Pakistan Banking Sector

Banks: Earning assets remain depressed – UW maintained

• With 3Q2013 in the bag, balance sheet figures show a bleak picture for the Banking Sector as credit off take and Investment Portfolios remains weak, both declining by 1% each since the start of year to Rs3.8trn and Rs3.9trn respectively.
  
• Deposits on the other hand have grown by 7% since December 2012, clocking in at Rs7.1trn. As a result, Banking Sector ADR has come down to 54% from 58% during the period.
  
• In line with depleting earnings assets, average weighted spreads also continued slide down clocking in at 6.28% in August 2013, down 3bp MoM and 67bp YoY. Spreads so far in 2013 have averaged at 6.26% compared to 7.02% in 2012.
  
• Going forward, spreads are likely to remain under pressure due to State Bank of Pakistan’s (SBP) new regulation of linking savings deposits Minimum Profit Rate (MPR) to the Central Bank’s Repo Rate. We maintain our ‘Under-weight’ stance on the Banking Sector.

Adv. And Inv. Fall By 1% In 2013 While Deposits Grow By 7%

Banking Sector aggregate deposits so far in 2013 (till September 27, 2013) have registered a growth of 7%, reaching Rs7.1trn. However, banks were unable to emulate this growth on the earning assets front, as credit off take remained weak during the year and gross advances declined by 1% to Rs3.8trn. Similarly, investments, too, declined by 1% during the same period to Rs3.9trn. Consequently, the Banking Sectors’ ADR and IDR have shrunk to 54% each compared to 58% each in December 2012. We anticipate the Banking Sector to continue with its prudent lending policy in the near term, amidst shrinking spreads and the Overall Gloomy Economic Scenario of the country.

Spreads continue to slide in 2012

After averaging at 7.02% in 2012, Banking Spreads have narrowed down to 6.28% in August 2013, down 3bp MoM and 67bp YoY. With the September number still to come, Banking Spreads on a QoQ basis have averaged at 6.30% in 3Q2013 compared to 6.29% in 2Q2013 indicating a weak quarter for banking results. To add to this misery, the SBP recently fixed the MPR on all Pak Rupee Savings Deposits to 50bp below the prevailing SBP Repo Rate (i.e. floor of the Interest Rate Corridor, currently 250bp below the Discount Rate at 7%) with effect from October 1, 2013. We believe this move by the SBP is likely to damage banking spreads further as MPR will now change in tandem with changes in Discount Rate. Our Banking Universe 2014 earnings are likely to come down by 5-17% (see our report “SBP regulations to put pressure on Banking Spreads” on September 30, 2013).

Spreads Continue To Slide In 2013

With spreads on Savings Accounts now due to remain flattish, we can expect to see banks opting to focus more on building up their Current Account deposits base and lowering the share of Savings Accounts in their deposit mix. Nonetheless, banking spreads are likely to remain under pressure and we maintain our ‘Under-weight’ stance on the sector a with ‘Sell’ on MCB Bank Limited (MCB) and Habib Bank Limited (HBL).