Intermarket Pulse: Pakistan Banks: Valuation anomaly warrants switch to large banks
- Medium banks in Pakistan now trade at a premium to large banks, something that has not happened in close to 10yrs. This follows (i) one-off hits for large banks e.g. pension fund charges, (ii) concentrated foreign selling pressure and (iii) higher capital requirements for systemically important banks (D-SIBs). As the large banks go through a tough period, growth posted by medium banks has been impressive.
- This valuation anomaly may only be temporary, however. Save for the D-SIBs classification - which is manageable in our view - there have been no developments that warrant a structural valuation shift in favor of mid-caps. ROEs for large banks will sharply trail that of medium banks in CY18F but will catch up over the next few years. As this occurs, the valuation gap should again revert to type.
- Large banks are up just 2.5%CYTD vs. a 35.3% return for medium banks in the same period. This is understandable given recent divergence in operating performance but future ROE projections now warrant a switch; we recommend trimming allocations to MEBL, BAHL and BAFL in favor of the large private banks. Swifter ROE acceleration for the latter should lead to a magnified rerating effect going forward, which will in turn drive outperformance.
Allied Bank Ltd. Allied Bank Limited is engaged in providing commercial banking and related services. The Bank's segments include Corporate & investment banking, Trading and sales (Treasury), Commercial & retail banking and Others. The Corporate & investment banking segment offers a range of financial services to medium and large sized public and private sector entities, and also covers overseas operation of the Bank. These services include providing and arranging tenured financing, corporate advisory, underwriting, cash management, corporate finance products and customer services. The Trading and sales (Treasury) segment undertakes the Bank's treasury and money market activities. The Commercial & retail banking segment provides services to commercial and retail customers, including agriculture sector. The Commercial & retail banking segment offers loans, deposits and other transactions to commercial and retail customers. Its other services include phone banking and utility bill payments.
Habib Bank Limited is engaged in commercial banking and asset management related services in Pakistan and overseas. The Bank's segments include Branch Banking, which consists of loans, deposits and other banking services to agriculture, consumer, small and medium-sized enterprise (SME), and commercial customers; Corporate Banking, which consists of lending for project finance, trade finance and working capital to corporate customers and it also provides investment banking services, including services provided in connection with mergers and acquisitions; Treasury, which consists of trading, fixed income, equity, derivatives and foreign exchange businesses, and it also includes credit, lending and funding activities with professional market counterparties; International Banking, which is engaged in monitoring and reporting purposes and consists of its operations outside of Pakistan, and Head Office/Others. It operates in Pakistan; Europe, Middle East and America, and Asia and Africa.
Muslim Commercial Bank, and its subsidiaries, are engaged in commercial banking and the floating, administration and management of modaraba companies, modaraba funds and modarabas.
United Bank is engaged in commercial banking and related services. Co. operates five business segments: Corporate Finance, Trading and Sales, Retail Banking, Commercial Banking and Asset Management. As of Dec 31 2016, Co. operates 1,341 branches inside Pakistan including 47 Islamic Banking branches and 2 branches in Export Processing Zones, and 18 branches outside Pakistan.
Intermarket Securities Limited (IMS) is a full service corporate brokerage firm based in Karachi, Pakistan. We service both domestic and international clients. IMS was ranked #2 Best Local Brokerage and #3 Best for Overall Country Research for 2016 by AsiaMoney.
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