COVER STORIES - Banks to keep strong core performance.

Byline: SHABBIR KAZMI

According to Inter Market Securities pre-tax 2QCY23 profits for its Banking Universe is expected to rise 10%QoQ, reflecting strong core performance. However, net earnings may come off by 15%QoQ due to retrospective impact of super tax (10% against 4% previously). Payouts should remain broadly intact.

Domestic asset quality has remained resilient, which should keep the cost of risk in check. Impairment, if any, should also be contained compared to the last few quarters. The brokerage house expects Meezan Bank to stand out due to the lagged asset re-pricing this quarter.

Bank scrips have risen 12% since the signing of IMF SBA facility with default fears put to rest for the time being. Valuations are still attractive.

The brokerage house expects its Banking Universe to report cumulative profits of PKR65 billion for 2QCY23, lower by 16% QoQ (pre-tax profits up 10%QoQ). Key highlights include: 1) modest 5%QoQ rise in NII due to initial re-pricing of liabilities - asset re-pricing to reflect more acutely in the upcoming quarter, 2) muted cost of risk as asset quality continues to hold, 3) tepid growth in non-interest income with income from foreign exchange normalizing, 4) a 30%YoY growth in admin expenses as inflation has been high, and 5) a high effective tax rate (56% on average) due to retrospective impact of 10% super tax applicable on 1QCY23.

The brokerage house expects decent cash payouts to continue even if earnings come off. UBL should stand out again in terms of payout, going by the bank's evident new strategy on this front.

NII is expected to depict a sharp 58%YoY growth on strong margin expansion (500bps increase in interest rates CYTD). However, on a sequential basis the brokerage house estimates more modest 5%QoQ growth led by initial re-pricing of the deposit base - having grown quickly since removal of ADR related taxation. Total assets of its universe grew by 20%yoy, with total deposits growing at 19%YoY to PKR25.4 trillion as per sector data. Banks with a more efficient deposit mix are likely to stand out on this front (BAFL, MEBL, and BAHL). The brokerage house expects earnings to accelerate in 2HCY23, provided higher taxation does not repeat.

The brokerage house expects its covered banks to register an annualized cost of risk of 10bps in the coming results as against 30bps in CY22. While some banks may witness ageing, coverage levels of the sector remain at a high 100%. The recent discussions with the...