504, 5th Floor, Business Avenue, Plot 26-A, Block-6, P.E.C.H.S., Shahra -e-Faisal, Karachi. PHONE : +92 21 3432 6917-19 WEBSITE : www.alt-research.com EMAIL : research@alt-research.com

Sector Update- Banks

AsiaPac | Pakistan | Equities Financial Institutions | Commercial Banks

Visit our Bloomberg page ARPL < go >

Analyst Umesh Kumar +92 21 3432-6919 u.kumar@alt-research.com

Wednesday, 08 Jan-2014

This report has been prepared by Alternate Research and is provided for information purposes only. Under no circumstances it is to be used or considered as an offer to sell, or a solicitation of any offer to buy. This information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. All opinions and estimates expressed in this report constitute our present judgment only and are subject to change without notice. This report is intended for persons having professional experience in matters relating to investments.

Declining ADR in CY13 to hinder banking sector profitability

Source: SBP, Alt- Research

Deposits of Scheduled banks increase by 12.7%YoY According to the data released by SBP, Deposits of scheduled banks surged by 12.7%YoY to stand at PkR7, 529bn in CY13 as compared to PkR6, 683bn recorded in CY12. It is important to note that SBP recently linked minimum deposit rate (MDR) with Reverse Repo rate, Consequently, MDR increased from 6% in Sep-13 to currently 7% in Jan-14. Due to the increase in MDR, total deposits of the scheduled banks increased by 5.7% in last quarter as compared to growth of 6.6% in 9MCY13. Advances surprised in last quarter despite increase in DR. Advances of scheduled banks remained flat during most of the CY13 and in fact depicted decline of 0.7% in 9MCY13. However advances posted surprise g6rowth in last quarter and reached PkR241bn, representing growth of 5.6%YoY basis and 6.3%QoQ. This came at a time when SBP increased DR twice in Sep-13 and Nov-13 to 9.5% and 10% respectively. As per the SBP numbers available with us till Nov-13, non - Govt sector (Inc. private sector) credit off-takes grew by PkR184bn in 4QCY13 increasing by 5.7%. At times when Policy rate was going down in 9MCY13, credit to Non - Govt sector portrayed decline of 2.6%.

*Credit Off- takes updated till Nov-13 : Source : SBP, Alternate research

Investments increase in 4QCY13 as expected. We anticipated increase in investments of scheduled banks after the increase of 100bps in DR by SBP. SBP In the last few auctions govt raised handsome amounts from banks through auction of 3M and 6M treasury bills. As a result, investments showed growth of 5.07%QoQ(PkR196bn) to stand at PkR4,1trn. Going Forward We expect SBP to increase DR further by 50bps in CY14 and as a result Deposits are further expected to grow after linking of MDR with DR. However, growth in advances will not outpace growth in deposits in absence of uncertain investment climate coupled with unresolved energy issues. However, in long run, we expect advances to increase as the new Govt continues to address energy problem and introduce business friendly policies.

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1QCY13 2QCY13 3QCY13 4QCY13

QoQ Growth

Advances Deposits Investments

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2,500

2,700

2,900

3,100

3,300

3,500

3,700

3,900

4,100

1QCY13 2QCY13 3QCY13 4QCY13

PkR (bn) Credit Off - take

Non- Govt Sector Govt Sector

Non- Govt Sector Govt Sector

Source: SBP, Alt- Research

PkR (in bn) CY12 1QCY13 2HCY13 9MCY13 CY13

Advances 3,857 3,873 3,869 3,831 4,071

Deposits 6,683 6,777 7,316 7,125 7,529

Investments 3,889 4,024 4,129 3,873 4,070

Non- Govt Sector credit off-take 3,335 3,365 3,217 3,248 3,431

Govt Sector credit off-take 440 367 508 487 442

ADR 57.7% 57.2% 52.9% 53.8% 54.1%

IDR 58.2% 59.4% 56.4% 54.4% 54.1%

Analyst Certification

The analyst primarily responsible for the content of this report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is or will be directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

Important disclosures and disclaimer

Information has been obtained from sources believed to be reliable but Alternate Research does not warrant its completeness or accuracy. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. Investors should consider this report as only a single factor in making their investment decision. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. All prices are those at the end of the previous trading session unless otherwise indicated. Additional information will be available upon request. Any opinions expressed herein are statements of our judgment as of the date of publication and are subject to change without notice. Reproduction without written permission is prohibited. Readers are advised that this analysis report is issued solely for information purposes and is not to be considered as an offer to sell or as the solicitation of an offer to buy. Past performance is no guarantee of future results. This report is not an offer to buy or sell or the solicitation of an offer to buy or sell any security or to participate in any particular trading strategy. Alternate Research may have an investment or trade securities or other instruments of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Alternate Research may enter into transactions with companies mentioned in this report and there may be a potential conflict of interest. Employees of Alternate Research not involved in the preparation of this report may have investments in securities or other instruments of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Alternate Research and its affiliate companies do business that relates to companies covered in its research reports, including corporate finance advisory, underwriting, fund management, investment services and investment banking. This document is issued to the person to whom Alternate Research has issued it. This document is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This document is not intended as an offer or solicitation with respect to the purchase or sale of any security. This document is not intended to take into account any investment suitability needs of the recipient. In particular, this document is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this document. Alternate Research strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this document take into account both risk and expected return. Information and opinions contained in this document have been compiled or arrived at by Alternate Research from sources believed to be reliable, but Alternate Research has not independently verified the contents of this document and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. To the maximum extent permitted by applicable law and regulation, Alternate Research shall not be liable for any loss that may arise from the use of this document or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this document may not be realized. All opinions and estimates included in this document constitute Alternate Researchs judgment as of the date of production of this document, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this document may be reproduced without the written permission of Alternate Research. Neither this document nor any copy hereof may be distributed in any jurisdiction outside the Islamic Republic of Pakistan where its distribution may be restricted by law. Persons who receive this document should make themselves aware of, and adhere to, any such restrictions. By accepting this document, the recipient agrees to be bound by the foregoing limitations. Additional information is available on request. 2