Banking sector loses 7.7pc market capitalization in 1H

LAHORE: The performance of the banking companies paints a dull picture, as the sector has lost 7.7 percent in value compared to a broader Index gain of 3.7 percent in 1H10-11.

Experts viewed concerns over a subdued macro scenario of high inflation and low growth on the stalled IMF program and rising stock of NPLs.

They believe the core macro issues are likely to cloud the sector’s performance in the short term. However, high loan coverage and attractive secondary market yields are likely attractions which will enable profits to remain high in 2011. Year end payouts too, may manage to lure investors.

Banking sector lost 7.7 percent of its market capitalization in 1H2011, underperforming the Index by 5.0 percent and 6.6 percent in 1Q and 2Q, respectively though sector earnings have been strong (1Q earnings up 26 percent YoY). Inflation level of 14 percent, LSM growth of a meagre 1.7 percent in 10MFY11 and depressed private sector offtake remain alarming for the sector. Further, rising level of NPLs (cumulative accretion of Rs54b in 4Q10 and Rs26b in 1Q11) continue to eat up profitability.

However, experts view improved loan coverage and higher yields in secondary market (along with non materialization of tax rate hike) as positives, which will continue to aid the bottom line growth; with encouraging developments on the macro front, likely to clear room for upward movement.

As far as individual stock performance is concerned, HBL came out as a major winner with adjusted gains of 10.4 percent, the only scrip to outperform the broader Index. ABL posted a return of 1.9 percent, while MCB’s share price gained 0.1 percent in the period. UBL lost 1.0 percent of its value, while NBP fared poorest amongst the big-5 banks, loosing 8.2 percent – with a significant loss of 11.2 percent in 2Q alone. Among mid-tier banks, BAFL and AKBL ended on the losing side, down 15.1 percent and 29.7 percent in the period.

Economic concerns will continue to overshadow otherwise impressive performance of the banks, in our view. More so, the shifting preference towards investments (lower yields + lower risk) instead of loans is unlikely to reverse in the near term. However, a rally towards the year end on account of healthy payouts has been witnessed previously, with sector up 24.9 percent in 4Q of last year.

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