AKD Quotidian about — Banks: Opportunities in Medium/Small space

Karachi, July 22, 2013 (PPI-OT): Since Dec 31’12, the Big-6 banks have on average gained 52%, outperforming the banking sector by 10% and the broader market by 13% in the process.

According to AKD Securities at the same time, top-tier medium-sized banks such as SCBPL and NIEBL have each gained 30%CYTD. AKD Securities attributes this valuation rerating to 1) an overdue price performance catch-up rally. 2) consensus that the next move in the DR will be an upward one, 3) improving asset quality and 4) some expectations that the SBP may reduce the rate floor on savings deposits. Within this backdrop, there are several banks that have actually lost market capitalization over the last 6-7 months.

In this regard, AKD Securities argues that the aforementioned reasons why the larger banks have rallied also apply to the medium/small banks space and that positions may selectively be built up in the latter. While AKD Securities flags that stock-specific issues remain (e.g. poor asset quality/relatively low capital strength), banks that trade at deep discounts to book and that have yet to rally, thereby potentially outperforming over the near-term, include AKBL, JSBL and BIPL, among others.

Dissecting the rally: Since Dec31 12, banking sector gains of 42% have exceeded the market’s 39%CYTD return with the Big-6 banks (-i-52%CYTD on average) at the centre of this valuation rerating. In addition to what AKD Securities perceives as an overdue price performance catch up-rally, AKD Securities flags firm expectations that the monetary easing cycle is at an end (inflation has bottom out; IMF program imminent), improving asset quality (systemic NPL stock poised to come off) and anticipation that the regulator may adopt a more accommodative approach (possible reduction in savings a/c rate floor).

Selective opportunities: Typically, the larger, more profitable banks tend to re-rate first followed by medium and finally by the smaller banks. In this regard, the Big-6 banks have on average returned 52%CYTD, medium banks (PkR100bn

Upside potential? Based on a combination of P/B multiples, the oft ignored market cap/deposits ratio and CYTD price performance (or lack thereof), AKD Securities flags AKBL JSBL and BIRL as banking sector scrips that may now potentially outperform over the near-term. While ~ie do not expect these banks to suddenly start converging to book values, AKD Securities believes the case for a lagged rerating is strong. In this regard, AKD Securities eyes upside of 23%-30% provided price performance catches up to that of their respective peer groups in this calendar year.

While AKD Securities does not formally cover these stocks, this would tentatively price AKBL at PkR2O.44/share, JSBL at PkR5.45/share and BIPL at PkR8.55/share Other banks trading at deep discounts to book or that have room to rally include FABL, HMB, SNBL, BOK and SBL and these should also depict some a degree of catch-up price performance in KASB Securities Limited views.