Lahore - The big banks of the country are anticipated to register impressive growth despite a 350bps decline in policy rate during 2015. This is due to major investment in high yielding long term Pakistan Investment Bonds (PIBs) by these banks (34% of total deposits) and volumetric deposit growth of around 10% for big banks.

According to statistics, big banks investment to deposit ratio (IDR) reached an all time high of 71%, whereas advance to deposit ratio (ADR) dropped to 44% as of Sep 2015. Net Interest Income (NII) of these banks is projected to grow by 17% to Rs298bn driven by major investments in PIBs and double digit deposit growth.  

Alongside increase in NII of these banks, growth in capital gains is likely to drive earnings of banks in 2015. Analysts of Topline have anticipated in a report that capital gains to grow by 79% to Rs37bn in 2015. Banks have aggressively realized capital gains on PIBs and equities in 2015.

They said that big banks are expected to report record profits of Rs130b in 2015, up 12% YoY. The top 6 banks in terms of deposits, including Habib Bank (HBL), National Bank (NBP), United Bank (UBL), MCB Bank (MCB), Allied Bank (ABL) and Bank Alfalah (BAFL), represent 63% of the total industry deposit, analysts added. 

In 9M2015, big banks had reported capital gains of Rs30bn in 9M2015, up 109% YoY.

Report added that advances of big banks are expected to grow by 4% in 2015 as against 9% in 2014 due to lower working capital requirement and aggregate demand. However, with commencement of China-Pakistan Economic Corridor (CPEC) projects and uplift in economic activity we expect advances of big banks to grow by 13% on average during 2016-18.

Private sector credit has already started depicting improvement. In 2H2015, credit to private sector has grown by 9% as against 7% in the same period last year and 7.5% for the full year 2015.

Despite sharp fall in interest rates and big PIB maturities expected in 2016, banks still trade at attractive multiples. Banks are currently trading at attractive forward PE of 7.2x and PBV of 1.2x and ROE of 16% as against PE of 11.7x and PBV of 2.6x and ROE of 19% during high growth period (2007-08). Banks are also offering attractive dividend yields of 8% higher than the prevailing 6-month kibor rate of 6.3%.     

Experts reiterate ‘Overweight’ stance on banking sector. Their investment thesis is based on factors including 1) Improving macros (estimated 2016-18 average GDP growth of over 5%), 2) expected increase in credit growth to 13% in 2016-17, 3) Strong Capital Adequacy Ratio (CAR) of 16% vs 10% requirement).