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Index retains rally as no reflect of political development observed

Pakistan Stock Exchange (PSX) retained momentum during the week ended 1st November 2019, gaining 2.14%WoW to close at 34,338 points after remaining under pressure in the backdrop of FATF developments and application of ‘minimum brokerage commission’. Average daily trading volume improved to 166.3 million shares, up 33.5%WoW. Top performers included CHCC, PIOC, DGKC, ASTL and PSO, while laggards were HASCOL, NCL, FFC, MEBL and OGDC.

Market was driven by: 1) resolution of issues between the government and traders, 2) decline in PIB yields raised expectation of an early interest rate cut, 3) delay in implementation of axle load policy for one year and 4) expectation of revision in OMC margins. Further impetus was provided by surprises in result: PSO posting higher inventory gains, HUBC receiving higher capacity payments and share of profit from CPHGC and PAEL registering low inventory costs and manageable debt levels, higher than expected results reinvigorated sentiment.

The market did not give much attention to the on-going ‘Azadi March’. Participation wise, Companies and Mutual funds emerged net buyers absorbing selling by foreigners, Banks and Insurance. Apart from OMCs and Cements, major performances were witnessed in Power, on possible issuance of Power Sukuk by year-end or early part of next year, and Commercial Banks, on the flipside Textiles witnessed selling on weak earnings announcements. Analysts believe market performance over the short-term could be dictated by the developments surrounding the ‘Azadi March’ and news flow relating to IMF review. Focus on inflation numbers for October 2019 can shape expectation of interest rate cut, through monetary policy announcement due later in November.

October 2019 can be termed a month of two halves, introduction of minimum brokerage commission by Pakistan Stock Exchange resulted in decline in volume by 41% to 144 million shares in the second half and benchmark index remaining flattish during second half, as against 6.2% gain in first half. FATF’s decision to keep Pakistan on grey list till February 2020 further dampened the market sentiments and kept the investors on sideline. Meanwhile, developments on the local political landscape – the ‘Azadi March’ – added to the market volatility. Overall, benchmark index returned 6.6%% during the month, closing at 34,204 points, while the average daily trading volume for the month was recorded at 192 million shares, being the highest monthly volume during last twelve months. Within market participants, Individuals and Others were the major players absorbing the selling by foreigners, banks and mutual funds. Market performance is likely to be dictated by macro headlines going forward. In this regard, monetary policy announcement later this month is an important checkpoint. Additionally, clarity on privatization of E&Ps (OGDC and PPL are heady, nameplate capital market transactions) and clarity on issues revolving around certain industries such as circular debt and decision on GIDC, should drive performance in these sectors in the medium term.


MCB Bank (MCB) held its conference call to discuss its financial performance for 9M2019. The Bank posted an EPS of Rs4.8; up by 38%YoY for 3Q2019, while cumulative EPS for 9M2019 rose to Rs13.6 up by 19%YoY. IFRS-9 implementation will begin from 1st January 2021. Based on impact assessment on 2017 balance sheet, the bank expects a one-time provision of Rs5.9 billion. The management has also highlighted some issues regarding implementation of IFRS-9 which the management expects to be resolved by next year. The problems include FSV benefit, taxation related impact and practical issues with respect to repayment days pertaining to corporate clients.

Average overall PIBs yield were reported around 12.13%, while floating PIBs yield settled at 14.1%. The PIBs amounting to Rs34 billion are scheduled to mature in 1Q2020, which will yield an average of 7.5%. The bank’s total PIB to investment base clocks around 30%.The management anticipates deposit growth of around 10% over the next 2 years, while advances are expected to accrete by up to 6% during this period. The Bank’s cost to income ratio settled at 45.8% as compared to 51% in the corresponding period last year.

MCB has recovered Rs4.5 billion out of Rs29 billion during 9M2019. The management eyes strong fee income growth beginning 2Q2020, after the implementation of new card management system. Operating expenses increased by 6%YoY to Rs9.8 billion, which were lower than the budget. The bank anticipates this expense to grow by 5%YoY during 2020.

National Bank of Pakistan (NBP) reported profit after tax of Rs16.6 billion (EPS: R7.81) for 9MCY19 as compared to Rs16.2 billion (EPS: Rs7.59) for the corresponding period last year. On a quarterly basis, 2QCY19 net profit was reported at Rs5.2 billion (EPS: Rs2.47), down 25.9%QoQ. The result was in line with market expectation. On a quarterly basis, Net Interest Income (NII) registered a decline of 8.4%QoQ which could be due to leveraged balance sheet growth, with lagged re-pricing of assets also contributing to fall in income. Non-Funded income declined 25.6% attributable to fee income dropping 28.3%QoQ to Rs4.4 billion as a result of seasonality usually associated with the quarter. Additionally FX income diminished to Rs869 million during 3QCY19 as compared to Rs1.7 billion in the last quarter. Effective tax rate remained stable at 40.6% in 3QCY1

Hub Power Company (HUBC) announced higher consolidated profit after tax of Rs5.6 billion (EPS: Rs4.29) for 1QFY20. The result was above expectation due to higher than expected gross profit and share of profit from associates contributing Rs1.8 billion. Higher earnings for 1QFY20 can be attributed mainly to: 1) a 55%YoY increase in gross profits led by 27% rupee depreciation and lower utilization of inefficient Hub base plant along with, 2) profits from 47.5% holding in China Power Hub Generation Company (CPHGC) reported at Rs1.8 billion EPS: Rs1.44 as the unit commenced commercial operations in mid August 2019. The impact of new coal based power plant running at full capacity would be more visible in the upcoming quarter. Finance cost and admin cost were up keeping the bottom-line growth in check. On sequential basis, a 24% higher finance cost was the only major earnings dampener due to higher policy rate. HUBC did not announce any dividends along with its 1QFY20 results, constrained by debt-based capex financing. Analysts await management clarification on capex plans for its upcoming water desalination project before updating investment case of HUBC.

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