EUR 30.00 For Business Accounts Only

Pakistan Banks: Sector Earnings Revised Post 3Q2018 Results

• We revise our earnings estimates for MCB, NBP, UBL, HBL and BOP post 3Q2018 earnings announcement to take into account their performance. For above stated banks, we change our estimates as shown in table below as we revisit our net interest income (NII) projections, our assumption for impairment of investments as well as estimates of extraordinary expenses (pension charge).
• Large Banks (MCB, NBP, UBL, HBL) have posted dismal performance for the quarter due to a number of reasons which include 1) slower growth in net interest income, 2) high provision charge (both NPLs and impairment of investment) and 3) pension related expenses.
• Despite 275bps hike in interest rates in 2018YTD, net interest income of large banks (MCB, NBP, UBL, HBL) have increased only by a meager 5.3%. We believe the slower growth is due to differences in time it takes assets and liabilities to re-price. Liabilities generally re-price within a month while majority of assets take upto 6 months to re-price. Hence, amid rising interest rates, interest expense growth outpaced interest earned growth and led to stagnant NII growth.
• Specific banks also had high provisioning charge. The charge can be divided into provision for diminution in value of investments and provision for Non Performing Loans (NPLs).
• HBL and UBL reported significant provision for impairment of investments at Rs1.8bn and Rs600mn, respectively, during 3Q2018. The provision was higher due to poor performance of the equity markets, we believe. More importantly, we think that the banks that have not already booked impairment charge will do so in the coming quarter as per the requirements under IAS 39, unless equity market improves significantly.
• UBL and NBP booked significant provision for NPLs which reduced their bottom-line considerably. For UBL, we expect further provision for NPLs in 4Q2018, which will increase its international coverage ratio to ~80%.
• Apart from this, pension related charge in UBL has also exceeded our revised estimates. As per management guidance, pension expense will continue to impact profits and hence we also revise pension related charge for UBL.