LAHORE - With rising investors’ confidence in the new business friendly government, banks have started to accumulate high-yielding government papers that will support Net Interest Margins (NIM). Reducing Non-Performing Loans (NPLs) coupled with adequate Capital Adequacy Ratio (CAR) will further help banks overall growth. In addition, evolution of branchless and Islamic banking will improve bank’s outreach and volumes which in turn will increase overall banking sector profits, experts said. They said that with clear signs of economic recovery, banks in Pakistan will be the key beneficiaries in coming years. As credit appetite has started to grow, local banks are all prepared to finance power, textile, telecom and consumer sectors when credit penetration in Pakistan is at multi year low of 19% of GDP, experts said.

Topline experts in a report said that with likely earnings growth of 31% in 2014 and 16% in 2015, Pakistan banks provide ideal proxy to investors on expected economy turnaround. “We expect that banks multiple will eventually reach the high-growth period (2006-08) average PE of 12.4x and PBV of 2.5x. With average Return on Equity (ROE) likely to reach 17% in 2014 and 18% in 2015, banks offer 17-36% upside from current levels, the report added.

They expect profit growth and price re-rating across banking sector, however, UBL (29% upside) and BAFL (28% upside) seem most undervalued stocks, as UBL has diversified presence in local & International market and strong non-interest income while they like improving asset quality and strong presence in Islamic banking in BAFL.

State owned NBP profits are likely to grow on controlled provisions and new management’s consolidation efforts while large book size and efforts to yield economies of scale would result into further growth in HBL. MCB with sound fundamentals have already re-rated.