The KSE - Overview: The Broken Magical Spell

With a fall of 82 points, the KSE-100 Index closed at 1703 level for the week. The overall Index remained choppy within the range of 1788-1639 on the basis of intra day high / low, demonstrating confused sentiments of investors where the average daily volumes (ADV) declined by 12.4% from 286.4mn shares to 250.8mn shares.

Last week in our market review, we gave the target of 2500 in coming six months based on certain ifs and buts, which included the ability of the Index to remain over 1700 levels during the week. But that magical spell has been broken now at least in the short term. However, the Index closed above 1700 for the week and we do feel that market is likely to move towards the same target, but as far as the short term trend is concerned, sentiments seems to be more negative then positive.

The main reason for market collapse was high carryover volumes, which in anticipation of capital gains and high dividend yields, went up to almost nine billion shares. The buying euphoria in the market led weak holders to an unsustainable position and resulted in a crash of almost 119 points, in first three days, leading the market to close at 1666 levels. However, the very next day Hubco's results were announced and surprisingly high dividend payout of 40%, once again invited jobbers into the market and the Index rose 66 points to close at 1723 levels.

Technically, Hubco drove the market rally of almost 550 points. Due to: 1) The scrip was under valued at that point and 2) the anticipation of a dividend announcement was very high. Institutions, foreign funds and all kinds of investors jumped into the market, to buy Hubco and it gained almost 80% during the month, where a technical correction was overdue. In first three days of this week, Hubco corrected itself by almost 7% but then the results were announced and the correction was left hanging. All in all, Hubco's net profits declined by 33% (because of the new PPA), but due to the high dividend yield, investors ignored that. Again, Hubco is in its overbought zone and on a technical basis, we do not find the scrip very attractive at the current price, as carry over volumes are still very high and the correction is more than overdue. We do not expect Hubco to cross 30 levels in coming week, while on the other hand down side risk is much higher.

We would like to discuss PSO here, since due to a recent news item regarding expected decline in the its profitability in 1H02, it fell down almost 10% from 138.5 level to 124.5 level on WoW closing basis. The scrip, after the news of privatization in the previous week, rose almost 50% from 94 levels to 138.5 levels due to which, we expected this correction and this news triggered the correction. We must however point out that we do not expect the results to be quite as bad as the news items suggest. In our opinion, further weakness may lead the scrip down to 115 levels, where we advice investors to move in with a tight stop loss.

In our sector write-up we have discussed MCB's results announcement, so here we would like to add it and Askari Bank into our discussion. Askari and MCB announced results for FY01 in which both demonstrated massive improvement in their profitability. However, Askari was already trading on a very high level and is trading in its overbought zone, we expect a correction in the immediate term which may lead the scrip to 16.80 levels. On the other hand, MCB is still trading below our target level. Due to the expected weakness in the overall market, the scrip may decline further, but downside risk is limited, therefore, we advice investors to take any further weakness as an opportunity to accumulate the scrip for long-intermediate term investment.

Now, in conclusion, the main market movers are not looking very hot at the moment. Even if we assume that Hubco is likely to gain further strength, there is no reason for other scrips to move along the same line. Since, on the political front there is no excitement left we believe there is no reason for Index to remain bullish with the same sentiments, which were witnessed over the past few weeks.

Banking Sector: MCB's Results

Muslim Commercial Bank announced its CY01 results recently, depicting a massive 51% growth in NPAT to PkR 1,108mn against market consensus NPAT of PkR 900-930mn, and PkR735mn in CY00.

Net Interest Income

Net interest income rose 38% between CY00 and CY0l. This is due to a 21% jump in mark-up received, despite the fact that net advances fell l1%. But the above is slightly misleading in the context of comparison with the previous year's results where we believe that the yield on earning assets will not have improved by much. The SBP's BSD Circular No. 36 (10-10-2001) has prescribed a new format for presentation of annual accounts. Under the new format interest income from investments, which were previously reported in investment income, have now been shifted to mark-up received. (Please Note: Misleading in comparison, while the new format is an excellent reform which makes the annual accounts of the banks much more user friendly). But in the context of the announced results, management would have served the investing public much better if the same fomla, had been adopted for the 2000 results, something they will most likely do in the annual report.

Cost of funds have been well maintained despite a 14% rise in deposits. It is interesting to note that the deposits were at the same level at the end of the first half, which means that the bank has not expanded its deposit base further. Further analysis of the cost of funds is not possible with the data available in the announcement sheet, and due to the reluctance of management to give us a deposit mix breakdown in the lH0l. These should be available in the annual accounts, which should be available shortly.

Non-Interest Income - This Time for REAL!

Similarly the fall of 20% in non-interest income is not a true reflection of the bank's earnings, as a portion of these will have been shifted to interest income.

Operating Expenditure - More Haircuts and Prov?

Operating expenditure rose 15% YoY which leads us to believe that the bank has taken larger provisions against NPLs than in the previous year. We have noted previously that MCB's provisioning against NPLs was likely to rise in the CY01 as loans which went bad in the economic downturn following May 98 (banks required to provide 100% against bad assets after 3 years - net of collateral) were classified into defaulted loans. The bank provided PkR 900mn in 1H01 and we expect the final provisioning may have been higher still. The bank may also have taken a haircut similar to the one in CY00 (PkR 483.94mn). The haircut is also evident in the effective tax rate of 47.1% against the 50% applicable for 2H01.

Investment Perspective - Strong Buy/ Buy

We retain our Strong Buy/Buy rating for MCB. We however do not see any reason to adjust out CY02 forecasts as CY02 should see interest income shrinkage. And until the successful issuance of MCB's TFC, we do not think it will be in a position to successful deploy funds into higher earning advances assets. We do, however, expect provisioning requirements and haircuts to start coming down.

MCB is currently trading at 5.46x to our CY02E EPS of PkR4.65, where we think there is substantial upside. With country risk much lower, the bank should trade within a PER range of 7-8x 02E earnings. This translates into a target price range of PkR32.55 - 37.20, representing a minimum price upside of 28%.