Karachi, November 25, 2014 (PPI-OT): Pakistan Banks: Assessing recent trends
The latest banking sector data indicates that banks’ balance sheet continues to grow in double digits (up 14%YoY in Sep’14). While the NPL ratio has slightly inched up to 13% in Sep’14 on classification of certain names in the energy chain, the overall asset quality appears to be in control with industry’s coverage ratio at 78%.
Despite the sector’s high investment to deposit ratio of 54% in Sep’14, AKD Securities sees an encouraging 10.7% YoY uptick in private credit off-take where selected sectors such as food and beverages, transport and communication and agriculture have been the major recipients. Although consumer financing has grown by 10%YoY as the banks re-focus on extending auto financing and personal loans, AKD Securities believes the segment has more potential to grow currently constituting mere 7.6% in total private credit off-take.
Going forward AKD Securities expects spreads to come off gradually, that said, AKD Securities retains AKD Securities’ liking for those names in the banking space that have: 1) the room to benefit from loan growth without compromising on the capital adequacy ratio, 2) achieved economies of scale and 3) diversification through strong non-interest income. AKD Securities’ preferred plays include UBL, BAFL and NBP.
Spreads at 5.81% in Oct’14: With Oct’14 spreads 5.81% (lower by 39bps / 7bps MoM), 10MCY14 spreads averaged at 6.0%, The sequential downtick in spreads is on account of a 6bps drop in lending yields to 10.98% as the deposit costs remained at the same levels. While spreads might inch up a bit in Nov’14 on account of immediate adjustment in savings deposit rates, spreads are bound to come off gradually in the medium term (another 50bps cut expected in Jan’15 MPS).
BS growth set to gain momentum: Latest banking sector data indicates that banks’ balance sheet continue to grow at strong levels (14%YoY) to PkR8.74tn. Despite industry’s continued preference for risk-free GoP securities (investments up by 17%YoY), there has been an encouraging 10.7% YoY uptick in private credit off-take (loan to deposit ratio at 48% in Sep’14) over the last few months.
In this regard, selected sectors such as food and beverage, transport and communication and agriculture have been the key recipients of industry’s credit disbursements. Furthermore, consumer financing grew by 10%YoY in Oct’14, as banks continue to focus on auto finance and personal loans, a segment that constitutes a meagre 7.6% of private sector loans. Going forward, AKD Securities expects business activity to pick up providing space for continued double digit growth in advances.
Asset quality at comfortable levels: The SBP data for Sep’14 indicates that cumulative sector NPLs of the sector have gone up sequentially to 13.0% (up 20bps) on classification of certain names in the energy chain. Considering the industry’s coverage ratio at 78%, incremental provisioning requirements are expected to remain bearish heading into CY15F.
Investment perspective: With spreads expected to remain on the lower side in CY15, AKD Securities continues to prefer banks that have the room to benefit from any uptick in advances with a decent CAR buffer, lower cost to income and hedged against interest movements through strong non-interest income (fee, commissions, dividends, capital gains). At current levels, AKD Securities’ preferred plays are UBL (TP: PkR225/share), BAFL (TP: PkR33.2/share) and NBP (TP: PkR69/share).