Market stays dull but expected to pick up on FATF statement
Amid uncertainty on the macro front, pertaining to IMF and FATF, performance of Pakistan Stock Exchange (PSX) remained lackluster. The benchmark index closed the week ended 21st February 2020 closed at 40,249 points, flattish WoW. The GoP continued to push for deferral of additional tax measures and energy tariff hikes till the next fiscal year amid backlash on inflationary pressures. The news flow indicated a lack of favorable response from the IMF. Meanwhile, Federal Board of Revenue (FBR) began its exercise on how to generate Rs200 billion additional taxes, without further stifling the economy. News on FATF front remained comparatively positive, where Pakistan managed to increase compliance on 9 more points, taking full-compliance to 14 out of 26 points. As per news flow, the FATF issued a formal statement on Friday on conclusion of the group meetings and plenary from, in which Pakistan was expected to receive another four months time (until June 2020) to achieve full compliance with its 27-point action plan and secure exit from the FATF grey list.
The average turnover during the week plunged to 106 million shares, down 36.5%WoW, reflecting unease among investors. Other news flow that impacted the market included: 1) December data showed rebound in large-scale manufacturing, 2) hot money inflows crossed US$3 billion, 3) PTI government all set to borrow Rs200 billion from Islamic banks, 4) 1HFY20 FDI posted 66% growth, 5) GIDC collections came under scrutiny as court questions fate of funds, 6) Current Account Deficit shrank 72% during first seven months of current financial year, 7) UAE regulator indicated to investigate Pakistan bank for money laundering, 8) Gas, electricity rates frozen till June 2020 and 9) two fertilizer plants approached concerned ministry for early approval.
Top performers of the week included APL, KAPCO and PAEL, while PSO, ENGRO and NCL remained the worst performers. Major volume churners included UNITY, DGKC, HASCOL, MLCF and BOP. Market activity is likely to pick up contingent upon official statement on FATF expected over the weekend, and easing off of inflationary pressures. Important result announcements in upcoming week include: HUBC, PREMA, UNITY, OGDC and ASTL.
A worse than expected standalone 4QCY19 result (LPS: Rs3.75 including one-off impairment charge of Rs1.60/share), has led FFBL to underperform benchmark index of PSX by 6.5%. However, GIDC elimination on feed gas/fuel for the Fertilizer sector may give the loss making FFBL some breathing space in immediate term. To note, GIDC elimination reduces cost for overall production, benefit to end consumers was passed on only through a decrease in urea prices of Rs300/bag, starting from 1st February 2020. Meanwhile, DAP production/offtake accounted for 62/58% of FFBL’s total production and offtake in CY19. The current situation implies an uptick in DAP margins. FFBL has been posting losses on a standalone basis in 1H of each of last four calendar years. A potential turnaround in 1HCY20 cannot be ruled out, which can trigger scrip’s price performance. GIDC decision is still awaited, where a favorable decision could be another upside trigger. Downside risks include continued decline in international DAP price resulting in discounts by FFBL (current DAP price hovering around Rs3,450/bag as against landed cost of imported DAP of Rs3,000/bag).
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Habib Bank (HBL) has posted deposit growth of 14.2% in 2019. Going forward, the management is aiming to surpass the growth achieved in 2019, which may be a tough ask given the current economic situation. Although, current accounts have grown by 8%YoY during 2019, the current account percentage in terms of total deposits has declined from 38% to 36%. That said the growth in saving accounts was enough to improve the overall CASA over the year to 86%. The Bank aims to step up current account numbers through the branchless banking channel led by Konnect. HBL’s investment book saw a major shift, where the Bank moved towards high yielding PIBs. The mix now constitutes 44% of T-Bills (down from 55%) and 45% of PIBs (up from 30%). IDR stands at 57% as against 65% last year. Advances grew by 8%, higher than industry growth. The Bank’s strategy is focused on the real sector and as a result has renewed its focus on the agriculture sector and the SME sector. Growth target is similar to what was achieved this year. Asset quality overall has improved given the decline in infection ratio by 40bps. Achilles heel for the bank has been the cost over runs driven by a number of factors. With the expected close of the New York branch, costs associated to the branch are expected to come down significantly. It is evident from the management’s ambitious target of bringing down cost to income to around the low 60% mark. Current cost to income stands at 73%. Interesting to note that winding down of the open position has receded further by 30% and is expected to reduce substantially by 3Q2020. International franchises of the bank have posted profits and are expected to contribute going forward. The Bank aims to reach high double digit ROE over the next 3 years.
United Bank (UBL) posted 2019 consolidated earnings of Rs15.6/share, up 23% YoY on the back of 1) expansion in NIMs, 2) lower provisioning expense and 3) absence of one-time expense related to pension liability. The result however came in lower than our expectations due to lower-than-expected NIMs and fee income. Along with the results, the bank announced a final cash dividend of Rs4.0/share, bringing total cash dividend to Rs12.0/share in 2019. Net Interest Income (NII) for the year settled at Rs63.3bn (up by 9% YoY) owing to a 35% YoY increase in markup earned. However interest expense grew by 60% YoY given a relatively lower CASA compared to peers. The Bank’s non-mark-up income declined by 9%YoY to Rs23.6 billion, primarily due to lack of capital gains. The 2019 number for capital gains came in at Rs216 million as compared to Rs3.8 billion a year ago. In 4Q2019, earnings of the Bank declined by 15% YoY primarily due to 1) 14% YoY lower Non Interest Income and 3) 40%YoY higher Non Interest Expense (due to reversal in WWF charge last year). Effective tax rate of the Bank rose to 43% in 2019, from 41% for 2018.