Fiscal easing: Investors look to banking sector as spreads widen

Declining trend ends with interest rates expected to rise along with banking profits.


Our Correspondent September 26, 2013
The likelihood of a hike in policy rate is strong given that the State Bank has already predicted inflation to hover around 12% in fiscal year 2014. PHOTO: FILE

KARACHI:


With the central bank likely to increase the discount rate in the next couple of years, banking spreads are gradually picking up and are expected to improve their profitability. Improved spreads, difference between the cost of deposits and lending interest rates, will mean higher profits for banks, will improve their bottom lines.


According to Arif Habib Limited analyst Numair Ahmed, the banking sector’s weighted average spreads in August remained 6.28% after declining by a mere three basis points month-on-month, as opposed to 6.31% in July and 6.35% in June.



This takes the average eight-month spreads for calendar year 2013 to 6.26%, a decline of approximately 92 basis points year-on-year. “However, spreads have been picking up from their recent low in April of 6.19%. With a recent uptick in the policy rate, we expect banking spreads to improve further ahead,” he added.

Topline Securities, a brokerage house based in Karachi, now estimates that earnings of banks under its coverage is expected to rise by one-fifth in the current fiscal year.

“With the assumption of another 100bps increase in 2014 along with the improvement in balance sheets, the earnings of our banking universe are expected to rise 21% during fiscal 2014 compared to a 4% decline in fiscal 2013,” Topline Securities analyst Zeeshan Afzal wrote in a research note last week.

The likelihood of a hike in policy rate is strong given that the State Bank has already predicted inflation to hover around 12% in fiscal 2014. According to Taurus Securities analyst Hasan Raza, his brokerage house has further raised the discount rate assumption by 100bps and 50bps for calendar years 2014 and 2015 respectively, mainly because of a material jump in inflation driven by power tariff rationalisation and removal of subsidies.

“Also, the risk-free rate has also been revised from the previous 10.5% to 11% to reflect the current change in secondary market yields,” he said while referring to the upward trend in Pakistan Invest Bonds yields.

Top picks

According to Taurus Securities, valuations of most banks, especially larger ones, have already priced in the expected rise in the discount rate. Therefore, it believes that even after incorporating the increase in the discount rate in coming years, valuations of these large cap banks will stay unappealing.

However, it holds that owing to its pristine asset quality, growing current and savings account (CASA) ratio, and unmatched return on equity (ROE) with December target price of Rs48.2 a share, Bank Al Habib (BAHL) is a favourite stock.

Besides this, Taurus Securities also considers Bank Alfalah (BAFL) a top pick due to the cessation of provisioning on investment in Warid and improving asset quality ratios with the December target price of Rs27 per share.

Arif Habib Limited’s preferred banking stocks are National Bank of Pakistan, with the target price of Rs55 per share, and BAFL with the target price of Rs21.5 per share.

Published in The Express Tribune, September 26th, 2013.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.

COMMENTS

Replying to X

Comments are moderated and generally will be posted if they are on-topic and not abusive.

For more information, please see our Comments FAQ