–2013 was a mixed bag for Pakistan’s banking sector as the State Bank of Pakistan (SBP) ended its 500bp monetary easing streak by hiking the Discount Rate by 50bp in Sep 2013 for the first time since Aug 2011 (plus another 50bp in Nov 2013) building investor excitement in the sector.
-Nevertheless, unfavorable changes in SBP regulations on Minimum Deposit Rate (MDR) put pressure on banks spreads growth. As a result, the banking sector underperformed the market by 3.6% in 2013.
–On the balance sheet front, banks’ advances and investments grew by 5.6% and 4.6% respectively during 2013. Meanwhile deposits witnessed a growth of 12.7%YoY in 2013 where the challenge for banks in 2014 will be re-aligning their deposit mix away from expensive deposits.
-With (1) spread expansion capped due to linking of MDR on Saving Deposits to SBP Repo Rate, and (2) SBP’s more vigilant stance on compelling banks to focus more on core business (lending), we remain ‘Under-Weight’ on Pak Banks with ‘Sell’ calls on MCB and HBL.
Glimmer of spreads revival fades away
Spreads compression continued throughout 1H2013 as monetary easing and hike in minimum savings deposit rate played its part. This saw Net Interest Income (NII) of JS Banking Universe decline by 6%YoY in 9M2013. In addition, the ongoing power crisis and a deteriorating law and order situation did not make a strong case for private credit offtake as well. Nevertheless, revival in spreads kick-started post SBP’s 50bp Discount Rate hike in September 2013 (first since August 2011) followed by 50bp hike in November 2013. Investor excitement in Pak Banks was however, was short lived as the SBP linked the Minimum Deposit Rate on all savings deposits to the SBP Repo Rate, capping expansion in spreads, which was turning out to be an emerging theme for the sector at the time. As a result, we saw the banking sector underperforming the KSE-100 index by 3.6% in 2013.
Banks’ 2013 Investments +4.6%YoY; Advances +5.6%YoY
Banking sector aggregate Investments and Advances grew by 4.6%YoY and 5.6%YoY respectively in 2013 to Rs4.07trn each. Pak Banking Sector more than emulated this growth on the deposit side, which grew by 12.7%YoY during the same period to Rs7.5trn. Consequently, the banking sectors’ ADR and IDR shrunk to 54% each compared to 58% each in December 2012. With further monetary tightening expected by the SBP in 2014 (JS estimate: +100bp by June 2014), we anticipate limited growth in advances going forward. As far as banking spreads are concerned, the same have slightly recovered to 6.24% in November 2013 from a low of 6.18% in February 2013 where extent of further recovery hinges upon banks’ success in shifting their deposit mix further towards lower cost deposits.
Outlook – Maintain Underweight on Pak banks
Monetary tightening was eyed as an emerging theme for banks in 2H2013 but the linking of MDR on savings deposits to the DR has proved to be a game changer for the sector. Although further tightening is likely to bode well for the banking sector, we now envisage relatively curtailed growth in banking spreads going forward as compared to previous monetary tightening cycles. That said, we could see greater upside to earnings if banks opt to focus more on building up their Current Account deposits base and lowering the share of Savings Accounts in their deposit mix. On the other hand, poor law and order situation in the country is likely to make it difficult for banks to lend money. Adding to this, monetary tightening will also increase the cost of borrowing for corporates going forward. Eyeing limited near term triggers we remain ‘Under-weight’ on Pak Banks and re-iterate ‘Sell’ on MCB (TP: Rs264) and HBL (TP: Rs108). Meanwhile, we do not rule out a short-term rally in Pak banks in the build up to annual result announcements, which should contain decent dividend payouts.
