Banks sinking elsewhere, rising in Pakistan

InformationClearingHouse has recently run a story on the emerging financial markets crisis. It says these markets are becoming increasingly chaotic; either retreating or plunging. Its view is that there is a gigantic market crash in the coming future, one that has possibly already started.

Pakistan is very much part of the global financial system and it can’t remain immune. However, the point that provides some relief is that country’s commercial banks are being run efficiently, those some critics call State Bank of Pakistan ‘orthodox’.

The mindset has saved the banks from bankruptcies over the last more than six decades. Two out of ‘Big-Six’ have already announced CY15 financial results, MCB Bank on 9^th and Allied Bank on 10^th of this month. It may still be worth to look at the macro picture and review the forecast prepared by Pakistan’s leading brokerage house, AKDSecurities. 

Influenced by capital gains and strong fee income, the brokerage house expects the Big-six to post an aggregate profit after tax of Rs131.3 billion for CY15, up 12%YoY. Sequentially, profits are likely to take a hit to Rs32.8 billion (down 7%QoQ) on declining NIMs as yield on earning assets adjust to reflect rate cuts.

Positive surprise can come from higher non-interest income should these banks choose to utilize their hefty capital gain backlog (revaluation surplus amounting to Rs173.8 billion). Likely to round-off CY15 on a high note, the brokerage house  expect CY16 to be a slow growth period with risk to NIMs arising from bulk of high yielding PIB maturities in 1HCY16.

While risk remains, it may be an opportune time to build positions in the banking sector where interest rate cycle reversal, expected in September'16, is likely to rejuvenate interest. Furthermore, valuations also make a strong investment case.       

Despite 300bps cut in discount rate, NII is anticipated to grow by 16%YoY while asset quality is expected to come under stress with provisions rising by 19%YoY to Rs19.8 billion during CY15. That said, any above expected growth in advances on the back of CPEC related development and pick up in local infrastructure activities can provide room for earnings upside.

With interest rate cycle likely to reverse in 2HCY16, still there is significant room for valuation rerating in an improved macro setting. In the near-term, any surprise on the capital gains front in the upcoming result announcements can be a swing factor providing reason for banks to rally.