With 2 months into 2Q2014, banking sector credit offtake remains weak, growing by only 1% since March 31, 2014 to Rs4.2trn, with cumulative 2014 YTD growth at 4%. That said, Investments during the same period have grown by 11% since the start of the year showing heavy participation of banks in PIB auctions.
- Deposit growth also remained subdued at 1% since March 31, 2014, as deposits clocked in at Rs7.6trn. The same grew by only 2% since the start of the year. As a result, banking sector ADR has improved slightly to 55% during the period.
- Average spreads, on the other hand, have remained stable at 6.06% in April 2014, down 13bps YoY while up 1bp MoM. We continue to see spreads remaining low during 2014 given high probability of the government cutting interest rates by 50-100bps in 2H2014.
- We remain ‘Market-Weight’ on the banking sector as we believe most of the positives have been priced in at current levels. We currently have ‘Buy’ calls on UBL (TP: Rs219) and BAFL (TP: Rs32).
Adv. inch up by 4% in 2014 while deposits grow by 2%
Banking sector aggregate deposits so far in 2014 have registered a growth of 2%, reaching Rs7.6trn as of May 23, 2014. Banks maintained their prudent lending stance, where credit offtake remained low during the year and gross advances amounted Rs4.2trn (up 4% since December 31, 2013). Investments on the other hand grew significantly by 11% to Rs4.5trn during the same period, reflecting banking sector’s heavy participation in high yielding PIBs. As a result, banking sectors’ ADR and IDR improved to 55% (+1ppt) and 59% (+5ppt) respectively. With credit offtake expected to remain subdued we anticipate improvement in NIMs for banks will stem from their investments, which will bolster their earnings.
Spreads remain flat in 2014
Average spreads for banks remained almost flat at 6.06% in April (+1bp MoM while -13bps YoY) where the same had hit a low of 5.98% (lowest since April 2005) in January 2014. Meanwhile 4M2014 weighted average spreads stand at 6.04% compared to 6.21% in 4M2013. Going forward, on the back of our expectation of the State Bank of Pakistan (SBP) cutting the discount rate by 50-100 bps in 2H2014, we believe a sharp revival in banking spreads is an unlikely outcome. In fact cut in DR could prove beneficial for the banks, where banking NIMs would improve due to investments in the PIBs, which yield higher returns (~+2% from any other investment avenue). Similarly lower DR would mean low Minimum Profit Rate (MPR) on savings deposits that the banks have to pay to their consumers.
Outlook – Maintain ‘Market-weight’ on Pak banks
Banks have remained in the limelight during the past couple of months where the banking sector has outperformed the KSE-100 index by 4.9% in 2014 YTD. The rally has been mainly led due to banks opting for more unconventional methods to bolster earnings by investing heavily in the PIBs (with higher returns). Given the relatively balanced risk-reward outlook, we remain ‘Market-weight’ on Pak Banks with ‘Buy’ calls on UBL (TP: Rs219) and BAFL (TP: Rs32).