AKD Quotidian about — Banks: Spreads bottom out

Karachi, December 26, 2013 (PPI-OT): Following the resumption of interest rate hike cycle, weighted average banking spreads for Nov’13 have clocked in at 6.24%, lower by 43bps YoY but higher by 4bps MoM, the sequential increase primarily driven by higher lending rates.

According to AKD Securities, as a result, spreads have averaged 6.26% in 11MCY13 vs. 7.07% in the corresponding period last year. This means that full-year CY13 spreads are likely to be at their lowest levels since CY04, a key factor behind the flattish earnings trend this year (combined 9MCY13 profitability of listed banks at PkR83.7bn is lower by 2%YoY).

That said, with 1) spreads likely to continue widening going forward (albeit at a sluggish pace), 2) banks looking to aggressively reinvest in GoP securities as interest rates rise and 3) credit costs anticipated Source: SBP and AKD Research to taper off, AKD Securities reiterates that banking sector profitability is likely headed for an uptick in CY14F. Considering the broader market has returned 51%CYTD on top of 49% returns in CY12, AKD Securities flags quality banking sector scrips as relatively secure plays having the potential to outperform in CY14F. At current levels, AKD Securities likes UBL (TP: PkR145/share), ABL (TP: PkR95/share) and BAFL (TP: PkR27/share; which rises to PkR30/share upon successful Warid stake sale).

Textile Exports Nov13PBS recently released exports data for Nov’13 where textile exports declined by 9.5%MoM but grew by 0.9%YoY to clock in at As a result, textile exports for 5MFY14 have clocked in at US$5,684mn, registering a growth of 6.0%YoY. Exports for Nov’13 in most major textile segments were on a downtrend where yarn exports were the worst hit as they posted a quantitative decline of 22.8%MoM as yarn exports clocked in at 43.3k MT. This occurred despite Chinese yarn imports only posting a 4%MoM decline to clock in at 176k MT. Other textile segments also posted declines where cotton cloth posted a decline of 17.5%MoM to clock in at US$194mn. In the high value added segment, Knitwear and Bed wear also posted sharp MoM quantitative declines of 17.5%MoM and 10.9%MoM, respectively. Readymade garments was the only major segment that was relatively flat with a decline of 1.2%MoM. AKD Securities believes the sharp sequential decline in textile exports was due to a prolonged strike by transporters during Nov’13 which affected exports through sea. Going forward, AKD Securities believes the next couple of months may be slightly tough for the sector due to gas curtailment. However, the situation is likely to be better than the same period last year (when there was complete suspension of gas to the textile sector) particularly as the EU GSP Plus status is expected come into play from Jan’14 onwards. At current levels, AKD Securities retains AKD Securities’ liking for NML and NCL within the textiles space with upsides of 10.4% and 21.5% to their respective TPs of PkR141/share and PkR70/share.

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