An exclusive weekly Stock Market report for PAGE
by Khadim Ali Shah Bukhari & Co.
Updated on Jan 31, 2000
The KSE 100
Overview: The Correction Continues
The technical correction continues. The KSE 100 failed to gather
support at the 1750 levels and close at 1749, translating into a drop of 5.57% over the
week. Eventually a major correction would pull the index down by 200 point where our major
support would be tested.
Adding to the technical correction was news concerning US statements
concerning Pakistan's alleged involvement in terrorist activities which saw the market
losing around a 100 points in one single day!. With the corresponding clarification by the
US president the next day, the KSE 100 index consolidated lost ground by inching upwards.
During this period the index tried to consolidate the correction and
recovered over 1650 levels but good profit taking at and above 1750 levels was being
witnessed at 1750, both on an individual basis and by institutions as well.
We recommend reduction in exposure and believe that the KSE 100 Index
could be test the 1650 level. If 1650 breaks then the index could slide down to 1450 where
we would recommend aggressive accumulation.
The KSE 100: More Upside Potential
Banking stocks are likely to benefit from further restructuring and low
Earnings set to improve
Banking stocks are set to enter a period of steadily improving earnings
following a painful 3-year restructuring phase. During this period, large banks have
struggled to overcome significant NPL portfolios, high intermediation costs, and rapid
accretion of fresh NPL's as interest rates remained high. During this process, branch
networks of large banks were right sized, with over 500 branches shut down all over the
country. The banks also carried out optimization of the work force, with close to 7,000
employees being laid off. On the balance sheet size, strict discipline imposed by the
State Bank forced these banks to take large provisions on their loan portfolios, while
keeping asset growth under tight check.
Lower Interest Rates
With a dramatic reduction in real interest rates over the past 12
months, we believe banks are poised on the verge of a dramatic earnings recover. The
Governor of the State Bank, former World Bank official Ishrat Hussain, hinted at a further
reduction in interest rates, which we believe stems from the government's policy of
encouraging private sector credit demand growth for fuel an economic revival.
NPL/Total Loans ratio down to 23%
Banks in general have low loan/deposit ratios, with the Top 5 banks
having a loan/ deposit ratio of just 48% at end 1998. Similarly, aggressive provisioning
over the past 3 years has brought down the NPL/Total Loans ratio down to 23% (Dec 1998).
It is important to note that a massive recovery drive of these loans was fairly
successful, and we estimate current NPL's to be approximately 20% of total loans. The
total recapitalization cost of these major banks works out to 1 % of GDP at present, which
we believe should fall further as earnings recover dramatically for these banks.
Liquidity on the rise
With operating costs well under control, and heavy provisions already
accounted for, these banks are currently flush with liquidity. We believe most of these
banks are likely to start booking assets fairly soon, as ever decreasing returns on
competing governments saving schemes mean banks will have little trouble mobilizing fresh
deposits. Interim results for these banks (due in June) are extremely important in our
view, as we do not expect to see a lot of balance sheet growth up to that point. If this
turns out to be correct, 2HY00 should be a period of strong growth for these banks.
Internal reforms still going strong
It is also encouraging to note that most of these banks are still
pursuing their restructuring programs, with United Bank Limited asking the State Bank for
approval to shut down a further 200 branches (14% of current branches) to rationalize its
network. We remain bullish on the banking sector, and recommend investors to remain
Banking sector has under performed the KSE 100 by 24%
The banking sector has under performed the KSE 100 index by 24%. With
the recent change in economic ground realities and operating conditions we foresee the
banking sector to post encouraging numbers for the future. Remain OVERWEIGHT