Despite a 300bps cut in the discount rate and stricter regulatory actions and budgetary measures, the AKD Securities banking universe has posted 9%YoY growth in profits during 9MCY15 to Rs71.0 billion. In this regard, a combination of buoyant non-interest income, continued focus on low cost deposits and strong balance sheet growth remained the key earnings driver countering the uptick in provisions.
During 3QCY15 alone, combined profit after tax rose to Rs24.9 billion, up by 9%YoY/26%QoQ where sequential earnings growth came primarily from normalization of tax rate. With 9MCY15 results drawing to a close, the brokerage house sees banks rounding off CY15 with a decent 5%YoY growth.
However, sustainability of earnings growth in CY16 is hinged upon: 1) reversal of interest rate cycle, 2) strong non-interest income and 3) pick up in loan growth (private sector credit offtake up 6.2%YoY during September 2015.
AKD Banking Universe has posted net profit of Rs71.0 billion during 9MCY15 as compared to net profit of Rs65.1 billion during 9MCY14. Key growth drivers were 1) higher NIMs, 2) strong Balance Sheet growth, and 3) an increase of 27%YoY in non-interest income driven by dividend income /capital gains.
These were sufficient to counter impact of relatively steep increase in provisions and non-interest expenses. The 3QCY15 quarter was characterized by lower taxation and asset quality improvement – absolute NPL at Rs325 billion with NPL ratio/coverage at 14.8%/81%.
CY16 outlook: While 9MCY15 earnings performance has set the tone for decent earnings growth in CY15, CY16 is expected to be a challenging year where full impact of the policy tightening together with re-investment risk will serve to confine earnings growth to mid-single digits. That said, analysts believe prospects for improved loan growth (up 6.2%YoY in September 2015) remain in place while sizeable backlog of capital gains can be utilized to smoothen earnings in CY16.
Considering real interest rates at 400bps, foreign exchange reserves at all time high levels of around US$20 billion and contraction in current account deficit (FYTD at US$109 million as compared to US$1.6 billion during the corresponding period last year), room for a discount rate cut during November can’t be ruled out. Within this backdrop, any resultant dip in stock prices should be considered as an opportunity to add positions at attractive levels.