AKD Quotidian about — Banks: Emergent Trends

Karachi, December 10, 2013 (PPI-OT): Latest banking sector data indicates that banks’ balance sheets continue to grow at strong levels (13%YoY) which is all the more impressive considering the renewed drive for CASA accounts.

According to AKD Securities Limited, at the same time, asset quality appears to be in control with data available so far suggesting even 4QCY13 provisions should be sedate. Encouragingly, private sector credit offtake is on an uptick (5%+ YoY at last count) even as there has been a net retirement of loans from the energy chain over the last year. In this regard, sectors attracting fresh credit inflow include Agriculture, Food, Textiles, Paper and Board and Electricity machinery, among others. Moreover, consumer financing (ex-banks employees) is now increasing by more than 15%YoY, levels not witnessed since mid-CY07. While these are emergent positives, AKD Securities Limited reiterates that 4QCY13 is nlikely to alter what has been a soft year for banks earnings. That said, AKD Securities Limited draws attention to the anticipated return to growth in CY14F where AKD Securities Limited retains a selective preference for UBL, BAFL and NBP.

4QCY13 trends: Banking sector data at end-Nov’13 indicates that systemic deposits have increased by 13%YoY to PkR7.3tn. In this regard, banks have continued with their preference for risk-free GoP securities, there is an encouraging uptick in credit offtake over the last few months that is starting to result in stabilization of the Loan/Deposit ratio at ~50%. At the same time, provisions in the first two months of the ongoing quarter appear to be sedate although AKD Securities Limited notes that banks typically tend to book last minute charges at the end of the calendar year.

While there are emergent positives, tighter SBP directives on savings a/c imply that 4QCY13 is unlikely to change what has been a soft year for banks earnings (ex-NBP AKD Securities Limited sees the AKD Banking Universe’s profitability declining by 1.1%YoY in CY13F). AKD Securities Limited directs investor attention to CY14F which is likely to deliver growth again.

Uptick in credit offtake: Banks continue to prefer GoP securities, with investments up by 12%QoQ to exceed PkR4.0bn, while loans to PSEs are up by a robust 26%YoY. That said, selected sectors such as Agriculture (Crops/Livestock), Food, Textiles (led by Weaving/Finishing), Paper and Board and Electrical machinery have witnessed fresh inflow of credit. As a result, private sector credit offtake is now increasing at 5%+ levels for the first time since mid-CY11. And this is despite commerce and trade availing working capital finance only and loans to the Energy segment lower on a YoY basis due to conversions into bonds. Furthermore, consumer financing (ex-banks employees) is now increasing by more than 15%YoY, levels not witnessed since mid-CY07 as banks refocus on auto finance and personal loans.

While this casts concerns over asset quality down the road, consumer financing at present is just about 8% of private sector loans vs. almost 17% at peak. As a result, with systemic coverage at ~75%, AKD Securities Limited sees credit costs trailing lower over the next few years.

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