Banks: Stellar 1H results substantiate
What excites us is a healthy 4pp increase in
MCB, which was the first bank to recognize the PIB opportunity, leads the pack with 40% of deposits in this long term sovereign bond. HBL, on the other hand, has only 16% of deposits exposed to PIBs.
Balance sheet strength is sound; reiterate Buy on MCB/UBL
Based on sustained profit momentum driven by better (1) deposit structure, (2) asset quality and (3) investment yields,
The sector has performed 17% 2014TD, but top banks offer attractive ROE of 21%-23% and trade at undemanding
Top banks' PAT improves 21% YoY in 1H14; HBL surprises
As far as 1H14 results are concerned, NII of four banks under this analysis (having combined 39% market share of domestic deposits) rose by 19% YoY in 1H14, where, besides PIBs, (1) consistently improving CASA, and (2) robust loan growth were contributing factors.
Other sustainable growth metrics were fee income (+19% YoY), declining provisions (down 70% YoY) and controlled admin costs (cost to income ratio down 2pp to 44%).
The top banks thus posted 21% YoY higher bottom lines in 1H14. A prime example of factors ex PIBs driving growth is HBL the bank with least PIB exposure for its deposit size - which outclassed the entire industry profit growth (PAT up 40% YoY), thanks purely to astounding CASA changes (interest expense down 3% YoY) and non-core volume growth (fee income up 31% YoY).
Deposits: MCB leads growth; ABL/HBL focus on low cost funds
Top banks were able to grow their total deposit base by 5% in 1H14 from Dec-13 levels, compared to 7% growth observed in the overall sector. MCB's deposits grew 9%. What excites us, however, is a healthy 4pp increase in
While data shows that CA has jumped 5pp to 39%,
ABL, in particular, improved CA by 8pp to 51% and CASA by 6pp to 75%. The bank put in 14 more branches during the period, taking the total to 962branches.
Advances: MCB/UBL report marked quality improvement
In line with sector wide trend, loan books grew 5% from Dec-13 levels, where seasonal commodity financing remained a major growth factor. MCB reported highest (13%) increase in advances, driven by corporate lending in commodity, transport and communications sectors. In terms of asset quality,
The sample's provision cover has improved to 83%. UBL, thanks to expiry of PRs0.4bn in FSV benefit, has improved cover by 5pp to 89%. HBL and UBL both now carry PRs1.0bn each in FSV benefit. Going forward, single digit loan book growth should sustain on the back of slightly improved macro activity, having said, continuation of economic reforms are key to double digit loan growth outlook.
Investments: Not to fear DR cut; MCB leads in PIBs
Conventional banks have placed ~30% of their deposits in PIBs by Jun-14. In case of top banks, a quarter of their deposits are now in PIBs.
This, together with linkage of Minimum Deposit Rate with discount rate, will ensure that expected 50bp DR cut in Sep/Nov will only have a 2%-4% negative impact on earnings, compared to 8%-12% impact observed in previous years. 64% of PIBs are classified AFS (100% for MCB), whereas 34% are held to maturity.
MCB, which was the first bank to recognize the PIB opportunity, leads the pack on this front with 40% of deposits in this long term sovereign bond. HBL has only 16% of deposits exposed to PIBs.
HBL UBL MCB ABL Total (Top Private Banks)
PRs mn 1H14 YoY 1H14 YoY 1H14 YoY 1H14 YoY 1H14 YoY
Interest earned 66.0 7% 41.7 14% 37.6 14% 31.8 21% 177.1 12%
Interest exp. 34.3 -3% 19.7 8% 16.1 14% 18.9 20% 89.0 7%
Net Int. Income 31.7 21% 22.1 19% 21.5 14% 12.9 24% 88.1 19%
ANF brok. 5.1 31% 6.4 22% 3.7 5% 1.9 9% 17.1 19%
Real. Capital gains 1.4 1828% 1.5 -28% 0.6 -59% 1.6 96% 5.1 12%
Admin charges 20.4 20% 15.3 10% 9.8 20% 8.0 10% 53.5 16%
PPOP 22.5 32% 17.6 22% 17.1 1% 10.9 35% 68.1 21%
PAT 14.5 40% 11.3 28% 11.8 -3% 7.2 29% 44.8 21%
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