Pakistan’s banking sector has witnessed a run-up of 23% in the last 3 months and 115% in the last 12 months as market participants are reverting to historical valuation multiples of Banks as market multiple is also increasing gradually.
To recall, overall market PE has risen from 2.2-2.4x to 4.0x in the last year. Similarly, the Bank’s PE has increased from 2.0x in 2023 to 3.6x in 2024E.
This is in line with our expectations communicated in our Mid-Year Strategy published on May 12, 2024, wherein we wrote, “current PE of 3.7x will linearly revert to its historical average of 6.93x over next 3 years of IMF program (Jul 2024 – Jul 2027), subject to the successful implementation of the program and its conditionalities with respect to fiscal/monetary discipline and structural reforms”.
We have evaluated/screened out banks using PBV and PE multiples. Using the PBV method, banks trading at a higher discount to their 10-year average PBV are Bank of Punjab (BOP), Habib Bank (HBL), Askari Bank (AKBL), Allied Bank (ABL), and National Bank (NBP).
While using the PE method, banks trading at a higher discount to their 10-year average PE are Bank of Khyber (BOK), Soneri Bank (SNBL), Habib Bank (HBL), National Bank (NBP), and Askari Bank (AKBL).
However, using both PBV and PE approaches, there are 3 common stocks that are at deep discounts, namely HBL, NBP, and AKBL.
PBV approach: Pakistan banks’ 10-year PBV multiple has remained around 0.94x, with a maximum of 1.3x in 2015 and a minimum of 0.5x in 2023. Currently, based on Mar-2024 numbers, the sector’s PBV is 0.88x. The sector’s average Capital Adequacy Ratio (CAR) improved to 19% in March 2024 from 17% in 2014.
However, there are a few banks that are at a significant discount to their historic valuation multiples. Here are a few based on the highest discount.
Bank of Punjab (BOP): The bank is currently trading at PBV of 0.2x, 59% lower than its historic 10-Year avg PBV of 0.5x. We have taken Mar-2024 equity for the calculation of PBV. Similarly, CAR of the bank has improved in last 10 years from 10.2% in Dec 2014 to 17.1% in Mar-2024.
- Habib Bank (HBL): Trading at PBV of 0.5x vs 10-Year Avg of 1.1x. The CAR ratio of the bank is largely same at 16.0% as of Mar 2024 compared to 16.2% in Dec-2014.
- Askari Bank (AKBL): Trading at PBV of 0.4x vs 10-Year Avg of 0.6x. The CAR ratio of the bank has improved from 13.2% in Dec 2014 to 16.8% in Mar 2024.
- Allied Bank (ABL): Trading at PBV of 0.6x vs. 10 year avg of 0.9x, showing discount of 36%. The CAR ratio of the ABL is largest in industry at 27.8% as of Mar 2024 compared to 19.9% in 2014.
- National Bank (NBP): Trading at PBV of 0.3x vs 10-Year Avg of 0.4x. The current CAR ratio of the bank stands at 24.9%, second highest in banking industry, while it was 18.2% in Dec 2014. In the ongoing quarter, bank is expected to provide for ~Rs100bn in pension liabilities, which will reduce its CAR ratio by 600bps to 19%, still higher than Dec 2014 level.
Conversely, some of banks are trading at PBV higher than its 10 year PBV value, namely Standard Chartered (SCBPL), Faysal Bank (FABL), Meezan Bank (MEBL), Samba Bank (SBL) and United Bank (UBL).
PE approach: Pakistan banking sector is trading at an 2023 PE of 3.9x and 2024E PE of 3.6x compared to historical 10-Year average PE of 6.8x, a discount of 43-47%. ROE of the banks have significantly improved to 26% in 2023 compared to last 10 year average of 15%.
However, there are few banks which are at significant discount to their historic PE valuation multiples. Here are to name few based on highest discount
Bank of Khyber (BOK): Trading at PE of 3.8x vs 10-Year Avg of 12.2x. ROE of the bank has improved from 10 year average of 10% to 19%.
§ Soneri Bank (SNBL): Trading at PE of 2.2x vs 10-Year Avg of 6.3x. ROE of the bank has improved from 10 year average of 12% to 24% in 2023.
§ Habib Bank (HBL): Trading at PE of 3.2x vs 10-Year Avg of 8.4x. ROE of HBL has increased to 18% in 2023 compared to 10 year average ROE of 13%.
§ National Bank (NBP): Trading at PE of 1.7x vs 10-Year Avg of 4.3x. ROE of the bank has improved from 10 year average of 11% to 15% in 2023.
§ Askari Bank (AKBL): Trading at PE of 1.6x vs 10-Year Avg of 3.9x. ROE of the bank has improved from 10 year average of 19% to 25% in 2023.
Courtesy – Topline Pakistan Research
