Bank deposits see a growth of 16.5 % in Pakistan

Deposits of the banking sector have continued their upward trajectory, clocking in at PKR 17,257bn as at Feb’21, registering a 16.5% YoY jump while rising 1% MoM. Broad Money (M2) has seen an aggressive growth in tandem, posting a 17.1% YoY growth during Feb’21 while Currency in Circulation (CiC) is up 19.3% YoY during the same period. Pertinently, CiC/M2 has remained almost stagnant at ~30% as at Feb’21 compared to SPLY.

Meanwhile credit demand across the country is slowly reviving. Feb’21 showed a 3.8% YoY jump in Gross Advances to settle at PKR 8,527bn, while portraying a nominal 0.7% MoM increase. Meanwhile, banks extended PKR 120bn additional loans to private businesses in Feb’21 as compared to Jan’21, resulting in 1.7% MoM jump in private sector credit offtake.

Investments have shown a sharp 33.1% YoY acceleration to clock in at PKR 11,612bn amid weaker demand for advances and abundant liquidity. With interest rates expected to rise this year, banks have aggressively built positions towards the shorter end of the yield curve.

Gross ADR ratio has settled at 49.4% as at Feb’21 against 55.4% SPLY and 49.6% last month, as COVID dampened credit demand on account of subdued economic activities across the country. IDR stands at 67.3% as at Feb’21 against 58.9% SPLY and 66.8% last month. Banks have favoured risk-free debt instruments to expand their asset base in times of weak loan growth.

Moreover, banking sector spread remained unchanged on a month-on-month basis to 4.38% in Feb’21 on outstanding deposits (4.57% on fresh deposits).

Outlook – Valuations and Economic Revival to Ignite Performance

Going forward, we anticipate the current trend of banks’ preference for risk-free investments in gov’t securities to continue while advances growth is picking pace with the ongoing momentum of economic activity. We expect deposits to increase 12%, while advances are expected to grow 8% during CY21.

Substantial buffers have been created through aggressive general provisioning across the board. Coupled with the V-shaped recovery that various cyclical indicators have shown, we do not expect any major threat to banks’ asset quality once the loan deferment scheme expires. Average coverage ratio of the sector stands at a solid 105% as at CY20.

With interest rates expected to rise this year, we expect banks that have a higher exposure to current accounts such as BAFL (TP: PKR 43, upside: 43%) to perform well. Moreover, we expect large banks such as HBL (TP: PKR 173, upside: 47%) and UBL (TP: PKR 149, upside: 26%) to benefit from the ongoing economic recovery across the country. We also highlight MCB with healthy upside potential (TP: PKR 226, upside: 35%) based on its healthy coverage ratio (98% – highest ever), exceptional asset quality, and healthy exposure to high yielding PIBs. Fixed PIBs (PKR 244bn) are yielding ~ 11.35% while floater PIBs (PKR 125bn) are yielding ~7.62.

Currently, the banking sector is trading at a P/B of 0.70x, which is a 22% discount to last 3-Yr average of 0.89x. While ROE of AHL universe is likely to decline to 12.6% in CY21 from 13.4% in CY20, we project ROEs to start accelerating from CY22 when impact of rate hikes begins to fuel NIMs of the sector and overall profitability, with ROE expected to settle at 12.9% in CY22 and 13.8% in CY23.

Courtesy – AHL Research

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