AKD Quotidian about — Banks: 2QCY13 to show sequential improvement

Karachi, July 03, 2013 (PPI-OT): Based on preliminary workings, AKD Securities expects combined profitability of the Big-5 Banks to register close to PkR23bn in 2QCYI3 implying a contained decline of 5%YoY (vs. average decline of 12%YoY across the previous two quarters) and growth of 3%QoQ. AKD Securities build premise around strong balance sheet growth, stability in spreads, continued downtrend in loan provisions and higher capital gains.

According to AKD Securities specifically, sector provisions in 2QCY13 (up to Jun 21’13) have clocked in at PkR1 .2bn vs. PkR2.8bn in IQCY13 and PkR8.8bn in the corresponding period last year. At the same time, data indicates that Banks/DFIs recorded Net Sell of PkR7.6bn in 2QCY13, almost double the previous high Net Sell of PkR4.Obn recorded in 2QCYIO.

Going forward, considering that the monetary easing cycle is likely at an end, AKD Securities expects banking sector earnings to depict double-digit growth in CY14E This should unlock improved price performance, in AKD Securities views, where AKD Securities flags that hitherto underperforming ABL and NBP are primed for a catch-up rally.

Sequential improvement in earnings: Going by interim SBP data which indicates continuation of low loan provisions and NCCPL data which shows high capital gains, AKD Securities believes banks are poised to depict sequentially higher earnings in 2QCY13.

Specifically, based on preliminary workings, AKD Securities expects combined profitability for the Big-5 Banks to grow by 3%QoQ in 2QCY1 3. As a result, AKD Securities expects the VoY decline in earnings to be less than 5%, much improved over the 12%YoY average decline across the previous two quarters.

Lower provisions: As per interim SBP data, 2QCY1 3 loan provisions for the banking sector at large may tag in at the lowest quarterly level since CYO7. Specifically, sector provisions in 2QCY13 (up to Jun 2113) have clocked in at PkR1.2bn vs. PkR2.Sbn in 1QCY13 and PkR8.8bn in the corresponding period last year.

Even accounting for last minute additions to provisions, the quantum of provisions in 2QCY13 should to clock in at a multi-quarter low. In this regard, MCB and ARL may continue to record net provisioning reversals while provisions for the rest should depict sequential declines.

Capital gains uptick: Considering the KSE-100 Index returned 16% gains in 2QCY13, AKD Securities expects banks to have booked sizeable capital in the previous quarter. This is confirmed by NCCPL data with Banks/DFIs recording Net Sell of PkR7.6bn in 2QCY1 3, almost double the previous high Net Sell of PkR4.Obn recorded in 2QCY1O.

Although the recent figure will likely be influenced by one-offs such as MCB’s expected sale of ULEVER shares, AKD Securities believes the trend is broad-based, with banks attempting to smoothen reported earnings.

Investment perspective: While banks gained 26% in FY13, this was significantly lower than the 52% returns recorded by the KSE-100 Index. Going forward, considering the monetary easing cycle is likely at an end, AKD Securities expects banks to record improved price performance over the next 12m.

In this regard, while AKD Securities retains preference for UBL and BAFL, AKD Securities flags that hitherto underperforming ABL and NBP are primed for a catch-up rally in the near-term.

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