Medium tier banks: moving to centre stage
After posting steep earning declines in CY08, Pakistani banks’ 1HCY09 results indicate deceleration in earnings erosion which should lead to renewed growth in CY10F. Indeed, as a group, commercial banks’ combined market capitalisation now comprises 27% of the KSE-100 Index versus 25% on June 30 ’09, indicating a more positive investor perception of this sector. While the Big-5 banks have been leading the rally so far, we believe potential winners can also be found in the medium bank space. Within this group, we have revised our earnings estimates for both BAFL (revised TP: PkR15.25) and NIB (revised TP: PkR6.50), and have reinitiated coverage on AKBL (TP: PkR25.0). We have a Buy stance on all three banks where we base our bullish premise on improved growth prospects between now and CY11F due to:
· More conducive macroeconomic environment over the next 24 months
· Steepening yield curve that helps banks boost yields on earning assets
· Higher provisioning coverage, to help navigate the still-difficult CY09 corporate cashflow environment
· Spread maintenance due to lower reliance on savings deposits (5% floor)
· Attractive valuations – as a group, middle tier banks are presently at a discount of 44% to the Big-5 against average historical discount of 27%
UBL: price performance lags macroeconomic improvement
Following the announcement of 1HCY09 results, we downward revise our target price for UBL by 5% to PkR55/share but retain our Buy stance. Persistent high provisions compel us to reduce our EPS estimates by 6%-14% across CY09F-CY13F although target price revision is limited following cut in discount rate. Recent positives for UBL include improvement in fee income, improvement in CASA, continued cost control and an increase in CAR. Regarding asset quality, as per UBL management, time-based provisioning criterion would not materially impact foreign loan provisioning. Within this backdrop, we believe the scrip should now look to decouple from foreign asset quality concerns and track improvement in local economy as well as own fundamentals. Based on revised estimates, UBL trades at a CY09F Tier-I P/B multiple of 0.98x and a CY09F PER of 5.85x. The scrip offers an upside of 20% to our revised target price of PkR55/share (implied CY09F Tier-I P/B multiple: 1.2x). Buy!
Banks: valuation expansion but value multiples still
Banking sector valuations have expanded in the ongoing bull run with the AKD Banking Universe trading at a CY10F Tier-I P/B multiple of 1.13x relative to 0.86x on Jun 30’09. We continue to believe that interplay of asset quality, spreads and liquidity will dictate investor interest in banking sector scrips going forward. Recent data indicates 1) slow but consistent spread decline, 2) decelerating NPL slippage and 3) improved liquidity. In our view, investors should consider banks that are less vulnerable to bad loan ageing (AKBL, NBP, NIB) and that also have the liquidity to push loan growth (NBP, BAFL). We like UBL as well, where we believe asset quality concerns have been overplayed and valuations are unjustifiably depressed. On the flipside, MCB and HBL appear to be slightly pricey.
National Bank Pakistan
Weak topline and higher opex drag earnings
Bank of America Merrill Lynch)
Earnings decline by 20% YoY
NBP announced 20% lower YoY earnings of PRs5.84/sh in 1H09 driven by dismal top line growth and higher operating expenses – loan loss provisions remained flat. We maintain our earning estimates and Neutral rating on the stock. While details are not yet available, the key highlights from 1H09 results are:
Operating profit plunges 13% YoY
Total income (net interest + non interest) decline by 2% YoY in 1H09 remains a key concern. This is being driven by flat growth in net interest income (decline in margins) and lower, -8%, non-interest income (lower capital gains and one-off refunds in 1Q08). Meanwhile, higher operating expenses (+24% YoY) continue to hold traction on op profits. Resultantly, operating profit and pre-prov & tax op profit is down 13% YoY and 17% YoY respectively in 1H09.
Variance to our cluster….performance subdued
National bank operating performance remains an exception among the large cap/big 5 banks, also been reflecting in the stock price (6 month: NBP +27% vs Sector +38%). Bottom line is being dragged by both weak top-line (net int income) and NPL provisions as apposed to our other cluster banks that have posted healthy YoY (double digit) pre-prov & tax operating profits.
Investment perspective: Neutral
While we like NBP’s adequate capital base (13% of Assets and CAR: 16.6%) and its role as a treasurer to the government, a relatively low economic value add of the bank (CoE and RoE spread) justifies a discount to peers in our view. The stock currently trades at 2009E P/B of 0.7x (2009E RoE; 13%). We also maintain our 2009 earning estimates until the release of detailed results.
KASB Securities and Economics Research
We rollover our financial model for NBP to CY10F and raise our target price to PkR95/share from PkR81.5/share. Since announcing a 22%YoY decline in 1HCY09 results, NBP has gained 12.3% in absolute terms, outperforming the KSE-100 Index by 7.9% in the process. It appears that the market is looking beyond a poor CY09F (we forecast full-year earnings to decline by 14%YoY), and towards earnings improvement thereon. From this vantage, positives for NBP include 1) high provisioning coverage of 77%, 2) potential improvement in dividend income going forward and 3) CAR cushion & liquidity. NBP trades at a CY10F Tier-I P/B multiple of 0.85x and a CY10F PER of 5.3x. The scrip offers an upside of 20% to our revised target price of PkR95/share, as well as a CY10F dividend yield of 8.9%. .
NBP 1H09: weak top line & higher opex
NBP announced 20% lower YoY earnings at PRs5.84/sh in 1H09 driven by dismal top line growth and higher operating expenses. Loan loss provisions remained flat.
2% YoY decline in total income (net interest + non interest) in 1H09 remains a key concern. NBP posted YoY flat net interest income and 8% lower YoY non-interest income.
High operating expenses (+24% YoY) continue to hold traction on op profits. Operating profit and pre-provision-and-tax op profit are down 13% YoY and 17% YoY respectively in 1H09.
NBP operating performance remains an exception among the large cap/big 5 banks due to its weak top line compared to our other cluster banks which have posted double digit pre-provision & tax profits.
The stock currently trades at 2009E P/B of 0.7x (2009E RoE; 13%). We keep our 2009E earning estimates unchanged until the release of detailed results and maintain our neutral rating.
KASB Securities and Economics Research