Karachi, July 26, 2022 (PPI-OT): Pakistan Power: FY22 Power generation: Furnace oil makes a comeback

The profitability of AKD’s Banking Sector is likely take a tumble as new taxation measures announced in the federal budget hit the sector’s performance hard. Consequently, the sector’s profitability is likely to be down ~40%QoQ while the effective tax rate will likely jump to ~74%.

The worst hit banks will likely be MCB, UBL and ABL which will have to shoulder additional tax burden by virtue of their lower ADRs (all reported ADRs below 40%) while the banks such as MEBL, BAHL and BAFL, owing to their higher lending will be somewhat protected.

Owing to 525bps jump in policy rate in CY22, the unrealized gains sitting on books of our banking universe will squeeze significantly. The matter wasn’t helped by soaring bond yields of Pakistan’s Euro Bonds. This will therefore hit the capital buffers of the banks and the payout capacities of our coverage banks will be materially impacted, resulting in lower payouts during 2QCY22.

The core income however will likely improve significantly owing to i) robust book growth of ~14%QoQ, ii) better asset pricing and iii) huge repo borrowings made to exploit arbitrage opportunities by banking system. However, we may see non funded income disappointing on the back of i) poor equity market performance and ii) volatile currency.

Banking sector has underperformed market by 10.8% so far in CY22 owing to adverse taxation measures taken by the government. The underperformance may continue in the short term as the profitability is likely to be hit and dividend payouts may disappoint. The sector is currently trading at forward P/B of 0.6x. We highlight MEBL as potential outperformer in the banking space.