Karachi, July 19, 2019: Banking sector is most likely to witness robust growth during this fiscal year (FY20) supported by higher interest rates.
According to JS Global, outperform stance on banks for CY19 on account of healthy profitability growth driven by recent monetary tightening (1QCY19 Net Interest Income growth: 25 percent YoY), which is expected to more than compensate for a slowdown in asset growth and any potential increases in credit costs.
Given interest rate projections of 13.75 percent (+50bps from now) by December 2019, analysts at JS expects the sector’s recurring earnings to jump by 13 percent YoY during CY19, where base case earnings also account for double-digit growth in administrative expenses.
Robust growth to continue in CY20 as well with recurring growth of 22 percent YoY where interest rates are expected to average 13.8 percent expected and close the year at 11.75 percent.
However, our medium-term interest rates remain higher than the past 5-year average of 7 percent, resulting in higher NIMs of the banking sector.
With sustainable Tier I ROE at 20 percent (CY20F-CY22F), the sector currently trades at its 5-year low P/B (CY20F) of 0.8x, offering D/Y of 9 percent. With mid-tier banks generating a higher ROE than bigger sized banks, we believe the segment warrants a higher multiple going forward.
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Meezan Bank Ltd (MEBL, TP: Rs115), Bank Al Habib (BAHL, TP: Rs100) and Bank Alfalah (BAFL, TP: Rs55) given their sensitivity to interest rates and a relatively lower increase in credit cost estimated for the respective banks.
With guidelines in the recent Asset Declaration Scheme and Federal Budget FY20 leading to increasing documentation of the economy, initiatives such as routing white money through banking channels and increasing filers of tax returns are expected to gradually increase deposits of the banking sector.
While this may be long-term, every 1 percent increase in Deposit to GDP ratio would add 3 percent to the sector’s total Deposits.
