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Pakistan Banks: Earnings likely to decline QoQ in 3Q2020 as asset re-pricing takes effect

• We project Topline Banking Universe earnings to decline by 29% QoQ in 3Q2020, where we expect Net Interest Income (NII) to decline by 17% QoQ.
• Since Mar-2020, the Central Bank has lowered the Policy Rate by 625bps to 7.0%. 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 2Q2020 effect of immediate re-pricing of Deposits is expected to wane off with Asset re-pricing taking effect. As a result, we project the Interest Income for 3Q2020 to decline by 8% QoQ, while Interest Expense is likely to decline by 1% QoQ.
• We estimate Non Interest Income to decline by 15% QoQ largely owing to the expected decline in Capital Gains from the fixed income portfolio given that most banks booked hefty gains in 2Q2020.
• Fee income is also expected to increase by 6% QoQ as branch operations resumed after Covid-19 lockdown was lifted, while Forex Income is also likely to improve by 6% QoQ given that remittances have increased by 17% QoQ.
• Provisions are expected to decline by 54% QoQ given the hefty 2Q2020 charge, albeit we expect a 47% YoY increase.
• The sector as a whole has posted a growth of 4% QoQ in Deposits with investments increasing by 4% QoQ while loans depicted a decline of 1% QoQ.
• MCB Bank (MCB): 3Q2020 earnings are likely to clock in at Rs5.4/share, a decrease of 6% QoQ. NII is expected to decline by 19% QoQ. To recall, the bank in 2Q2020 posted a capital loss of Rs51mn. We may see a big chunk in capital gain given that the revaluation surplus stood at Rs31bn on federal government securities.
• Habib Bank (HBL): The bank is expected to post 3Q2020 earnings of Rs4.4/share, down 42% QoQ. The decline will largely be attributed to lower capital gains compared to the massive Rs4.4bn recorded in 2Q2020. NII is likely to decline by 18% QoQ.
• United Bank (UBL): Earnings in 3Q2020 are expected at Rs3.7/share, down 25% QoQ. Although NII is expected to decline by 19% QoQ, a key concern weighing down quarterly earnings are provisions, largely emanating from the international portfolio.
• Meezan Bank (MEBL): 3Q2020 earnings are likely at Rs3.4/share, down 21% QoQ. Interest earned is expected to be subdued as interest on loans adjust and is likely to impact NII by 11% QoQ. We expect NFI to be the silver lining with a 12% QoQ increase driven by the growing branch network translating into higher fee income.
• National Bank of Pakistan (NBP): EPS for 3Q2020 is likely to arrive at Rs3.1/share, decreasing by 40% QoQ. Loan book re-pricing is expected to catch up, impacting NII to decline by 21% QoQ.
• Bank Al Habib (BAHL): The bank is expected to depict a 19% QoQ decline in earnings, translating into an EPS of Rs3.2 on the back of NII contraction of 12% QoQ. We may see a surprise on the capital gains front, given the Rs13.4bn revaluation surplus on the available for sale (AFS) book.
• Bank Alfalah (BAFL): Earnings for the 3Q2020 are expected at Rs1.2/share, decreasing by 25% QoQ. Given the high ADR of the bank, decline in interest income is likely to be of 18% QoQ. We expect lower capital gains following the Rs1.7bn recorded in 2Q2020.

Bank of Punjab (BOP): Earnings are likely to decline by 26% QoQ, translating into an EPS of Rs0.6. Bare in mind that 2Q2020 was driven by Rs3.7bn capital gain, which we do not foresee to be repeated.