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27 November 2013 Asia Pacific/Pakistan

Equity ResearchRegional Banks

Pakistan Banks SectorUPGRADE RATING

Fundamentals support further re-ratingFigure 1: Profitability rebound on rising NIMs and improving asset quality

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0%

5%

10%

15%

20%

25%

2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Earnings growth Gross NPL ratio NIMs (RHS)

Source: Company data, Credit Suisse estimates

Margins to expand. NIMs have bottomed out (4.5% in 2Q13) and are likelyto rise by 35-45 bp over the next 3-6 months given the rise in policy ratesand shift in liability mix to lower cost deposits. MCB and UBL shall benefitmost from NIM expansion given a high proportion of low cost deposits.

Loan growth to pick up, fiscal financing will remain. Macro outlook hasimproved post political change with businesses ready to venture into newprojects. Banks are well placed to support the likely uptick in credit demand(53% LDR) and we expect a three-year (2013-16) loan growth CAGR of 14%.Moreover, fiscal financing will continue to support asset growth.

Asset quality improvements to continue. Deleveraging has led to assetquality improvements NPL reversals of PRs5.5 bn (7%) for UBL and MCBin 9M13. Macro recovery will further support asset quality for private bankswith 100 bp decline in credit cost in 2014. This, along with margin expansion,higher loan growth should drive a 2013-16 earnings CAGR of 17%.

Further re-rating of private banks, UBL top pick. We increase estimatesfor UBL and MCB by 4-21% over 2013-15 and upgrade both banks toOUTPERFORM with revised TPs of PRs170 (implied upside 34%) &PRs350 (25% potential upside), respectively. While we upgrade the sector toOVERWEIGHT, we maintain NETURAL on NBP given near term risk to itsearnings. Despite relative outperformance YTD, further re-rating of privatebanks appears justified given rising margins with UBL and MCB bestpositioned to leverage from improving business sentiment. UBL is our toppick trading at a 2014E P/B of 1.4x, 7% yield and a potential return of 41%.

Research Analysts

Farhan Rizvi, CFA65 6212 3036

[email protected]

Asia Financials TeamSanjay Jain

(Head of Asia Financials Research,China, Hong Kong)

Arjan van Veen(Regional, China Insurance)

Gil Kim(Korea)

Chung Hsu

(Taiwan)Ashish Gupta

(India)

Teddy Oetomo(Indonesia)

Danny Goh(Malaysia)

Dan Fineman(Thailand)

Thaniya Kevalee(Thailand)

Anand Swaminathan(Singapore)

Alvin Tan(Philippines)

Farhan Rizvi(Pakistan)

James Ellis(Australia)

Jarrod Martin(Australia)

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Pakistan Banks Sector 2

Focus chartsFigure 2: Margins have bottomed and should rise from4Q13 given the uptick in policy rates

Figure 3: Improving business climate to lead a revival incredit growth

2.0%

3.0%

4.0%

5.0%

6.0%

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0.0%

2.0%

4.0%

6.0%

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2009 2010 2011 2012 2013E 2014E 2015E

Asset yields NIM (RHS) Regional NIMs avg. (RHS)

-5.0%

0.0%

5.0%

10.0%

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20.0%

25.0%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2007 2008 2009 2010 2011 2012 2013E2014E2015E2016E

Gross loans Loan growth

PRs mn

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 4: Low LDR to provide room for new lendingthough fiscal financing will continue

Figure 5: NPLs have peaked with reversals for privatesector banks and declining credit costs

20.0

30.0

40.0

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250,000

500,000

750,000

1,000,000

1,250,000

1,500,000

2009 2010 2011 2012 2013E 2014E 2015E 2016E

Inv. in GoP securities (LHS) LDR IDR

PRs mn (%)

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

2009 2010 2011 2012 2013E 2014E 2015E

Gross NPL ratio Credit cost Coverage (RHS)


Figure 6: Earnings momentum for private banks to pickup with a three-year CAGR of 17%

Figure 7: Banking sector performed well in a risinginterest rate environment with low LDR during 2004-06

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2010 2011 2012 2013E 2014E 2015E 2016E

PRs mn

But will pick up with a 3 year (2013-16)CAGR of 17%

Earnings growth subdued in 2010-13

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M a r -

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l - 0 5

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l - 1 0

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Banking Stock per fo rmance (LHS) 6M KIBOR

