Karachi, June 23, 2021 (PPI-OT): Pakistan Banks: May’21 spreads clocked in at 4.44%

Banking sector spreads for May’21 stood at 4.44%, flat MoM while taking 2QCY21TD avg. spread to 4.45% as against 4.35% in the previous quarter and 5.53% in 2QCY20. Fresh spreads continue to expand, exhibiting an increase of 25bps in May’21 over 27bps recorded in the previous month.

We attribute these trends to seasonally stronger financing demand amid possible TERF related disbursement where Gross Advances surged by PkR146bn in May’21 – highest monthly outflow in CY21TD, taking cumulative 2QCY21TD advances growth to 2.4%QoQ – already highest 2Q growth in the past 2y.

We take ensuing trends to be indicative of robust business confidence in the country while providing key insights on the asset quality outlook of the banking sector. We see asset quality risks to be largely contained with the sector prudently carrying out subjective assessment of its loan portfolio and building adequate loss reserves.

The banking sector has underperformed the market with CY21TD negative performance of 2.1% compared to KSE-100 index’s +10.3% were we see potential interest rate hikes in the near term to catalyze performance in the sector.

On valuations, we have preference for larger plays compared to mid tiers where we like HBL (earnings recovery, high exposure to economic activity – TP: PkR174.6), UBL (CY21F dividend yield of 9.4% – TP: PkR142.5/sh), and MCB (PIB book, recoveries from NIB portfolio supporting earnings – TP: PkR223.4/sh).