AKD Daily November 26, 2013 Banks: Oct’13 spreads at 6.2% Weighted average banking sector spreads for Oct13 have clocked in at 6.20%, down by 11bpsMoM/57bpsYoY. This was the first month in which the linking of the savings a/c rate floor to the DR became effective and brings the 8MCY13 average spread to 6.26% vs. 7.11% in the corresponding period last year. At this run rate, it appears that 4QCY13 spreads are headed for their lowest quarterly level of the ongoing calendar year. Heading into CY14F however, we see a marginal uptick in spreads as interest rates rise while other positives include continued strong balance sheet growth (+14%YoY at last reading), declining credit costs with systemic coverage at a 5yr high of 74% and opportunity to book capital gains on equity portfolios with the KSE-100 Index having gained 42%CYTD/ 14%FYTD. This should drive ~10%YoY NPAT growth for our coverage banks in CY14F after a soft CY13. Within this backdrop, we would take any dip in banking sector share prices to build positions in quality names such as UBL and ABL. At the same time, while not under our formal coverage, hitherto underperforming banks such as SBL, FABL and BOK could also depict a catch-up rally. Spreads close to bottoming: Provided no further tweaking of the savings a/c rate floor takes place, we believe spreads are close to bottoming and will likely depict an uptick in CY14F as interest rates continue to rise (we see a further 100bps uptick in the DR across the remainder of the fiscal year). In this regard, although weighted average deposit costs have depicted an uptick, averaged lending yields have yet to re-price even as the DR was raised by 50bps in Sep13. Investment perspective: Within the backdrop of SBP steps to tighten interest rate margins, 4QCY13 spreads may be headed for their lowest quarterly level of the calendar year. That said, we see marginal uptick in spreads in CY14F which coupled with strong balance sheet growth, lower credit costs and opportunities for capital gains should drive a rebound in earnings next year. At current levels, we prefer UBL and ABL and flag SBL, FABL and BOK as potential catch-up rally plays.
Posted on: Tue, 26 Nov 2013 06:39:47 +0000
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