8/13/2019 M05DEC13

1/2JS Research is available on Bloomberg, Thomson Reuters, CapitalIQ and www.jsgcl.com

Please refer to the important disclaimer on the last page Page 1

With CPI inflation reported sharply higher at 10.9% YoY in November2013 (resulting in 5MFY14 CPI at 8.8% YoY), we believe the KSE is

readying itself for potential sharper-than-earlier-anticipated Discount

Rate (DR) hikes by the SBP during the remaining part of the fiscal year.

While linking the Minimum Profit Rate (MPR) on Savings Deposits forbanks to the DR has limited banks spreads accretion from higher

interest rates, the sector will emerge a beneficiary of any earlier or higher

than expected DR hikes.

We have already built in 11% DR by June 2014 into our banking models.Every 50bp change in DR beyond 11% is likely to result in 1-6% earnings

upside for our Banking Universe. Bank Alfalah Ltd (BAFL), Allied Bank

Ltd (ABL) and National Bank of Pakistan (NBP) are key likely winners as

savings deposits as a percentage of total deposits stand low at 24-37%.

With our base-case 11% DR view in place for now, we maintain ourUnder-weight stance on Pak banks with Sell calls on MCB Bank (MCB)

and Habib Bank Limited (HBL). The sector is trading at 2014 PE and PBV

of 10.2x and 1.5x respectively.

Above-eyed rate hikes? BAFL, ABL & NBP the winnersCPI inflation in November 2013 clocked in at 10.9% YoY with 2QFY14-to-date

number averaging at 10.0%. Going forward, with inflation numbers in sequential

quarters expected to keep heading higher, we re-iterate our call of a further 100bp

interest rate hike by the end of FY14 (June 2014) to the 11.0% DR mark. The same

is built into our base-case for Pak banks. Meanwhile, with inflation rising faster than

expected, we flag the risk of sharper and/or earlier than expected rate hikes.

Though linking the MPR on Savings Deposits to the DR has limited banks spreads

accretion from higher interest rates, any tightening beyond the 11.0% mark is likely

to change our earnings expectations for Pak banks. For every 50bp higher DR

beyond the 11.0% mark, JS Banking Universe earnings are likely to clock in 1-6%

higher. Banks which have a high CASA (more tilted towards Saving Accounts) are

likely to lose out compared to banks with low percentage of savings deposits.

Banks: Impact of incremental 50bp higher DR

* Savings * Total Savings as

Base case 50 bp higher DR % Deposits Deposits % of T.Dep

ABL Hold 78 10.67 11.22 5% 137 571 24%NBP Hold 48 6.02 6.33 5% 293 1,021 29%

UBL Hold 134 15.18 15.33 1% 271 773 35%

BAFL Hold 24 3.31 3.51 6% 90 247 37%

HBL Sell 108 15.82 15.96 1% 553 1,184 47%

MCB Sell 264 22.18 22.31 1% 309 584 53%

AKBL Hold 14 0.79 0.82 3% 180 304 59%

Source: Company accounts & JS Research, * as per September 2013 accounts

(Rs bn)2014F EPS (Rs)

Rating TP

Pakistan Banking SectorBanks: Possible impact of sharper thaneyed DR hikes

KSE100 Index: Closing 24,445.38 (143.09)

Banking sector performance vs. KSE-100

90%

100%

110%

120%

130%

140%

150%

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Banking sector

KSE-100 Index

Source: KSE

MORNING BRIEFING

Bilal Qamarbilal.qamar@js.com

+ 9221 111-574-111Ext: 3099

D e c e m b e r 0 5 , 2 0 1 3

8/13/2019 M05DEC13

2/2

D e c e m b e r 0 5 , 2 0 1 3 MORNING BRIEFING

Page 2

Pakistan market statistics (Dec 04, 13)

KSE-100 Index

Previous KSE-100 Index

Change from last closing

Change from last closing (%)

KSE Market Cap. (Rs. bn)

KSE Market Cap. (US$ bn)

Total Volume (Shares mn)

Traded Value (Rs. bn)

Traded Value (US$ mn)

KSE-30 Index

Change from last closing

Change from last closing (%) -0.55%

KSE Futures Volume (Shares mn) 27.26

KSE Futures Value (Rs. mn)

KSE Futures Spread

Source: KSE

6.31%

110.64

18,383.98

-102.31

2,949.78

5,914.81

54.47

200.11

12.01

24,445.38

24,588.47

-143.09

-0.58%

KSE valuations

2013A/E 2014F 2015F

P/E (x) 9.5 8.3 7.8

P/BV (x) 2.0 1.8 1.7

Div. Yield (%) 5% 6% 6%

Earnings growth 8% 15% 6%

Source: JS Research

As far as the big five banks are concerned, MCB and HBL fall in the category of

high saving deposits with 53% and 47% respectively of total deposits parked in

saving deposits. Hence a 50bp incremental DR would result in 1% upside to 2014Eearnings. We highlight BAFL, ABL and NBP as clear winners of DR hikes going

forward as their concentration of savings deposits stand low at 24-37%.

Incremental 50bp hike in DR is likely to result in 5-6% higher than anticipated

earnings in 2014E.

Overall outlook on banks remain bleakAlthough monetary tightening is likely to bode well for the banking sector, with the

MPR on savings deposit linked to the DR, growth in banking spreads will now be

slower than in previous monetary tightening cycles. That said, we could see greater

upside to earnings if banks opt to focus more on building up their Current Account

deposits base and lowering the share of Savings Accounts in their deposit mix.

Meanwhile, we also do not see private credit offtake picking up pace in a high DR

scenario, where so far in 2013 gross advances have only grown by 3% (despite thefact that DR came down to 9% in Jun 2013). On the other hand, poor law and order

situation in the country is likely to make it difficult for banks to lend money. We

maintain our Under-weight stance on Pak Banks eyeing limited near term triggers.

Government unlikely to receive US 800mn from EtisalatNews reports have suggested that the government is unlikely to receive US$800mn

outstanding from Etisalat on account of privatization of Pakistan Telecom Company

Limited (PTC) as no progress has been made in the mutation of remainingproperties. Etisalat has held up the amount because titles of around 131 properties

have not been transferred in its name. Note that the inflow of this amount has been

budgeted for by the government in this years budget.

Also in Focus

JS Global Capital Limited6thFloor,FaysalHouse,Shahrah-e-Faisal,Karachi

Research Equity SalesTel:+92(21)32799005Tel:+92(21)32799513

Fax:+92(21)32800163Fax:+92(21)32800166

js.research@js.com eqsales@js.com

This report has been prepared for information purposes by the Research Department of JS Global Capital Ltd. The information and data on which this report is based are obtained from sources whichwe believe to be reliable but we do not guarantee that it is accurate or complete. In particular, the report takes no account of the investment objectives, financial situation and particular needs ofinvestors who should seek further professional advice or rely upon their own judgment and acumen before making any investment. This report should also not be considered as a reflection on theconcerned companys management and its performances or ability, or appreciation or criticism, as to the affairs or operations of such company or institution. Warning: This report may not bereproduced, distributed or published by any person for any purpose whatsoever. Action will be taken for unauthorized reproduction, distribution or publication.