End of a good summer

End of a good summer

  • Revenues facing headwinds: Banking sector saw a strong bottom line growth of ~27% Y/Y during 1hCy12, primarily driven by lower provisioning expense and improved non-interest income. However, revenue growth is facing headwinds in the shape of low net interest income growth on the back of lower interest rates and higher cost on deposits. These headwinds will continue for another three quarters as asset re-pricing takes place on lower yields, curtsy 150bps cut in discount rate in Aug-12. It is imperative to note that not all of the decline in net-interest income can be attributed to interest rate cut, as some of the decline is on account of re-routing of interest income from non-interest income (dividends), in the shape of investments in mutual funds.

  • The pain of lower margins for longer: NIM’s will continue downward trajectory and are likely to shrink further by 80-110bps over the next 3-4 quarters on the back of recent cut in discount rate, assuming no further change in policy/saving deposit rates. This decline in NIM can also be seen in L-D spread coming down to 7.09% in Jul-12 from 7.93% in Jul-11. Meanwhile, banks will strategize potential NIM offsets in the shape of improving CASA mix and gradual shift of asset mix towards advances.
  • Banks to push for loan recoveries: Pakistan has one of the highest Gross NPL ratio of ~15% against its regional counter parts. With interest rates comparatively lower than past, banks will aggressively push for recoveries of non-performing loans which will continue to keep provisioning expense on the lower sides.


  • Hefty deposit growth prospects: Bank’s deposit growth continues to remain strong as it registered a ~14% Y/Y growth during Jun-12. Strong remittances inflow and increasing government borrowing continue to contribute towards hefty deposit growth. Banks are focusing on various niches to increase and improve its deposit mix. Meanwhile growth in NSS and alternative options to savings amid low interest rates (investing in real estate rather than fix rate deposit) will provide competition to banking sector’s deposit base.
  • Capital gains to be a key differentiator: Banks with flexibility to deploy capital base will be better positioned to take advantage of higher yields in equity market. We expect ABL and NBP to register higher dividend income and capital gains from their equity portfolios.
  • Need of clarity on regulations: Increasing profit rates on savings account and falling interest rates have clipped the banking spread from both sides. In a span of one year, SBP has reduced discount rate to saving rate spread from 9% to 4.5%, essentially increasing regulatory risks of the banking sector. It is important that SBP provides clarity on this spread and the regulatory goals it wants to achieve.
  • Decrease in savings rate can trigger banking stocks: Banks have a strong case to pursue with SBP to decrease minimum profit rates on savings account, when the spread was implemented in Cy08, it stood at 5.5%. We believe decrease in saving account profit rate can provide upside potential for banks with high share of savings accounts in their deposit mix. MCB will be a major beneficiary because of its large savings account base.

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