Karachi, July 17, 2023 (PPI-OT): Banks: Higher volumes to support 2QCY23E core income growth
We preview 2QCY23 results for the Pakistan banks under our coverage, where we expect contraction in NIMs owing to higher cost of deposits as compared to asset re-pricing.
We, however, expect the jump in deposits witnessed in 2QCY23 to more than offset the potential NIMs contraction, supporting sequential core income growth.
Nonetheless, budgetary measures impacting 2Q taxes and projected higher admin and provision expenses trim our 2Q profits on a sequential basis, resulting in ~25% QoQ profit decline.
We do not expect the same to alter respective banks' dividend strategies, where dividends higher than earnings should also not be ruled out for some banks.
Higher volumetric growth to offset NIMS contraction
We preview 2QCY23 results for the Pakistan banks under our coverage. The 2QCY23 witnessed additional cost of deposit burden of +350bp QoQ on a weighted average basis. At the same time, previous interest rate hikes are expected to reflect asset repricing of ~250bp, leading to contraction in NIMs. We, however, expect the jump in deposits witnessed in 2QCY23 to more than offset the potential NIMs contraction, supporting sequential core income growth. To recall, deposits have jumped 8% QoQ, mostly placed in Investments. We expect NII to jump by an average of 3% QoQ, and by 45% YoY. On the non-interest income end, likely absence of higher loss on sale of securities (for most banks) are expected to offset by normalized FX income, compared to higher FX income reported in 1QCY23 over flat PKR/US$ movement during this quarter. We expect total non-interest income to report at similar levels, compared to 1QCY23.
Taxes and expenses to impact sequential bottom-line growth
On the expense front, we expect higher credit costs, leading to an absolute increase on a sequential basis. Moreover, with the potential increase in Admin expenses growth due to inflationary pressures, we expect Cost to Income to remain sticky during the quarter. We also incorporate the higher taxes announced in Federal Budget FY24. Pertaining to 2QCY23, the sector has been slammed with 10% Super Tax on CY23 income (retrospective impact of 1QCY23). As a result, the quarter will be burdened with 6% additional tax pertaining to 1QCY23’s PBT. Hence, despite higher core income, we expect the sector’s flat non-core income and higher expenses to contract bottom-line by ~25% on a sequential basis.
Dividend announcements expected to surprise
Higher yields would once again expand the sector’s unrealized losses/reduce unrealized gains of ‘Available-for sale’ fixed rate securities, albeit given a smaller yield movement this quarter, the dent is expected to be lower than recent quarters. Banks with exposure to Euro Bonds may receive support from the uptick in Pak Bonds that started in the tail of 2QCY23, resulting in an average price increase of ~50% in the same.
We expect banks to report comfortable buffers to continue with respective dividend strategies. Some banks may also opt for a higher payout than the quarter’s earnings, keeping the stock’s annual D/Y intact, where we highlight UBL among potential candidates for the same.