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Banking sector analysis Nov 09

ABL: standing out of the crowd

We initiate coverage of Allied Bank Limited (ABL), the fifth largest commercial bank in Pakistan in terms of asset base, with a Buy rating and a target price of PkR80/share (22.3% upside). We believe the bank is well positioned to leverage the ongoing U-shaped domestic economic recovery. ABL’s earnings have increased by 35%YoY in 9MCY09, in sharp contrast to a decline of 3%YoY posted by the sector. As a result, ABL has outperformed the banking sector by 55%CYTD. We base our expectations of further price performance on our forecasted 3-year (CY08-CY11F) EPS CAGR of 25%, the highest within the AKD Banking Universe.

In our view, this growth will be driven by: 1) strong domestic corporate linkages and low asset quality drag, 2) likely effective entry in higher-yielding segments, 3) deposit restructuring leading to limited NIM erosion and 4) consistently increasing cost efficiencies. ABL is trading at a CY10F Tier-I P/B multiple of 1.43x and a PER of 7.24x. Our target price of PkR80/share implies upside of 22.3% from current levels. Buy!
AKD Research
2 December, 2009

Value multiples set for rerating

We remain selectively positive on the Pakistan Banking Sector and believe that a fresh banking rally will develop over the next 3-6 months. 3QCY09 results have surprised on the upside despite most banks not availing the benefit of lower provisioning requirements. In our view, sizeable provisioning reversals will likely be booked in 4QCY09, potentially leading to bumper earnings. Setting accounting changes aside, improving fundamentals such as 1) slower NPL accretion, 2) NIM maintenance, 3) better liquidity, and 4) greater balance sheet strength reaffirm our expectations for growth in CY10F. Prevailing value multiples suggest there is room for sustained positive price discovery going forward. Our top pick is NBP (volumetric growth). In case of a broad-based rally, outperformers would likely include MCB (high beta) and BAFL (mean retracement).
AKD Research
November 17, 2009 

Banking Spreads withhold decline in 0ct-09

Banking spreads haveincreased marginally by 3bp MoM to 7.41% in Oct. Rate on outstanding deposits declined by 3bp MoM whereas that on loans remained constant. Rate on fresh deposits is declining vis-à-vis lower lending rates; however, we expect a secular decline in spreads due to 1) lower average KIBOR vs Jul 08 – Jun 09 average, 2) 5% floor on PLS saving accounts and 3) persistent non-bank government borrowing. Also note that spreads data does not include yield on fixed income securities which results in an upward bias in spreads. We expect our universe margins to decline by 60bp YoY in 2010E.

Spreads historical trend and peak

Historically banking spreads were supported by hefty liquidity in the system but peak i.e. 2009 (Jan 09-Oct 09 avg: 7.54%) has been a manifestation of record high lending rates, despite regulatory floor on PLS savings deposits (~40% of total). Lending rates declined to low single-digit in 2004 to support output which kept spreads relatively low. However with gradual increase in lending rates, spreads started to trend upward from 2005 as deposit cost remained upward sticky due to high CASA amid excess system liquidity. Average annual banking sector spread was 5.33%, 6.57%, 7.40%, 7.29% & 7.29% in 2004, 2005, 2006, 2007 & 2008 respectively.

NPLs cycle nearing peak – be wary of tail risk

NPL accumulation rate has slowed down substantially as evident from 3Q09 results – our banking universe quarterly run rate declined to 4% from 8% in 2Q09. However, the sector might not be out of the woods just yet and could see the tail-end of credit cycle unfolding in the near future before NPLs hit their peak. Two cases i.e. cement sector and the Dubai crisis (particularly exposure of UBL, ~17% of loan book in UAE) are in limelight off-late. Meanwhile post Aug-09 price war, small cement manufacturers are struggling to meet debt obligations and concerns have surfaced on potential flow of NPLs in the sector. Total loans to cement sector amount to ~PRs100bn, ~4% of private loans, with cement sector NPL ratio of at 11.1% as of Jun-09 (latest data) vs 9.9% in Sep-08. Bank-wise, HBL and ABL lead the pack in cement exposure whereas MCB Bank remains a safe haven.

Investment perspective

We downgraded our stance on Pakistan banks in Oct-09 due to strong run up in prices, since then the sector is down 9.33% (KSE: -7.63%). Our view remains that reversion to historical mean multiples remains a long shot for Pakistan Banks as trading history ex-MCB is skewed to the bull cycle of 2004-2008 (see our report “mean reversion unlikely for the near term”) and banks’ share prices would have to find a new mean with economic cycle. Our top pick for now remains MCB on 1) attractive return metrics 2) superior asset quality and 3) asset growth potential.
KASB Securities and Economics Research

S&P downgrades ratings on four UAE banks

Standard & Poor’s has lowered its credit ratings on four UAE banks over their likely exposure to Dubai World debts.
The ratings agency said it had reduced counterparty ratings for Emirates Bank International, National Bank of Dubai and Mashreqbank to ‘BBB’ from ‘A’, while affirming their short-term ratings at ‘A-2′.
Simultaneously, it lowered its long- and short-term counterparty credit ratings on Dubai Islamic Bank to ‘BBB-/A-3′ from ‘BBB+/A-2′.



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