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 9th and Allied Bank on 10th
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.
