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AKD Quotidian about — Banks – Spreads up 5bpsMoM in Dec’11

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by January 26, 2012 Brokerage

Karachi: According to the latest data released by SBP, weighted average banking spreads for Dec’11 have registered at 7.58%, down 3bpsYoY but surprisingly up by 5bpsMoM.

According to AKD Securities, in this regard, the rate on deposits has fallen quicker than lending yields. As a result, full-year CY11 weighted average spreads have registered at 7.63%, up from 7.46% in CY10. At the same time, spread on fresh tending and deposit taking was at 6.17% in Dec’11, down 62bpsYoY but up 7bpsMoM. This data affirms AKD Securities’ view that banks have likely closed out the previous quarter on a strong note, leading to robust CY11 result expectations.

Furthermore, while margin compression risks remain particularly if the SBP cuts the DR in the next MPS, latest spreads data indicates banks have the ability to limit the impact on NIMs through deposit cost rationalization. While the AKD Banking Universe has already gained 14%CYTD, AKD Securities believes banking stocks can continue to perform in the run up to CY11 result announcements. At current levels, AKD Securities prefers UBL, ABL and BAFL while AKD Securities removes MCB from AKD Securities’ top picks list as the scrip has gained 25% since its recent low.

Strong end to CY11: Dec’11 weighted average spreads at 7.58% (down 3bpsYoY but up 3bpsMoM) reaffirm AKD Securities’ view that CY11 results will likely be robust. Besides sustained spreads, further impetus to earnings growth should come from 1) lower provisions (enhanced FSV benefit), 2) recognition of suspended mark-up following conversion of circular debt exposure into GoP securities, 3) capital gains on potential portfolio churning and 4) easing price pressures. Furthermore, while margin compression concerns remain for CY12F, particularly if the monetary easing process continues, latest spreads data indicates banks have the ability to limit the impact on NIMs through deposit cost rationalization.

Investment Perspective: Banks have gained 14%CYTD, outperforming the KSE-100 Index by 8.8% in the process. AKD Securities believes outperformance can continue in the run upto CY1I results announcement, as has generally been the case in the past few years. AKD Securities’ top picks are UBL, ABL and BAFL while MCB could potentially come in for a breather post share price gain of 25% since its recent low.


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