THE KSE OVERVIEW. A SPECTRUM OF EVENTS ...

The KSE 100 Index closed 36 points up at the 1887 level on Friday for the week. Average Daily Volumes (ADV) remained high and increased by almost 3% to 224mn shares, from 218 mn shares, last week. The overall market remained choppy, while firm, on the basis of a spectrum of events, where the active scrips were PSO, PTCL, Hubco, NBP, FFCJ, Engro and PTA Pakistan.

After PSFL's privatization, market sentiments became positive regarding Engro, due to the expectations of Dawood becoming more aggressive on taking over Engro after both of these companies lost the bid in PSFL. This led Engro up 2% to close at 75.85, while it was trading spot during the week. While PTCL, being the safest investment avenue amongst other blue chips remained very active during the week with the highest volumes of 400mn shares.

Above all the market, PSO remained the main attraction during the week, where the confused sentiments of investors, regarding the confirmation of oil distribution margin's increase, kept the Index choppy. On Thursday, it happened! The increase of the distribution margins was confirmed by the Ministry of Petroleum & Natural Resources which led the Index up by 70 points to close at 1930 level, with a buying euphoria in oil marketing scrips. The turnover was 273mn shares.

The PTA scrip was also very active during the week, and climbed almost 29% to 6.85 from 5.35 last week's closing. This was based on the rumor that DSFL was acquiring Pakistan PTA. However, it was not confirmed by any of these companies. Another, active scrip in the market was National Bank, prices of which increased drastically over the period of last two weeks after the announcement of the results of Habib Bank. The scrip closed at 22.40 level after testing 24.90 as intraday high.

Finally, on Friday investors generally started taking profit, where Hubco also went ex-dividend and came down 3% from its high of 30.30 price level to close at PkR25.50. We feel the market is poised to retain its upward momentum with the privatization of major scrips like PSO and PTCL on the cards.

TECHNICAL OUTLOOK

The Index closed at its major support / resistance level at 1885, which is likely to provide direction to the market in the short term. Over the period of the past two weeks, the KSE-100 gained 160 points, while corrected itself by almost 4% or 72 points during the week. The Index is still in its overbought zone. Now, there are two possible routes, which market may adopt in the short term. 1) If it fails to sustain above 1885-1850 levels, we are looking at 1800 again 2) however, if it succeeds in sustaining above these levels, 2000 is likely to be tested in a hurry. Here, we would like investors to keep one thing in mind that our view regarding the market in Intermediate-long term is positive, where we expect 2300-2500 levels to be potential targets over the next 6-8 months time. Therefore, we advise them to take this weakness in the short term as an opportunity to re-enter in the expected market rally. While short term traders may take this as trading opportunity.

SECTOR OUTLOOK

COMMERCIAL BANKS: MCB DICTATES!

Most of the listed banks have now released their CY01 results (with MCB setting its own best time record), where we have attempted to try and gauge the banking sector profitability in the CY01 results season by analyzing a selection of listed commercial banks (whose full annual reports are available) and taking them as proxies for the performance of the entire listed commercial banking sector.

The selection, for which, we have conducted an analysis comprises:

Muslim Commercial
Platinum
Faysal
Soneri
Al-Habib
Union
Metropolitan

FY01 PERFORMANCE

The above sample banks depicted a 39% and 42% growth in the net profit before and after tax respectively in FY01, against 63% NPAT growth in CY00 and 3% in CY99 (for population of listed commercial banks). Out of the total profit of this group, of PkR2.19bn, almost half is directly attributable to MCB. If we were to include Askari into this group (unable to for more detailed analysis due to lack of detailed accounts), then NPAT would have grown by 48% for the amended group.

The key feature of the performance during the year CY01 has been that the growth in profitability has been driven by quality improvement in core operating areas. Profitability growth in CY01 was driven by 37% growth in the net interest income of the sample group, wherein net interest margin climbed by 89bps to 4.23% and net interest spread climbed by 83bps to 4.18%. This led to an improvement in the Endowment effect, from -0.02% in CY00 to 0.04% in CY01. But the cost of NPA provisioning jumped from 0.34% of interest earning assets to 0.67% in CY01.

MCB clearly enjoys the best interest margins and spreads from the selected group at 5.52%, driven primarily by its low cost of interest bearing liabilities. Even accounting for the additional cost of provisioning, MCB is clearly superior despite taking hefty provisioning this year.

Overall return on interest earning assets climbed by 96bps, while the cost of interest bearing liabilities climbed by 12bps. This reflects much better spread management by the sector as a whole. This is especially pertinent as net advances actually declined in CY01 by 6.14%, while deposits climbed 15.42% leading to a fall in the gross loan to deposit ratio from 74% in CY00 to 61% in CY01. The shift in asset allocation was towards investments (up 41%) and cash/balances w/ treasury banks (up 88%). The rise in cash and fall in advances were a disturbing sign, but are isolated mainly to MCB, where we believe that management had problems with its capital adequacy. The upcoming subordinated debt issue by MCB, should alleviate this problem for the coming year. Overall interest earning assets climbed by 8.4% financed by a 7.3% rise in interest bearing liabilities.

The sector's ROE and ROA both showed a marked improvement from 12.06% and 0.51% in CY00 to 15.31% and 0.68% in CY01 respectively, but we continue to note that the sector's ROA continues to remain weak, compared with relatively strong banks in the region, where we believe that ROA in excess of 1% is prerequisite. Again, MCB seems the main culprit (larger interest earning assets).

Other notable trends include a 17bps improvement in equity to assets ratio for the sector and an massive improvement in the NPA coverage from 38% in CY00 to 44.5% in CY01.

VALUATION AND OUTLOOK

In CY02, we expect overall earnings growth to slow down from the attractive growth rates witnessed in CY00 and CY01, particularly as MCB's earnings growth normalizes somewhat. The impact of lower interest rates should also become evident, we expect net interest margin and net interest spread for the sample banks to decline by 42bps and 33bps respectively, though if we were to exclude MCB the decline would be much more pronounced. On the other hand, continued turnaround at Faysal and Union will provide a boost to the sector, while the niche banks Al-Habib, Metropolitan and Soneri should continue to display solidity in earnings though we do expect them to display a slight earnings decline.

The sample stocks are trading at 5.77x 02E EPS and 1.77x 02E PPP where we believe that the sector is adequately priced. We maintain our NEUTRAL rating for the commercial banking sector, while we reiterate our STRONG BUY on Muslim Commercial Bank. Given the recent run-up in price, we believe that NBP is now slightly overpriced and we are changing our rating on the stock from BUY to NEUTRAL.