June 08, 2012 (JS Research)
Latest banking sector data (June 1, 2012) released by the SBP show a growth of 3%QoQ in aggregate deposit during 2Q2012 so far, while credit offtake, on an encouraging note also rose by 1%. While Kibor is up 9bps on an average in 2Q2012, spreads have seen a contraction to 7.13% (only April number yet released) from an average of 7.32% in 1Q mainly on account of an increase in minimum deposit rate on saving deposits to 6%. On the provisions front, cumulative provisions have grown by 2%QoQ (Rs9bn) so far to Rs401bn which is unlikely to pose a great risk to bigger banks mainly on account of their higher loan coverage ratio. We maintain our ‘Market-Weight’ stance on the sector and flag MCB and NBP as our preferred play.
Deposits and offtake up 3%QoQ & 2%QoQ
Banking sector aggregate deposits in 2Q2012 have grown by 3%QoQ to reach Rs6.1trn so far. Credit offtake, in 2012, has seen a reversal in its declining trend witnessed during 2011, growing by 2%QoQ to Rs3.7trn. Growth in investments, on the other hand, has slowed down – just growing by 1%QoQ to Rs3.1trn, as the government issued TFCs in 1Q to resolve the circular debt issue. ADR for the banking sector has come down by a single ppt to 60% in 2Q with IDR also contracting by 1ppt to 51%.
Spreads in April contract to 7.13%
After averaging at 7.32% in 1Q2012, spreads have further contracted to 7.13% in April, down 39bps YoY. As per the breakup, average lending rates are down 15bps MoM, with a 2bps increase witnessed in the deposit rate in April. However, with the 6-month Kibor averaging at 12.01% in 2Q (up 9bps) so far, we can see a slight improvement in net interest margins on QoQ basis which is likely to be offset by an increase in the minimum deposit rate on savings to 6%.
Cumulative provisions rise by Rs9bn
Total provisions have risen by Rs9bn in 2Q, compared to an average rise of Rs10bn in the previous five quarters. Bigger banks with high coverage ratio and relatively better asset quality are likely to be less affected by rising provisions, however, it remains a concern for the smaller banks.
Outlook: ‘Market-Weight’
We currently maintain our ‘Market-Weight’ stance on the banking sector in the absence of any major trigger. So far in 2012 the banking sector has outperformed the broader market by 8% while underperforming by ~6% in 2Q. Underperformance in 2Q can be linked to pre budget news of increase in tax rate on income from government securities for the banking sector, which did not materialize. However, tax on dividend income received by banks from money market and income funds was raised to 25% and 35% in 2013 and 2014 respectively. With banking sector down 5.3% in 2Q so far, we believe investors have an opportunity to take positions in NBP and MCB as both the stocks offer a potential upside of 30% and 22% to their respective target prices.
Also in focus
Forex reserves decline to US$15.53bn
Country’s foreign exchange reserves fell to US$15.53bn during the week ending May 31, 2012 from US$16.01bn. The decline was witnessed on account of scheduled debt repayments made by the SBP to various multilateral lending agencies. Reserves held by commercial banks dipped slightly by US$15mn to US$4.29bn while those held by the SBP witnessed a contraction of US$455mn to US$11.24bn.
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