Pakistan’s macro indicators have improved over the past few months
and the SBP has started to loosen monetary policy to boost growth.
Despite this improving outlook, we believe Pakistan banks face
another challenging year, as our concern has shifted from asset quality
to margins, due to the monetary easing. We estimate aggregate NIM for
our banks will contract by 28-69 bps over CY09-10, as asset yields are
mostly floating in contrast to funding costs, which are more static.
Asset quality and loan growth should benefit from monetary easing
though we expect credit costs to remain elevated as NPLs jump
buckets and loan growth to remain weak in CY09 due to slow economic
growth and a peaking credit cycle.
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Pakistan banks have outperformed the domestic market and regional
peers as the market has recovered from the panic after the removal of
the price floor in 4Q08. Valuations have recovered sharply and appear
to be stretched in the case of MCB and ABL.
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On an aggregate basis, we have lowered our earnings estimates by 17-
13% over CY09-10 to reflect lower margins, easing asset quality
pressure and stronger loan growth. At the same time, we have lowered
the risk-free rate to 13% for valuation purposes. We are maintaining
our MARKET WEIGHT stance on Pakistan banks, while upgrading NBP
to an OUTPERFORM (target price implying 41% upside potential) from
Neutral and downgrading MCB to an UNDERPERFORM (target price
implying 21% downside risk) from Neutral. We are continuing with our
NEUTRAL rating on UBL and HBL, and UNDERPERFORM on ABL.