Lahore - Banking sector advances to private sector have climbed up during Feb 2015 in contrast to seasonality, where credit to private sector increased by Rs13b to Rs3.3 trillion. Major off-take was witnessed in food products and energy sector. Textile sector, on the other hand, retired loans worth RS11 billon. That said, demand for credit from private sector has remained slightly depressed during 2MCY15 due to lower credit demand from Food and Textile sector. Going forward, we expect private sector credit to gain pace owing to monetary easing environment and demand from the energy sector.

Despite ongoing monetary easing, banking sector spreads have improved by 10bps to 5.89 per cent in Feb 2015 versus 5.79 per cent in Jan 2015. The expansion is primarily attributed to immediate re-pricing of savings deposits while it takes some time for return on advances to fully incorporate lower interest rates. However, on year on year basis, weighted average spreads declined by 16bps. Experts see compressed spreads in the longer run on the back of lagged impact of recent 150bps cut in SBP policy rate (during Jan-Mar 2015) on return on advances portfolio which would bring down lending rates of the sector. They continue to like Pak Banks despite another 50bps cut in discount rate by the State Bank of Pakistan (SBP). They believe recent underperformance of the banking sector remains unjustified given a muted 1-7 per cent valuations impact driven by -2.2 per cent to +0.9 per cent earnings revision for 2015E and -5.3 per cent to +0.6 per cent for 2016F on the back of shift in sizable high-yielding assets to low-yielding assets during 2016. They flag the magnitude of monetary easing impact on Pak Banks has shrunk post linkage of Minimum Deposit Rate (MDR) to the interest rate corridor. Their top picks amongst Pak Banks are United Bank Limited and Allied Bank Limited, as they trade at 2015E P/B of 1.24x and 1.22x, respectively. However, introduction of the Target Rate remains a key risk for the sector. Contrary to expectations, SBP did not mention the Target Rate in its Monetary Policy Statement (MPS), which can potentially wipe out banks’ 2016F profitability by an average 16 per cent. However, SBP still has three more MPS announcements before its deadline to introduce the Target Rate.