Karachi: The listed banking sector has now gained 33%CYTD, following which the sector’s weighted average trailing P/B and P/E multiples have rerated to 1.1x and 6.9x, respectively.
According to AKD Securities, in this regard, banking stocks are rerating following robust CY11 results; AKD Banking Universe profits are up 25%VoY white select small and medium-sized banks have on average more than doubled their YoY profitability. As such, the sector’s weighted average ROE has climbed to 16.7% which, in AKD Securities’ view, just about justifies a P/B multiple of 1x. However, considering that banks are likely to continue with a double-digit growth trajectory in CY12F, sector ROEs have the potential to climb to 18% in CVI2F (and further to 18.5% in CY13F) led by improvements in some of the smaller and medium banks. This could potentially carry forth the ongoing valuation multiples rerating process. While UBL (ex-dividend TP: PkR88/share) remains the top pick from AKD Securities’ formal coverage cluster, some of the cheaper listed banks, particularly from a medium- term perspective, are BAFL, SNBL, HMB and BIPL. Following robust recent price outperformance, relatively pricey banks (on trailing valuations) are MCB, NIB and SILK.
Banks Trailing Valuations
|BS Annualized from 9MCY11 Adjusted for goodwill Source: Company Reports and AKD Research|
Investment Perspective: AKD Securities estimates that if combined sector profitability increases by 20%YoY in CY12F and trend of payouts remains consistent, banks’ ROE may reach 18% in CY12F from 16.7% in CY11. While upcoming capital injections (e.g. BIPL) may dilute immediate-term ROE, AKD Securities believe some select small and medium banks have experienced a sustainable turnaround where ROE expansion over the medium-term should continue driving the rerating process for them. In this regard, while AKD Securities will update AKD Securities’ financial models shortly, an indicative forward P/B multiple of 1x would price BAFL at PkR231share while a 08x P/B multiple for HMB, SNBL and BIPL would value these banks at PkR22/share, PkR11.5/share and PkR9.2/share, respectively. Risks remain insofar as potential macroeconomic slippage constricts multiples expansion even as profits/ROEs continue to rise.