Paltry Earnings of Pakistani Commercial Banks

Commercial banks listed at Pakistan Stock Exchange (PSX) are scheduled to announce their quarterly financial results shortly, beginning with UBL (Oct 19), followed by HBL (Oct 20) and ABL (Oct 21). According to a report by Pakistan’s leading brokerage house, AKD Securities, the Big-6 banks are expected to post a combined profit after tax of Rs98.2 billion for 9MCY16F as compared to Rs96.9 billion for 9MCY15.

The top-line growth is likely to be constrained on account of lower yield on earning assets amid ongoing PIB substitution and lower banking spreads. Capital gains backlog is estimated at a whopping Rs94.8 billion for the B-6, where higher utilization of the same can cause earnings expectations to deviate particularly in case of banks like NBP and ABL that have sizeable equity portfolios in addition to the bonds portfolio.

This growth seems illusive, being a function of lower tax expenses (super tax expensed out in 2QCY16) as on a pre-tax basis profits are expected to go down by 14%QoQ. With expectations regarding interest rates bottoming out, the banking sector has gained 13% since July 2016. While 9MCY16F results are expected to depict weakness, price performance will remain hinged upon the following: 1) earlier than expected monetary tightening and 2) pick-up in economic activity amid CPEC related development.

Core income is expected to remain weak (flat YoY) as lower interest rates continue to squeeze margins. Non-core income is also expected to decline by 4%YoY as capital gains utilization is anticipated to remain lower in 9MCY16. However, in 3QCY16 alone, the brokerage house expect the B-6 banks to post combined profit of Rs33.7 billion, higher by 10%QoQ where growth is likely to be a function of lower tax expenses in the absence of super tax charge levied in 2QCY16.

Investment Perspective: With economic indicators and global commodity trends now directing towards a possible end to the monetary easing cycle, the banking sector is likely to remain in limelight. While fundamental pressures remain intact, analysts believe triggers in the form of faster than expected uptick in advances, both corporate and consumer, along with speedy pickup in CPEC related infrastructure projects can push price performance.



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