Morning Call about Sector update – Arif Habib Limited

Karachi, December 11, 2013 (PPI-OT): Non-performing loans steadily improve

Non-performing loans steadily improve
The State Bank of Pakistan’s (SBP) third quarter banking sector non-performing loans data paints a picture of stable and steadily improving industry core fundamentals.

According to Arif Habib Limited, the stock of NPLs in banks’ and DFI’s portfolios, declined by PKR 11bn to PKR 621bn by Sep’13 end.

PKRbn     NPLs     Net NPLs    Prov.     Net NPLs /      Infection     Coverage
                                         Net Loans         Ratio        Ratio

Sep-12   635.8      193.7      442.1        5.2%          17.1%         69.5%
Dec-12   629.0      183.1      445.9        4.7%          16.3%         70.9%
Mar-13   630.4      178.4      452.0        4.6%          16.3%         71.7%
Jun-13   632.1      169.6      462.5        4.4%          16.3%         73.2%
Sep-13   621.0      148.1      472.9        3.9%          16.2%         76.2%
Source: SBP, AHL Research

Encouragingly, sector’s infection ratio has started to shrug off to 16.2% by Sep’13- end compared to 17.1% in Sep’12. Moreover, the sector has been actively disposing of non-performing parts of their loan portfolios by increasing the provisioning coverage ratio which, as per Arif Habib Limited’s estimates, stands at 76.2% by Sep’13 compared to 69.5% in Sep’12.

Selected Banks’ NPLs (Sep’13)
                    %age of Gross       Infection ratio        Coverage ratio
Banks     NPLs          Loans          Sep-13     Jun-13     Sep-13     Jun-13
ABL      19,692         7.4%            7.4%       7.1%       91.5%      89.5%
BAFL     21,296         8.5%            8.5%       8.6%       68.2%      66.8%
BAHL      3,878         2.4%            2.4%       2.5%       92.3%      86.2%
HBL      50,644        10.2%           10.2%      10.4%       84.0%      84.7%
HMB      17,322        13.8%           13.8%      14.5%       74.6%      73.5%
MCB      24,936        10.2%           10.2%      10.1%       82.4%      85.3%
MEBL      4,842         6.3%            6.3%       5.3%       93.0%      93.3%
NBP      95,569        13.2%           13.2%      12.9%       78.5%      78.8%
UBL      52,438        12.6%           12.6%      13.6%       84.6%      79.7%
Total   290,617        51.1%           10.5%      10.5%       81.2%      80.4%

Continued deleveraging, improving sectors performance pacing down NPLs accretion
Arif Habib Limited suspects banks’ would continue to build-up NPLs albeit with slow pace of accretion. Arif Habib Limited believes the risk of rising interest rates and its subsequent impacts on NPLs would partially be mitigated through further deleveraging loan sheets and improving individual sectors credit exposures. Arif Habib Limited’s talks with different banks’ managements suggested a similar outcome.

Major sectors’ credit disbursements (share of total credit off take)
Sector                                      Dec-12      Jun-13       Sep-13
Agriculture                                   8%          9%           9%
Food                                         11%         13%          11%
Textile                                      21%         21%          21%
Chemicals                                     7%          7%           7%
Power                                        11%          9%          10%
Construction                                  2%          2%           2%
Commerce And Trade                            9%          8%           8%
Others                                       31%         31%          31%
Source: SBP, AHL Research

Nov’13 end deposit growth slowed to 12% YoY
By Nov’13 end, banks’ overall advances stood at PKR 4.0trn, showing a 6% YoY growth, while banks’ advance-to-deposit ratio showed a steady trend at 54.8% by period end. Banks’ deposit, on the other hand, showed a decent 12.2% YoY growth to PKR 7.3trn. With the rising interest rates and improving core fundamentals Arif Habib Limited remains bullish on banking sectors outlook. Arif Habib Limited has a strong preference for BAFL at current prices.

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