EUR 4.08 For Business Accounts Only

Intermarket Pulse: Pakistan Banks: The next leg of regulatory tightening

• With the SBP notifying a framework for Domestic Systemically Important Banks (D-SIBs) and channel checks suggesting IFRS 9 implementation is also under consideration, the regulatory environment for Pakistani banks will likely further tighten over the medium-term. Banks with strong capital bases and high coverage should continue to do well, but the rest may face a squeeze.
• Systemically important banks will be identified by end-Jun’18 and may face additional requirement of up to 2% in CET 1 (CAR may also rise in tandem). At the same time, potential replacement of IAS 39 with IFRS 9 may result in higher provisions going forward, especially for banks with low coverage.
• The banking sector has generally followed a high 60%+ cash payout policy over the last few years. With anticipated relaxation on bonus tax, we believe banks are likely to revert to a mix of 30-40% cash payout and bonus issuances going forward. In this backdrop, we think it is possible that banks such as MCB and ABL – with their high CET1 capital and coverage – open up a valuation gap vs. peers.