Among 35 sectors on the Pakistan Stock Exchange (PSX), commercial banks stand out with their aggregate paid-up capital of Rs387 billion and market capitalisation of Rs1.46 trillion.
Around two dozen banks are listed on the exchange. The five biggest banks — MCB Bank, Habib Bank Ltd (HBL), United Bank Ltd (UBL), Allied Bank Ltd (ABL) and National Bank of Pakistan (NBP) — maintain strong balance sheets. These are among the highest valued shares in the sector.
The stock of MCB with the par value of Rs10 is priced at Rs210, HBL at Rs135, UBL at Rs150, ABL at Rs112 and NBP at Rs46.
Due to their high values, banking stocks attract foreign investors, institutions and high net worth individuals (HNWIs). Mutual funds also allocate a sizeable sum to the banking sector. A fund manager, who asked not to be named, observed that some mutual funds had separate financial-sector funds that were invested completely in banks. Overall, most funds allocate around 20-25 per cent of their assets in banking stocks.
With the majority of their purchases in the banking sector, foreign investors turned net buyers of equities in January
Growth in the banking sector slowed down as banks were asked to bear more and more responsibilities, according to the fund manager. In addition to know-your-customer requirements, banks are now supposed to keep watch on any money-laundering activities. “The government and the regulators have absolved themselves of all responsibilities, passing them on to the banks,” he said.
As for mergers, a seasoned banker said the mid-sized banks, such as Habib Metro Bank (HMB), Bank Al Habib Ltd (BAHL), Faysal Bank Ltd (FBL) and Soneri Bank Ltd (SBL), were doing well independently. They met the capital adequacy ratio (CAR) of the State Bank of Pakistan (SBP), faced scarce competition and had diversified shareholdings.
However, he pondered that when Basel III — the global voluntary regulatory framework on banks’ capital adequacy, stress-testing and market liquidity risk — goes into effect, smaller banks may be forced into mergers to keep up with regulatory requirements.
In January 2019, foreign investors on the PSX turned net buyers. They enhanced their exposure in Pakistan equities by $16.5 million with a majority of purchases in the banking sector. “Foreigners are betting on cheaper valuations of banks being net beneficiary of rising interest rates,” Foundation Securities wrote in its research report of Feb 1. After the monetary policy meeting held on Jan 31, the SBP announced an increase of 25 basis points in the key interest rate to 10.25pc — six-year high — taking the cumulative hike since January 2018 to 450bps.
Arif Habib Ltd stated that the robust return on the bourse was led by the heavyweight banking sector, which has 25.4pc weight in the index. The banking sector gained 1,225 points or 13.6pc return in January as enticing valuations of larger banks attracted foreign inflows.
Intermarket Securities provided the perspective of the banking sector in its Jan 1 report. It stated that after a multiyear run of bad loan recoveries and provisioning reversals, the asset quality cycle turned in 2018. Non-performing loans (NPLs) at the end of September 2018 stood at Rs581bn, up 5pc since December 2017.
Although relatively high loan growth thus far had shielded the NPL ratio, it was set to change given the slowdown in the economy and double-digit interest rates.
Analysts believed that the larger banks were better positioned to ride out the challenge. “The loan books of the larger banks appear to be differently structured compared to medium-sized banks. In general, the larger banks have significantly lower ADRs, lower exposure to the consumer segment and higher exposure to the public sector. They have also been more cautious in extending new loans over the last few years, especially in comparison to the medium banks. ABL, MCB and UBL, in particular, appear to have relatively better domestic asset quality dynamics,” Interbank Securities stated.
The big-five banks announced their financial results for 2018 last week. Apart from the investors’ concerns over the Indo-Pak relations, the direction of the stock market was largely determined by the results of the three largest banks. HBL posted a consolidated profit after tax of Rs12.4bn, up 53pc year-on-year mainly because of a hefty penalty that the bank booked in the preceding year.
MCB posted a net profit of Rs20.4bn against Rs22bn a year ago. UBL recorded a profit of Rs15bn against Rs25.9bn in the preceding year.
Published in Dawn, The Business and Finance Weekly, February 25th, 2019