Karachi, April 18, 2023 (PPI-OT): Banks: 1QCY23 to mark another quarter of sequential earnings growth

We present earnings preview for JS Universe banking sector's 1QCY23 results (10 banks), commencing from this week, where we expect another quarter that would report sequential growth in bottom-line. While this would be the third sequential bottom-line growth for the sector, on PBT level, it would be the ninth consecutive growth quarter.

While we expect bottom-line to expand, we believe book value growth may be restricted owing to further unrealised losses on Available for Sale investment segment this quarter amid added increase in investment yields. Alongside results, we expect HBL, UBL, MCB, ABL and MEBL to announce quarterly dividends.

We highlight SBP has notified extension of mandatory implementation of IFRS 9 to CY24, versus CY23 previously. While option of voluntary implementation remains, we would need to see if banks reverse any impact of the reporting standard implementation on equity and adequacy ratios disclosed in CY22 financials.

1QCY23E: Profits to improve

We present earnings preview for JS Universe banking sector’s 1QCY23 results (10 banks), commencing from this week, where we expect another quarter that would report sequential growth in bottom-line. While this would be the third sequential bottom-line growth for the sector, on PBT level, it would be the ninth consecutive growth quarter. Alongside results, we expect Habib Bank (HBL), United Bank (UBL), MCB Bank (MCB), Allied Bank (ABL) and Meezan Bank (MEBL) to announce quarterly dividends.

Though we expect bottom-line to expand, we believe book value growth may be restricted owing to unrealised losses on Available for Sale investment segment amid increase in investment yields. During 1QCY23, 3Y secondary market yields have inched up by ~250bp, while 5YR yields have increased by ~40bp. The same may also keep adequacy ratio increase restricted.

On asset re-pricing

The ongoing monetary tightening cycle, compounding with consistent asset growth is expected to improve core income in 1QCY23 by 4%/64% QoQ/YoY, respectively, where we expect Islamic banks to outperform peers. We expect higher growth in Investments, as compared to Advances, that may drive the asset growth.

In addition to asset repricing effect from previous earlier Policy Rate hikes, earlier KIBOR movement prior to the Jan-2023 (+100bp) and Mar-2023 (+300bp) Policy Rate hike is expected to reflect in 1QCY23 topline growth. Moreover, gradual shift of partial corporate loans to 1M KIBOR may also add to the growth.

Increase in Cost of funds to be restricted

We expect the higher revenue growth to outpace increase in deposit and borrowing costs this quarter where the sector witnessed 100bp increase in deposit rate costs in Jan-2023. To note, the deposit rate impact of 100bp Policy Rate hike in Nov-2022 was reflected in 4QCY22, where the 300bp hike impact of Mar-2023 will be reflected in 2QCY23’s deposits. While we expect muted deposit growth, expansion in current account mix is likely to continue.

Moreover, quantum of borrowing is also likely to increase, which was raised by the sector during 1QCY23 to partially fund Investments. In addition to that, the earlier asset yield movement may also expand spread over borrowings this quarter as the Repo borrowing rate change is implemented with the Policy Rate announcement. For perspective, prevailing spread between shorter tenor secondary market yields and borrowing rate averaged to ~200bp during 1QCY23, which was higher than historical average of ~150bp.

Growth in expenses to continue

We expect operating expenses growth to continue amid higher inflation trend this quarter, resulting in a slight increase in Cost to Income ratio. On a sequential basis, we expect 5% higher operating expenses, taking YoY growth to 28%. As a result, we expect Cost to Income ratio to increase to 45%, +78bp QoQ.

Extension of IFRS 9 implementation

On credit cost front, we highlight the State Bank of Pakistan (SBP) has recently notified an extension of mandatory implementation of IFRS 9 to CY24, versus CY23 previously. While in the same notification, the option of voluntary implementation was reiterated by the regulator, we would need to see if banks reverse any impact of the reporting standard implementation on equity and adequacy ratios disclosed in CY22 financials.

We prudently assume 100bp (annualized) credit cost expecting record-high inflation and interest rates to bring some pressure on borrowers. We also expect some impairment on international bond Investments given Fitch’s rating downgrade for Pakistan in 1QCY23.

Effective tax rate likely to clock in at 43%

On taxes front, we expect effective tax rate of 43%, with Corporate Tax rate at 39% and Super Tax at 4% from CY23. While all banks under our coverage are expected to maintain Gross ADR above 50%, higher tax on income from federal government securities for banks reporting less than 50% ADR has been removed for Tax Year 2024, which is CY23.