The State Bank of Pakistan (SBP) announced a 50bps hike in the discount rate to 9.5% in its September 2013 Monetary Policy Statement (MPS) against market expectation of maintaining the status quo. This brings much awaited relief for the banking sector specifically to the large banks which have seen a continuous decline in core earnings due to tighter spreads on the back of monetary easing of up to 300bps since July 2012. Rise in inflation has been intimated by the SBP, we anticipate further rise in discount rate to 150bps by the end of 2014. We hereby revise our estimates incorporating the hike of 50bps in our models.
National Bank Limited (NBP) is the biggest bank in terms of advances which represents 18.7% of total industry share. Although we flag a potential risk on asset quality side, we have noticed a significant growth in provisioning against Non Performing Loan’s (NPLs) during 1HCY13 improving the bank’s coverage ratio. We expect asset quality to get worse due to its aggressive lending approach whereas; bank’s huge advances will ingest the shock of adverse asset quality. We expect CY14 earnings to grow 26.7% on the back of increased policy rate and improved spreads. Please refer to the valuation matrix on the following page.
2QCY13 Result Highlights:
During 2QCY 13, Net Interest Income (NII) declined sharply due to lower realized interest rates and heavy provisioning against Non Performing Loan’s (NPLs). Increase in non core earnings primarily comes from gain on sale of securities. Reversals in taxes provide some cushion to bottom-line. The bank post earnings of Rs. 1.41/share translating into PAT of Rs. 2.99bn for the quarter.
NBP is currently trading at CY14(E) P/Bv of 0.69x yielding significant upside to its justified P/Bv of 0.87x. We reiterate Positive stance for the stock with Dec-14 TP of 66.17/share.