The banking sector outperformed KSE100 by 2.03% (total return 1.15%) during 1HCY23.

In terms of profitability, during 2QCY23, the banking sector is expected to post jump in YoY earnings driven by higher NIMs amid policy rate hikes and strong balance sheet growth.

Improved NIMs are anticipated through a higher yield on investment, primarily from floater bonds and T-bills, along with a higher yield on advances, given the record high yields and KIBOR.

However, it is important to note that an increase in the super tax rate in FY24 budget, from 4% to 10% will have an adverse impact of ~11% on the overall profitability of AHL’s banking universe. This will result in QoQ decline in earnings of banks.

Banking industry’s advances were up by +3.1% QoQ by Jun’23 end, lower than deposit growth of +8.2% QoQ, which took the overall ADR of the banking sector to 47.8%.

IDR of the banking sector remained at 81.9% as at Jun’23 as banks focused on secured returns through government papers.

Average lending rate during the period inched higher to 19.4% by May’23 (up by a 693 bps YoY).

Going forward, we expect banks to continue investing in high-yielding bonds along with the prudent lending approach to support asset yields.

Besides, banks may witness slight jump in FX income amid currency volatility (2QCY23 avg.: -0.77%).

The OPEX is also going to remain high due to increased inflationary pressure (CPI 2QCY23 avg.: 34.6% vs. 1QCY23 avg. 31.5%).

For the 1HCY23 ending, our AHL universe is expected to post a jump of 81% YoY in overall profitability with MCB likely to show the highest earnings growth of +128% YoY, followed by ABL (+122% YoY), and HBL (+118 %YoY).

Courtesy- AHL Research