EUR 50.00 For Business Accounts Only

Pakistan Banks: Lifting Pak Banks to Over-Weight; Earnings revised up

• We are lifting our outlook on Pak Banks to ‘Over-Weight’ from ‘Market-Weight’ given their stellar and resilient performance in 9M2020 amidst the COVID-19 outbreak and aggressive monetary easing by the Central Bank. We also now expect a 100bps increase in interest rates from Jul-2021. This has led to revision in earnings estimates, where we now expect sector’s profits to fall by 7% YoY in 2021 vs. our earlier projection of a decline by 13% YoY.
• The valuations too have opened up, with the sector’s 2021E P/B at 0.7x vs. its average 5-year historical P/B of 1.2x. The 2021E P/E of 5.6x (6.3x excluding state owned banks NBP and BOP) is also significantly lower than average 5-year historical P/E of 8.5x. Additionally, the banks withheld dividends as per SBP restriction and we believe that in the coming quarter we can see handsome payouts. Our top picks for the sector are MEBL, BAHL, MCB and HBL.

Higher & Improved mix of deposits along with lower provisions to drive 2021 growth

• Deposit growth: The industry’s deposits have grown at an above average rate of 20% YoY as at Oct-2020. While we expect 12% YoY growth in deposits during 2021, the high base from this year results in upwards revision in our earnings estimates. This will somewhat mitigate the expected  impact of asset re-pricing in 2021.

Provisions: The banks have heavily provided for COVID-19 in 9M2020 (+169% YoY), where an average 37% (in the range of 18-82%) of the provision build up in our Universe has been precautionary and in the General Category. We believe given the sharp pick-up in economic activity post lifting of lockdown, the net provisioning in 2021 is likely to witness a 32% YoY decline.