March 14, 2012   Brokerage   No comments

AKD Quotidian about — Banks: Rerating can continue

Karachi:  The listed banking sector has now gained 33%CYTD, following which the sector’s weighted average trailing P/B and P/E multiples have rerated to 1.1x and 6.9x, respectively.

According to AKD Securities, in this regard, banking stocks are rerating following robust CY11 results; AKD Banking Universe profits are up 25%VoY white select small and medium-sized banks have on average more than doubled their YoY profitability. As such, the sector’s weighted average ROE has climbed to 16.7% which, in AKD Securities’ view, just about justifies a P/B multiple of 1x. However, considering that banks are likely to continue with a double-digit growth trajectory in CY12F, sector ROEs have the potential to climb to 18% in CVI2F (and further to 18.5% in CY13F) led by improvements in some of the smaller and medium banks. This could potentially carry forth the ongoing valuation multiples rerating process. While UBL (ex-dividend TP: PkR88/share) remains the top pick from AKD Securities’ formal coverage cluster, some of the cheaper listed banks, particularly from a medium- term perspective, are BAFL, SNBL, HMB and BIPL. Following robust recent price outperformance, relatively pricey banks (on trailing valuations) are MCB, NIB and SILK.

Banks Trailing Valuations

 

Bank  ROE   P/B(x)   P/E(x) ROE/PB(x) Mid Cap/Deposits
FABL  7.1%    0.47 7.53    15.26     4.2%
SNBL  7.5%    0.51  7.78    14.73      6.1%
SBL   3.4%  0.52 17.88 6.50   23.1%
AKEL 10.1%    0.54 5.65    18.66       3.3%
BOK   8.9%   0.60 7.09 14.71      14.2%
SMBL     n.m   0.67 n.m    n.m      4.6%
NBP   13.3%    0.68   5.22 19.48    10.0%
BIPL 8.1%   0.70  9.09   11.60  7.4%
HMB   14.7% 0.76   5.65   19.37   10.0%
JSBL  4.6% 0.77 18.81  6.39  16.9%
BAFL  18.2%   0.83  5.00   21.79     0.4%
UBL 18.5%   1.03   5.97  17.87   14.0%
HBL   21.7%   1.16  5.85  18.19   14.0%
SILK   13.3%   1.32 10.72  10.04   11.6%
ABL   25.6%  1.45 5.76 16.64  14.6%
SCBPL     19.6%  1.41  7.64  14.05  16.6%
MEBL 22.4% 1.40   6.97   19.61  12.5%
BAHL     25.0%   1.44  6.75  17.41  9.5%
MCB   22.2%   1.63  7.75  13.61    70.5%
NIB  n.m  2.19   n.m    n.m 35.1%
Wghtd Avg 16.7% 1.68 8.66 15.58     13.0%
BS Annualized from 9MCY11 Adjusted for goodwill   Source: Company Reports and AKD Research

 

Investment Perspective: AKD Securities estimates that if combined sector profitability increases by 20%YoY in CY12F and trend of payouts remains consistent, banks’ ROE may reach 18% in CY12F from 16.7% in CY11. While upcoming capital injections (e.g. BIPL) may dilute immediate-term ROE, AKD Securities believe some select small and medium banks have experienced a sustainable turnaround where ROE expansion over the medium-term should continue driving the rerating process for them. In this regard, while AKD Securities will update AKD Securities’ financial models shortly, an indicative forward P/B multiple of 1x would price BAFL at PkR231share while a 08x P/B multiple for HMB, SNBL and BIPL would value these banks at PkR22/share, PkR11.5/share and PkR9.2/share, respectively. Risks remain insofar as potential macroeconomic slippage constricts multiples expansion even as profits/ROEs continue to rise.

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