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Pakistan Banks - Best top-down setting in a decade

• Pakistan Banks enter 2017 in the most supportive backdrop; interest rates are poised to inch higher, loan growth is accelerating with credit costs moving in the opposite direction, and further regulatory clampdown on spreads appears unlikely. This combination of stable NIMs & double-digit loan growth last occurred in CY06/07.

• The catch is that ROEs will tread slightly lower in CY17F and earnings growth will not appear until CY18F, as PIB reinvestment will create a temporary disconnect with macroeconomic improvement. For the IMS Banking Universe, 6%YoY growth in CY17F magnifies to a 12% CAGR over CY17-20F. Narrow focus on CY17F will indicate Banks are expensive; a medium-term view will paint a different picture.

• High representation in MSCI EM and a growing economy should keep Banks in the limelight. For the IMS Banking Universe, CY17F Tier-I PB/PE of 1.8x/9.5x drops to 1.6x/8.8x on CY18F. We are Marketweight on Banks where our preferred picks are UBL, ABL, NBP and BAFL. Outside our coverage, HMB & JSBL are interesting names.