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  1. The KASB review
  2. Finex week

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 interest rates

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 OVERWEIGHT.

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