National Bank Limited on their way back to glory!

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.

Valuation:

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.