JS Securities Limited - JS Research 15-04-2022

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JS Securities Limited – JS Research 15-04-2022

April 15, 2022

Karachi, April 15, 2022 (PPI-OT): Banks: Pre-emptive move in yields to partially contain NIMs decline in 1QCY22

We preview the sector’s 1QCY22 earnings where despite a run-up in secondary market yields and KIBOR, we expect NIMs to slightly contract on a sequential basis, leading to a decline in earnings this quarter.

Moreover, despite higher Fee Income, absence of hefty gains similar to 1QCY21 expands our Cost to Income ratio for 1QCY22E to 58% (+500bp YoY).

Alongside result, we expect HBL, UBL, MCB, ABL and MEBL to announce quarterly cash payouts.

MDR increase to outweigh asset price increase

We recap that the spike in bond yields and KIBOR picked up from Oct-2021, however amplified from late Nov-2021. With an average advances and short-term bond portfolio re-pricing age of 3 months, the complete impact of the hike of secondary market yields is expected to reach to late 1QCY22. On the other hand, the impact of Policy Rate hikes of 1.5% in Nov-2021 and another 1% in Dec-2021, would reflect in the sector’s Minimum Deposit Rate (MDR) from the start of 1QCY22.

This has resulted in asset yields witnessing a relatively lower increase than cost of funds. Hence, we expect a sequential decline in NIMs and core income for the sector, with some exceptions. On a YoY basis, core income in absolute terms of most banks is expected to remain at similar levels as compared to 1QCY21.

Cost to Income ratio may surge

On non-core income front, the key earnings head item – Fee Income, is expected to continue double-digit growth this quarter over normal banking activity and higher trade income. On the other hand, likely absence of hefty capital gains this quarter as compared to 1QCY21 would also contribute to YoY decline in profits.

Moreover, administrative expenses are likely to grow by 11% YoY over higher inflation and ongoing expenditure on IT. As a result, our Cost to Income ratio for 1QCY22E expands to 58% (+500bp YoY).

On the taxation front, we expect most of the bigger banks to witness a relatively higher tax rate over Gross ADR below 50%, while most mid-tier banks are expected to report normal tax rate of 39%. Alongside the results, we expect HBL, UBL, MCB, ABL and MEBL to announce quarterly cash payout.