THE KASB REVIEW
STOCK MARKET AT A GLANCE
An exclusive weekly Stock Market report by Khadim Ali Shah Bukhari
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
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.
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|ASIA PACIFIC & AUSTRALIA