1) lower share of MTBs in total assets and (2) higher contribution from non-interest income.
Valuations drop in tandem; but impact remains muted
Similarly, valuation impact varies from bank to bank due to their distinct asset maturity profiles. ABL’s valuation declines the most within JS Securities Limited’s coverage on diminishing ROE given (1) high re-investment risk because of hefty investments in PIBs and (2) lower savings deposits together with high zero-cost deposits. That said valuation impact on UBL remains muted owing to (1) least re-investment risk amongst peers, (2) presence of higher foreign operations and (3) increasing contribution from fee-based income.
FX reserves to cross US$18bn by year-end
Pakistan’s foreign exchange reserves posted a decline of US$142mn during the last week because of external debt payments. The country’s total foreign exchange reserves stood at US$16.13bn on March 20, 2015 compared to preceding week’s reserves of US$16.27bn. Meanwhile, the Finance Minister has said that country’s foreign exchange reserves are likely to hit US$18.2bn by 2015-end.