JS Securities Limited - JS Research.

Karachi -- September 06, 2022 (PPI-OT)

Banks: General provisions help cross 100% coverage

Ongoing economic headwinds, coupled with flash floods, have once again pushed select banks to increase General provisions stock. These are over and above the regulatory requirement of holding general reserves against certain sectors, such as consumer loans etc. and to the already run up to preparing for IFRS 9, which is to be implemented from 1 January, 2023.

We present current position of 12 listed banks at PSX, which shows General provisions have led to almost half of the banks' Coverage ratios to cross 100%. In some cases, general provisioning stock is more than 10% of respective banks' market capitalization and 7% of its total equity.

For CY22 and CY23, we cautiously incorporate ~1% credit cost in sector's earnings, vis-a-vis 50bp annual average credit cost reported during CY10-CY21. To note, General provision stock already amounts to an average of ~1% of performing loan book for select banks.

General provisions (greater than) 10% of market cap in some cases

We present the current position of 12 listed banks at PSX, which shows General provisions have led to almost half of the banks' Coverage ratios to cross 100%. Some banks have General provisioning stock equivalent to more than 10% of their respective market capitalization and 7% of total equity.

To recall, Pakistan banks have been taking support from General provisioning reserves to build a cushion for any unforeseen or probable credit costs. This trend was evident during the pandemic, where banks opted to build General provisions in anticipation of bulk non-performing loans over economic slowdown. Barring limited segments, the pandemic did not result in increasing the sector's infection ratio to the same extent, where banks chose to remain seated on the cushion.

In addition, preparing for application of IFRS 9 has also led the sector to build more General provisions, which has been getting delayed since 2019, with the latest implementation date now standing at 1 January, 2023. We highlight, General provisions are also a prerequisite as per Prudential Regulations of the State Bank of Pakistan for NPLs in consumer financing, etc.

Banks further increase General provision...