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Pakistan Banks: Banks earnings likely to rise 25% QoQ in 2Q2020 Amidst delay in Asset re-pricing

• We project Topline Banking Universe earnings to grow by 25% QoQ in 2Q2020, where we expect Net Interest Income (NII) to increase by 16% QoQ. We do not expect cash payouts with the results, in line with the earlier Central Bank directives.
• Since Mar-2020, the Central Bank has lowered the Policy Rate by 625bps to 7%. Recall that in Mar-2020, the SBP had also made the interest rate corridor symmetric around the Policy Rate, resulting in 50bps lower fall in MDR vis-à-vis the Policy Rate.
• The immediate re-pricing of deposits is likely to lead to decline in interest expense by 9% QoQ, while the lagged impact on the asset side is expected to keep interest earned afloat with a marginal increase of 1% QoQ.
• We estimate Non Funded Income (NFI) to decline by 9% QoQ largely owing to the relief measures announced by the Central Bank in the wake of COVID-19 pandemic. That said, there may be some respite from potential capital gains on PIBs (like last quarter) and equity investments as KSE-100 has recorded a return of 18% for the quarter.
• The relief measures, which also included delayed principle payments and restructuring of loans, may hint at lower provisions. However, we believe the banks may prudently provide for risky assets. We expect the provision expense of our universe to go up by 16% QoQ in 2Q2020.
• The sector as a whole has posted a growth of 7% QoQ in Deposits and an increase of 15% QoQ in Investments, with Advances remaining largely unchanged.   
• MCB: 2Q2020 earnings are likely to clock in at Rs6.4/share, an increase of 14% QoQ with NII is expected to grow by 11% QoQ. To recall, the bank in 1Q2020 posted a capital loss of Rs6mn. Given the market performance, and potential gains from the PIBs portfolio, NFI is likely to increase by 13% QoQ primarily driven by capital gains.
• HBL: The bank is expected to post 2Q2020 earnings of Rs4.7/share, up 67% QoQ. NII is likely to expand by 22% QoQ, while NFI is expected to decline by 17% QoQ.
• UBL: Earnings in 2Q2020 are expected at Rs4.6/share, up 14% QoQ. Although NII is expected to increase by 7% QoQ, a key concern weighing down quarterly earnings are provisions, largely emanating from the international portfolio.
• MEBL: 2Q2020 earnings are likely at Rs4.9/share, up 15% QoQ. Interest earned is expected to be largely stable as interest payments continue on advances but a key advantage for the bank will be from interest expense which is expected to decline by 10% QoQ. We expect NFI to be subdued depicting a decline of 7% QoQ. Provisions are expected at similar quantum as last year, for the bank to maintain its 147% coverage ratio.
• NBP: EPS for 2Q2020 is likely to arrive at Rs2.2/share, increasing by 11% QoQ. The decline in interest rates is expected to be positive for the bank, however provision charge is expected to limit increase in profitability.
• BAHL: The bank is expected to depict a 43% QoQ increase in earnings, translating into an EPS of Rs3.7 on the back of NII expansion of 25% QoQ. NFI is expected to expand for the bank, driven by capital gains which were close to zero in 1Q2020.
• BAFL: Earnings for the 2Q2020 are expected at Rs1.9/share, increasing by 17% QoQ. Given the high CASA of the bank, decline in interest expense is likely to be limited to 5% QoQ. Decline in other elements of NFI are expected to be overshadowed by the expected capital gains following a loss of Rs47mn recorded in 1Q2020.

BOP: Earnings growth is expected of 44% QoQ translating into an EPS of Rs0.8. Current accounts constitute only 16% of total deposits for the bank making the decline in interest rate extremely beneficial for the bank as interest expense is poised to decline by 10% QoQ, consequently pushing NII up by 35% QoQ. Early adoption of high yielding PIBs mostly on fixed rate are expected to maintain interest earned.