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An exclusive weekly Stock Market report by Khadim Ali Shah Bukhari & Co.

Updated on Jul 17, 2000

Low volumes and a very tight trading range clearly indicative of investor apathy and lack of new investment themes characterized the market behaviour last week. The market showed some signs of life towards the end of the week, which helped it to close at 1539.77, up 1.6 per cent from its opening level of 1514.86.

Over 90 per cent of the companies in key sectors such as leasing, mutual funds, modarbas, paper and board, investment banks, synthetics, etc. had their financial year closings on June 30. We believe that expectations of dividend yield announcements by these companies should provide some support to the market in the near term.

A lot of activity was noticed in the World Call scrip. As the market recovered from its earlier collapse, the stock's price registered a healthy upward movement showing good volumes. Judging from its brisk price pick-up (9.5 per cent), it seems that the scrip is drawing a lot of attention from speculators. However, a small float implies high volatility. Al Faysal Bank Limited moved up 33 per cent, driven by a better interim payout, whereas Adamjee was another good mover (up 8 per cent), indicating that investors continue to hunt for relatively cheaper scrips.

Overall, low volumes once again this week mark the consolidation phase the market has entered into. The index is consolidating in a triangle with the ceiling at 1550, and an ascending base. The converging point of the base and the ceiling is not too far away, so we feel that a breakout could be imminent in the forthcoming week.

As the process of consolidation continues, 5 DMA has sustained over 20 DMA, which is a positive trend indicator. The immediate strong support is at 1500 levels. A breakout above 1550 will confirm the second wave, of which minimum upside potential will be 1700 levels.

MCB FY99 update

  • Full year PAT of Rs568.95mn, up 43% from the previous fiscal year
  • 15% cash dividend paid out, and 10% bonus
  • Maintained net interest margins, despite falling rates in the economy, with substantial success in reducing cost of funds
  • As expected, forex earnings took a hit in FY99, this situation is likely to continue into FY00 and beyond
  • NPLs increase by Rs 4bn, despite a nominal growth in advances
  • Effective tax rate declined to 53%

Muslim Commercial Bank showed substantial improvement in its profitability in the fiscal year 1999, with a 28% rise in profit before tax, despite net interest income remaining almost stagnant with 4% growth. This is all the more commendable as management opted to provide fully for almost Rs400mn as provision for staff compensation related to previous years' downsizing. At the same time however the negative impact of this extraordinary item on the bottom line was mitigated as management adopted a relatively aggressive stance in not recognizing any net provision against NPLs. This is surprising given that gross NPLs increased by over Rs4bn in FY99, but management claims that they have fully met all SBP requirements.

The most impressive element of the results is that MCB has been able to maintain its net interest margin in the face of declining interest rates in the economy. MCB improved its cost of funds on the back of the macro shift of depositors out of FCAs, and the great success of MCB's prize draw savings schemes which were cheaper. This allowed MCB to reduce markup paid by 15%, whereas markup only declined by 7%.

As expected, given the SBP's requirement for remitting export proceeds within a week, the banking sector's earnings via forex income has fallen substantially. The previous time limit of 8-9 weeks allowed bank's to take speculative positions on the Rupee in order to make profits, hence now this element of non-interest income will find itself linked more and more with the trade related financing that the bank engages in.

The reduction in effective tax rate to 53% from 58% previously also contributed towards the robust growth experienced in the bottom line. We suspect that better tax management and possible benefits from prior years loan provisioning have accounted for this improvement.

The sector going forward - budgetary implications

Three specific announcements in the budget related to the banking sector and all are expected to have a positive medium-term impact. First, interest rates on national savings schemes have been reduced by 150bps. This brings the cumulative reduction in NSS rates to 600bps since March-April l999.

With one-year T-bills currently yielding around 7%, the latest reduction should help banks that compete for retail savings. Deposit rates have been sticky downwards due to competition with NSS schemes, and so this move should alleviate some of the pressure on banks' net interest spreads.

Secondly, banks that earlier had to pay taxes on interest accrued in suspense accounts related mainly to sub-optimal earning assets, can now treat this amount as a tax deductible item. While the P&L adjustments come through the deferred tax account, thus having no core earnings impact, banks' cash tax payments should come down, implying greater availability of funds to be deployed into earning assets.

Third, the formation of the Corporate and Industrial Restructuring Corporation (CIRC) announced in the budget should finally help the large (mostly public sector) banks to improve their loan books. At present between 30% and 50% of public sector bank loans can be regarded as non-or sub-performing. If even 10-15% of such loans were to be written off from the banks' books, the quality of their balance would improve significantly. While we do not expect any immediate impact on existing listed banks, this development should be seen in the context of the anticipated IPO of Habib Bank Ltd. the second largest bank in Pakistan.







Mkt. Cap (US $ bn) 7.52 7.65 1.73
KSE 100 Index 1514.86 1539.77 1.64
Total Turnover (mn shares) 356.18 401.36 12.68
Value Traded (US$ mn.) 266.98 326.60 22.33
No. of Trading Sessions 5 5  
Avg. Dly T/O (mn. shares) 71.24 80.27 12.68
Avg. Dly T/O (US$ mn) 53.40 65.32 22.33
MSCI Pakistan Index:      
Pak Rs. 105.62 107.81 2.07
US $ 52.04 53.11 2.06



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