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AKD Quotidian about — Banks: Buy on dips for a 2HCY13 rally

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by March 27, 2013 Brokerage

Karachi, March 27, 2013 (PPI-OT): Weighted average banking spreads have registered at 6.18% in Feb’13, down by 112bps VoY but by a more contained 3bps MoM.

According to AKD Securities however, this apparent stabilization in spreads will likely prove temporary, with the recent directive on savings deposits (interest to be calculated on average balance basis) coming into effect from the start of 2QCYI3. As a result, IHCYI3 banking sector results will likely be soft which could lead to Banks underperforming across the next few months.

That said, while AKD Securities believes the SBP will not quickly reverse its stance which presently focuses on encouraging banks to lend to the private sector or face tightening interest margins, AKD Securities does eye an uptick in interest rates and thereby in spreads in 2HCYI3. From this vantage, AKD Securities recommends investors take positions in banking scraps on dips in anticipation of a potential rally in 2HCYI3. AKD Securities tops picks are BAFL (TP: PkR2O/share) and UBL (TP: PkRII2.5/share).

Spreads outlook: Weighted average banking spreads have registered at 6.18% in Feb’13, down by 112bps YoY but by a more contained 3bps MoM. As a result, 2MCY13 average spreads have clocked in at 6.20% vs. 7.34% in 2MCYI2. While data would seem to suggest that sequential spreads have flattened (Marl 3 spreads likely to be siriiilar to Feb’13), this apparent stabilization will likely prove temporary with the recent directive on savings deposits (interest to be calculated on average balance basis) coming into effect from the start of 2QCY13. As a result, 2QCY1 3 sector spreads will likely dip below 6%, their lowest level since early CYO5.

View on SBP stance: Considering the SBP has only recently taken steps to further clarrip down on spreads, AKD Securities believes any reversal in the central bank’s stance is unlikely to occur this year This is especially so because private sector loans have increased by a tepid 4.9%YoY as at end-Feb 13. Although there has been improvement on a sequential basis, banks continue to focus on GoP securities with a preference for lending to GoP-backed entities (see table on right). In this regard, data suggests further energy sector lending has taken place after recent moves to convert energy chain loans into TFCs/GoP securities.

Investment Perspective: AKD Securities sees soft 1HCY13 banking sector results which could lead to Banks underperforming across the next few months. That said, AKD Securities eyes an uptick in interest rates and thereby in spreads in 2HCY13 which could trigger a banking sector rally in the second half of the year. As such, AKD Securities recommends investors take positions in banking scrips on dips where AKD Securities tops picks are BAFL (TP: PkR2O/share) and UBL (TP: PkR112 .5/share).

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