THE disconnect between the underlying fundamentals of commercial banks and their respective performance at the stock market so far this year has been widening.

Investors’ concerns over banks’ ability to churn in profits during times of falling interest rates are valid. Yet, this alone does not explain the quantum of the drop in banks’ stock prices, acknowledge some market watchers.

Stock prices of all but one of the top 15 listed commercial banks in the country — which accounted for approximately 88pc of industry-wide assets and 86pc of deposits by end-2014 — are down (till March 25) from their level at the start of the year. Standard Chartered Bank was the exception, with its stock rising 0.8pc. (Note: NIB Bank was excluded from the analysis since only 6,100 of its shares were traded during this time, as per KSE data).

The steepest drop — 22.6pc — came in Askari Bank’s (AKBL) stock, which went from Rs23.22 a share to Rs17.98. MCB Bank’s stock followed close, dropping 22.2pc to Rs240.25 a share.

And all these scripts are down double digits from their peaks earlier this year, with AKBL down the most (29.2pc), followed by MCB (28.6pc) and Faysal Bank (27.1pc).

More surprisingly, the drop in equity prices came about as the banks declared stellar CY14 results during the same period. Industry-wide after-tax profits rose a big 45.5pc to Rs163bn, according to central bank data. The yearly increase in annual earnings of the top 15 banks is listed in the table.

From January 1 to March 25, the benchmark 100 index slipped 4.3pc — against the average 14.7pc drop in the stock prices of the top 15 banks

So, what explains this seeming disconnect between the banks’ fundamentals (measured by the improvement in their CY14 earnings) and their stock market performance?

Banks are not immune from the headwinds that are pushing stocks across the board into the red week after week, say some analysts. Yet, from January 1 to March 25, the benchmark 100 index slipped 4.3pc — against the average 14.7pc drop in the stock prices of the top 15 banks.

“Stock prices are [generally] linked with investors’ expectations of future earnings, not past ones. That’s why you see bank stocks down even after they declared good CY14 results. Besides, there are a few regulatory issues that have dried up volumes, but these are impacting all sectors, not just banks,” argued Zeeshan Afzal of Taurus Securities.

“In case of the banking sector, it is an overreaction by the market to two issues. The first is the potential drop in the sector’s earnings owing to the over 200bps fall in the benchmark rate. And the second is the SBP’s decision to introduce a target rate within an interest rate corridor,” Farid Aliani, banking analyst at KASB Securities, told this writer over phone.

“As for the first, [most] banks have already optimised their asset mixes by locking in higher yields on PIBs, which will shield their earnings from erosion. Secondly, the market was expecting the State Bank to include details about the interest rate corridor with its monetary policy statement. But we are still awaiting clarity on that front. Worst case scenario, we expect industry-wide earnings for CY15 to decline 6pc owing to this factor.”

Besides that, many banks have yet to book the entire unrealised gains available to them after the drop in PIB rates. Analysing the top seven banks, Umair Naseer at Topline Securities noted that they cumulatively “carried an unrealised gain on PIBs of Rs62bn at end-2014. These un-booked gains could be used by banks to balance earnings growth going forward, especially in 2016”.

Yet, one market source lamented that the banks’ over-dependence on PIBs. “Given the fall in PIB yields post-monetary easing, it is only reasonable that investors are worried about the subsequent hit to banks’ top lines. And this is reflected in the selling pressure on these stocks,” he said.

Nonetheless, analysts are known to sell optimism during rough times. The elephant in the room — foreign selling — has continued to drive sentiments at the market lately. From January 1 to March 25, foreign investors sold a net Rs12.5bn worth of equities, against having bought Rs2.4bn worth of stocks in the same period of last year.

Much of the outflow has been accredited to the Miami-based hedge fund Everest Capital, which has been forced to sell its positions after five of its six funds imploded owing to bad currency positions. Yet, there have been no confirmed reports about Everest’s individual equity positions and no indication about the extent of its exposure to the Pakistani bourse.

Regardless, banks are widely regarded as a safe bet on the direction of the overall economy. Most sector watchers believe that private sector lending will pick up pace as new projects in energy, infrastructure and real estate near financial close, aided by the multiple cuts in the discount rate. Bank investors surely hope that is the case.

Published in Dawn, Economic & Business, March 30th , 2015

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