Updated Sep 10, 2005

The market swung wildly both ways ending the last trading day with 5 points gain. However, the drama prevailed throughout the day as the market remained volatile with punters preferring to square positions before the weekend. MCB touched a new high of Rs 118.20. From a trading perspective, any further run-up in price should not be pursued as the stock is bound to cool down after a long rally. Cement stocks are starting to buzz with D. G. Khan Cement and Pioneer Cement churning out fine performances in Friday's proceedings. PSO was another stock that did well to close at Rs 393 with a volume of 16.3 million shares. Analysts are still bullish about the market and feel that banking sector together with the cement sector will lead the way forward, though profit taking will be common at all levels.

The Securities and Exchange Commission of Pakistan has allowed listing of Pension Funds at the stock exchanges of the country. The three types of funds will be Debt Fund, Equity Fund and Money Market Fund. These pension funds were approved in November 2004 and at present the SECP is busy in finalizing the administrative structure for these funds. Reportedly the SECP had detailed consultations with stakeholders before granting the permission. According to the details these three funds will have to place mandatory seed money of 50 million rupees and participants will be allowed to acquire the units in any of these funds of their choice. Federal government intends to unlock trillions of rupees of pension funds of both federal, provincial governments and three armed forces of the country to ensure their productive investments for generating new business and industrial activities.

The Karachi Stock Exchange on Friday announced revised list of companies eligible for futures contracts. There has been no change in the number of eligible securities for futures contract and the number remains at 27, based on the positions on 30th June, 2005. The free-float based eligibility criterion was enforced on 17th March, after the March futures crisis. Previously, market capitalization and trading volume were considered the criteria for selection of a security on the futures counter. The companies declared eligible for futures contract are: Hubco, PTCL, Fauji Fertilizer Bin Qasim, MCB, SNGPL, OGDC, SSGC, Telecard, Fauji Fertilizer, Dewan Salman Fibre, Maple Leaf Cement, National Bank, D. G. Khan Cement, PPL, Faysal Bank, PICIC, Southern Electric Power, Union Bank, Worldcall Communications, Lucky Cement, Askari Commercial Bank, Bank of Punjab, Nishat Mills, PSO, Engro Chemical Pakistan, Pakistan Oilfields and PICIC Commercial Bank.

Banking industry is going through a golden era of improving profitability due to widening spreads, improving advance to deposit ratio and better half yearly results. Analysts foresee a vast improvement in advance to deposit ratio for MCB and NBP, as they remain two of the very few banks with a capacity to further extend their loan books. In this regard, optimistic credit expansion target set by government to fuel the economic growth, amid capacity constraints and growing demand for consumer financing, augurs well for these banks. Improved ADR combined with widening spreads should result in record level of profitability for both the banks in 2005 and 2006.

Muslim Commercial Bank at current levels offers an upside potential of 11%. MCB remained a laggard in the banking industry for most part of 2004. However, since the last quarter of 2004, MCB's loan book growth has been phenomenal. This trend is expected to continue in coming months and take its ADR to 68% at the end of 2005 from 62% in 2004. EPS growth in 2005 should also be a result of low cost of funds for MCB in combination with improved ADR. MCB relishes on its extensive click and brick networks, enabling it to generate funds at lower costs compared to the industry. On the other hand, return on earning assets has been increasing in tandem with the rising interest rates, which saw a quantum leap in second quarter of 2005. Widening of spreads would be further augmented by MCB's intention to enter the consumer financing market aggressively, raising the spreads further in 2006, despite the eventual increment in cost funds.

Kot Addu Power Company announced its financial results for the year ended 30th June 2005 and also declared 45% final dividend. It had already paid 35% interim dividend along with announcement of third quarter results. Therefore, the total payout for the year comes to a hefty 80% and was a pleasant surprise for the investors. The scrip was ignored for some time despite recommendation by some brokerage house. The company posted slightly more than Rs 8 billion profit, which translated into an EPS of Rs 9.14. The company has posted Rs 6.9 billion profit for 2003-04 yielding Rs 7.88 EPS.

Fauji Cement also announced its financial results for the year ended 30th June 2005. It has posted Rs 510 million profit after tax for the year compared to Rs 314 million for the previous year, which depicts 62% growth. As a result EPS improved from Rs 0.85 to Rs 1.38. The top line of the company posted an increase of 24% at the back of 11% growth in sales and 5% increase in production. Moreover, better retention prices not only at the domestic market but also in export market resulted in a 600 basis points increase in gross margin.

National Bank of Pakistan also offers 21% upside potential.

The biggest bank of the country also has the largest branch network of nearly 1200 branches and works as the effective arm of GoP for banking operations. All government funds are routed through NBP, providing NBP low cost funds and consequently higher spreads. With all the small banks' ADR exhausting near the theoretical limit of 80%, NBP has plenty of room to expand its loan book in 2004. NBP's yield on earning assets should also mark an improvement in the overall spread. NBP's other advantage are its unrealized gains on equity investments in NIT and Bank Al-Jazira of Saudi Arabia, which upon realization can bring positive surprises to NBP's book.