Karachi: Banking system NPLs have registered at PkRG23.2bn in Dec’11, up 11%YoY but down 1%QoQ.
According to AKD Securities, as a result, the estimated NPL ratio for commercial banks has contracted by 60bps QoQ to 16.9% while provisioning coverage has inched up slightly to 67%. This is the first time since Dec’06 that systemic NPLs have come off and, if this trend sustains, is a significant positive for banks’ asset quality. That said, we believe this sequential downtick in NPLs is partly due to the 4QCY11 conversion of circular debt exposure into GoP securities particularly as reduction in NPL stock has almost completely arisen from public sector banks e.g. NBP which have a disproportionately high exposure to the sovereign/quasi-sovereign entitles. As such, we believe stock of NPLs has further room to increase in CY12, particularly if the recent pickup in inflationary pressures sustains. In this regard, coverage that is only in the mid-60%s (on high FSV benefit) implies that credit costs are likely to stay relatively elevated across the medium-term even if NPL stock depicts a secular downtrend. At current levels, we retain our selective preference for the larger banks where our top pick is ABL (CY12F P/B: 1.2x, PER: 5.4x, DIY: 8.7%) based on our TP of PkR75.5/share.
Temporary dip in NPLs: Systemic NPL stock has increased by a relatively modest 11% YoY in Dec’11 (lower than 15%YoY asset growth) while on a sequential basis, NPL stock is down 1% QoQ. This is the first time since Dec’06 that systemic NPLs have come off – NPL stock appeared to be flattening in mid-CY10 before floods hit and the central bank tightened monetary policy. While recent NPL data is uplifting, we believe the improvement is largely due to the 4QCY11 conversion of circular debt exposure into GoP securities. As such, we believe stock of NPLs has further room to increase in CY12 (although at a slower clip than asset growth), particularly if the recent pickup in inflationary pressures sustains (CPI at 11.05%YoY/0.3%MoM in Feb12). Low provisioning coverage in the mid-60%s entails credit costs may remain relatively elevated (as FSV benefits expire) over the medium-term.
Investment Perspective: Listed Banks have rallied by 29%CYTD, outperforming the KSE-100 Index by 12% in the process. Going by precedence (banks generally tend to underperform in March), some banking scrips could be ripe for profit taking particularly as results season euphoria recedes and macroeconomic concerns, particularly on inflation and Balance of Payments, come to the forefront. As such, while we like the larger banks in general, our preference is skewed towards balance sheet strength (high CARs; little to no reliance on FSV benefit) were our top pick is ABL (TP: PKR 75.5/share) while positions may also be taken in MCB (TP: PKR 180/share) at lower levels.