Karachi, May 22, 2012 (PPI-OT): Systemic NPLs have stabilized at PkR625bn with the NPL ratio easing to 16.1% from recent peak of 17.5% and provisioning coverage inching up to 69%. In AKD Securities’ view, this is an outcome of skewed lending to the GoP over the last 3yrs (IDR at 52% vs. 26% in CY08) and a reflection of private sector crowding out. Considering similar dynamics should prevail over the next 2-3 years, NPLs should be in for a secular downtrend, in AKD Securities’ view. That said, NPL data is slightly distorted due to conversion of energy chain loans into GoP securities while asset quality risks emanate from 2nd round of NPL formation, either on continued private sector choking out or forced premature private sector lending if tax rate on T-bills is raised in the FY13 Budget. Post recent dip in banking sector scrips, AKD Securities believes the risk-reward balance is in favor of a bullish stance where AKD Securities’ top pick is BAFL while selective opportunities exist in UBL and NBP as well.
Asset quality outlook: NPLs are stabilizing at the PkR625bn mark (NPL ratio: 16.1%, coverage: 69%). While data is slightly distorted due to conversion of energy chain loans into GoP securities (e.g. public sector NPLs for NBP came down to PkR674mn in CY11 vs. PkR16.8bn in CY10), AKD Securities believes a secular downtrend in NPL formation is on the cards which should lead to lower credit costs. Nevertheless, risks remain where regulators face a tough balance between the need for private sector credit offtake (up just 0.75%YoY in Apr’12) and ensuring banks’ balance sheets remain strong. Accordingly, AKD Securities believes higher tax rate on T-bills may be too radical a move at this point in time with lack of clarity on resultant direction and quantum of liquidity flow. Nevertheless, clarity will only emerge post Budget.
Investment Perspective: Within the backdrop of loud pre-Budget noise for the Banking sector, selloff in banking sector scrips was always on the cards (Banks are down 8% from recent peak). That said, AKD Securities believes potential negatives (e.g. higher income tax rate, higher tax rate on T-bills) have largely been priced in already. Accordingly, AKD Securities maintains AKD Securities’ view that Banks are primed for a post-Budget rally, even if regulatory overhang caps some upside potential. AKD Securities’ top pick is BAFL while selective opportunities exist in UBL and NBP as well.