AKD Quotidian about — Banks: CY13 kicks off with sharply lower spreads

Karachi, February 25, 2013 (PPI-OT): Re-pricing risk is clearly manifesting with Jan’13 weighted average spreads registering at 6.21%, down by 33bps MoM and by 116bps VoY, and against the 4QCYI2 average level of 6.66%.

According to AKD Securities this level of spreads has not been witnessed since mid-Jun’05 and is a result of lower lending yields and sticky deposit costs, due to the floor on savings a/c deposits.

Considering average lending yields have come off by -3ppt since peaking in Jan’09 while the DR has reduced by 450bps in the monetary easing cycle initiated since 2HCYII, AKD Securities believes margins will continue to compress across IHCYI3, thereby putting pressure on banks’ earnings. In this regard, mitigating factors could be either a reversal in the monetary easing cycle and/or a reduction in the savings alc rate floor.

In AKD Security’s views, although interest rates may start to increase in 2HCYI3, an immediate reduction in the rate floor appears unlikely going by SBP tone and industry channel checks. Within this scenario, AKD Securities believes banks will likely book capital gains to shore up earnings across the next few quarters. While AKD Securities has a Market weight stance on Banks. AKD Securities selectivelys Drefer UBL. BAFL and ABL.

Re-pricing risk is manifesting: Re-pricing risk is clearly manifesting with Jan’13 weighted average spreads registering at 6.21%, down by 33bps MoM and by 116bps YoY, and against the 4QCYI2 average level of 6.66%. To put this in context, combined Nil for the four largest private banks came in at PkR37.4bn in 400Y12, down 5%QoQ/14%YoY, and NIl for 1QCY13 is likely to be even lower going by Jan’13 spreads. To compensate, banks are clearly looking towards capital gains – combined capital gains for the same sample of banks clocked in at PkR1 .5bn in 4QCYI2, up 183%QoQ/149%YoY. In this regard, AKD Securities expects banks to realize further gains across the next few quarters.

Investment Perspective: Prospects for capital gains notwithstanding, CY13 is shaping up to be a soft year for banks’ earnings on tighter margins. Although banking sector scrip could potentially be lack luster post CYI2 results announcements, AKD Securities believes banks will come in the limelight by 2HCY13, particularly if interest rates begin to rise. While AKD Securities has a Market weight stance on Banks, AKD Securities selectively prefer UBL, BAFL and ABL.

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