Karachi, September 28, 2021 (PPI-OT): Pakistan bank: Sector exhibiting robust asset quality

Banks under our coverage – representing 60.8% of industry advances – have witnessed significant contraction in NPLs buildup with infection ratio spiraling down to 5.3% in Jun’21 compared to 5.9% at the start of the year.

In absolute terms, NPLs stand at PkR292.0bn, down 3.0% since the beginning of the year whereas normalizing for currency appreciation transpired in 1HCY21, NPLs have remained flat. A closer look featured offsetting trends between domestic NPLs (down 4.1% in 1HCY21) and overseas NPLs jumped 4.0% (ex. of exchange rate gains) – attributable to resurging asset quality issues in UBL international loan book.

Banking spreads for Aug’21 clocked in at 4.3% flat MoM, undergoing seasonal dynamics. Fresh spreads stood at 4.52% compared to 4.90% as banks pushed to capture financing demand (advances: +0.7%MoM vs. avg. 0.2%MoM in Aug since 2002).

From investment perspective, banking sector has returned -ve 2.0% however, with the Central Bank moving the needle and signaling further rate hikes, the long-gone interest should return in the sector which would be magnified in our view as Govt. caps Pakistan’s growth trajectory necessitating move to value stocks. We like mid-tiers over top-tiers which are likely to face pressure on account of MSCI-related rebalancing.