Banking Outlook: Pakistan’s Sectoral Growth & Impact of IMF
According to Inter Market Securities pre-tax 2QCY23 profits for its Banking Universe is expected to rise 10%QoQ, reflecting strong core performance. However, net earnings may come off by 15%QoQ due to retrospective impact of super tax (10% against 4% previously). Payouts should remain broadly intact.
Domestic asset quality has remained resilient, which should keep the cost of risk in check. Impairment, if any, should also be contained compared to the last few quarters. The brokerage house expects Meezan Bank to stand out due to the lagged asset re-pricing this quarter.
Bank scrips have risen 12% since the signing of IMF SBA facility with default fears put to rest for the time being. Valuations are still attractive.
The brokerage house expects its Banking Universe to report cumulative profits of PKR65 billion for 2QCY23, lower by 16% QoQ (pre-tax profits up 10%QoQ). Key highlights include: 1) modest 5%QoQ rise in NII due to initial re-pricing of liabilities – asset re-pricing to reflect more acutely in the upcoming quarter, 2) muted cost of risk as asset quality continues to hold, 3) tepid growth in non-interest income with income from foreign exchange normalizing, 4) a 30%YoY growth in admin expenses as inflation has been high, and 5) a high effective tax rate (56% on average) due to retrospective impact of 10% super tax applicable on 1QCY23.
The brokerage house expects decent cash payouts to continue even if earnings come off. UBL should stand out again in terms of payout, going by the bank’s evident new strategy on this front.
NII is expected to depict a sharp 58%YoY growth on strong margin expansion (500bps increase in interest rates CYTD). However, on a sequential basis the brokerage house estimates more modest 5%QoQ growth led by initial re-pricing of the deposit base – having grown quickly since removal of ADR related taxation. Total assets of its universe grew by 20%yoy, with total deposits growing at 19%YoY to PKR25.4 trillion as per sector data.  Banks with a more efficient deposit mix are likely to stand out on this front (BAFL, MEBL, and BAHL). The brokerage house expects earnings to accelerate in 2HCY23, provided higher taxation does not repeat.
The brokerage house expects its covered banks to register an annualized cost of risk of 10bps in the coming results as against 30bps in CY22. While some banks may witness ageing, coverage levels of the sector remain at a high 100%. The recent discussions with the bank managements support this view.
On the flipside, the brokerage house believes impairments on international sovereign bonds are mostly through which should keep the overall provisioning expense in check. Admin expenses are expected to jump sharply; up 30%YoY led by high inflation and branch expansion strategies. However, strong revenues should keep the overall levels within manageable limits.
The brokerage house expects dividend payouts to remain intact on cheap valuations. It expects dividend payouts to remain modest even if earnings come off QoQ. Pakistani banks are trading at attractive value. With an immediate liquidity crisis averted following successful inking of IMF’s SBA, comfort on Pakistan equities is returning. Pakistan Banks are up 12% this month but the brokerage house believes significant upside still remains.
Topline Securities expects its Banking Universe to post an earnings drop of 14%QoQ for 2QCY23, despite lower provisions; amid higher operating costs and surge in super-tax. Still, the brokerage house expects sector earnings to jump 90%YoY during 1HCY23 over the same period last year on the back of higher interest rates driving margin expansion as well as growth in non-markup income led by higher income from foreign exchange activity due to a volatile PKR over the year.
In terms of industry balance sheet, de-risking has been the focus CYTD with gross advances posting a drop of 3%QoQ, stands at 48%. Investments are up 14%CYTD and 6% on a QoQ basis, pouring into Government securities. Industry deposits are up 9%CYTD and 3%QoQ, respectively, standing at PKR 25.5 Trillion.
During 2QCY23, the SBP increased the benchmark policy rate by another 200bps, taking the CYTD hike in interest rates to 600bps. The policy rate currently stands at 22% and is likely to remain unchanged or increase slightly for the rest of CY23 as the IMF has stressed continuance of a proactive and tight monetary policy.
On the asset side the brokerage house anticipate yields to reflect the impact of the increase in January 2023 (100bps) as well as some impact of the hike in March 2023 (300bps) in case of assets with shorter re-pricing tenures.
However, increase in the average cost of funds is expected to exceed the benefit of re-pricing on yields, resulting in slightly lower net-interest margins overall from 1QCY23.
Total income of the universe is expected to increase amid surge in earning assets (2%QoQ balance sheet growth) as well as higher fee income. With operating expenses also expected to grow owing to inflation as well as PKR depreciation. Hence, the brokerage house expects the Cost-to-Income ratio for its universe to clock-in at 47% as against 46% for 1QCY23).
Moreover, provisions are expected to fall on QoQ basis as the brokerage house anticipates asset quality to show resilience despite economic uncertainty, with a few banks even booking net reversals.
Some reversal in investments related provisions also cannot be ruled out given the recovery in equity markets towards the end of 2QCY23 as well as sharp increase in the price of Pakistan’s Eurobonds, following announcement of the SLA with the IMF.