Banking sector analysis Dec 09

Banking sector weighted average spread has registered at 7.33% in Nov’09, down by 8bpsMoM and by 30bpsYoY. Inline with expectations, the MoM decline is largely due to lower lending yields and sticky funding costs. That said, with the SBP retaining a cautious monetary stance, lending yields should sustain over the next 3 months at least. In such case, the key determinant of spread in the medium term will likely be funding costs, in turn a function of deposit mobilization. In this regard, banking sector deposits are up 11%YTD to PkR4.2tn on Dec 19’09 while competing National Savings Scheme (NSS) products have attracted PkR98.4bn in 5MFY10, up 148%YoY. NSS is providing viable competition where we believe banks may be pushed to raise deposit rates, leading to gradual spread contraction. From this vantage, we believe investors would likely pay a premium for liquid banks that do not need to raise expensive deposits. Within our coverage universe, these are BAFL, MCB, NBP, AKBL and ABL.