Stock performance wascorrelated with rising KIBORwith low LDR (

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Fundamentals support further re-ratingMargins have bottomed outThe monetary easing cycle has reversed with two consecutive hikes of 50 bp over asmany months and a further 50-100 bp hike likely in Jan 2014 as the central bank looks totackle an uptick in CPI. This should drive asset yields and NIMs higher over the next fewquarters. We believe NIMs have bottomed out (4.5% in 3Q13) and should rise by 35-45 bpover the next one to two quarters. Margin expansion will be also be driven by the shift inliability mix to lower cost deposits as banks have successfully adjusted their liability profileto minimise the impact of 500 bp of policy easing between Jul-2011 and Jun-2013. MCBshould benefit the most from this margin expansion given it has the highest proportion ofstatic/low cost deposits, though the decision by SBP to link minimum profit rate on savingsaccounts (including term deposits) with changes in policy rate has diluted this benefit.

Loan growth to pick up, budgetary funding to remainPakistan's macro outlook has improved with the change in political set-up and while thereform process has been slow thus far, we believe 2014 will be a watershed year with aflurry of economy activity led by the energy, telecommunication, textiles and cementsectors. Banks are well placed to meet the rising demand from corporates and consideringlow leverage (LDR of 53%) there is huge scope to fund new projects. We expect loangrowth to hit double digits in 2014 with a three-year (2013-16) CAGR of 14%. Moreover,despite fiscal consolidation measures undertaken by the new government under IMFsupervision, financing of the budget deficit will continue to fall on the banking sector, atleast in the short run. We expect banks to remain active in the treasury market which willcontinue to be a key source of asset growth. An uptick in policy rates, particularly, makeinvestment in PIBs (yielding 11.8-13.0%) an attractive proposition.

Asset quality improvement to support earnings

Substantial deleveraging of the balance sheet (LDRs at a ten-year low of 53%) has led toasset quality improvements with NPL reversals of PRs5.5 bn (7%) for UBL and MCB in9M13 as against an average annual NPL creation of PRs9.2 bn over 2009-12. Animprovement in macro fundamentals in the backdrop of economic reforms and better riskmanagement will continue to drive improvements in asset quality of top private banks inour view, despite a likely uptick in policy rates with an estimate 100 bp decline in the NPLratio in 2014. This, along with expansion in margins, robust growth in non-funded incomeand higher loan growth, should drive a strong earnings momentum over the medium termwith three-year (2013-16) earnings CAGR of 17%.

Further re-rating of private banks, UBL top pickWe upgrade the sector to OVERWEIGHT (MARKET WEIGHT) and increase our estimatesfor UBL and MCB by 4-21% over 2013-15 on account of higher margins, lower provisions,more upbeat loan growth and robust non-funded income. UBL is our top pick with arevised TP of PRs170 (34% upside), while we upgrade MCB to OUTPERFORM (revisedTP of PRs350). We believe likely improvement in macros support a further re-rating of thesector given low leverage, strong adequacy and cleaner balance sheet, with UBL offeringan attractive value, trading at a 2014E P/B of 1.4x with 7% dividend yield and offering apotential total return of 41%. However, we maintain our NETURAL stance on NBP( revised TP PRs53) as we believe negative surprises on asset quality are likely tocontinue in the near term as the new management stringently reviews the loan book whichmay result in subjective downgrades and build-up of further provisioning buffers.

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Valuation comparisonFigure 8: Pakistan banks valuation comparison

2011 2012 2013E 2014E 2015E 2011 2012 2013E 2014E 2015ECore profit (PRs mn) Core profit growth (%)

NBP 16,964 16,163 8,120 14,850 16,956 NBP -7.3 -4.7 -49.8 82.9 14.2

UBL 15,500 18,007 17,457 20,369 24,705 UBL 10.3 16.2 -3.1 16.7 21.3MCB 19,274 21,153 21,774 25,462 29,531 MCB 2.2 9.7 2.9 16.9 16.0

P/E (x) P/B(x)NBP 6.3 6.8 13.6 7.5 6.5 NBP 0.8 0.7 0.8 0.7 0.7UBL 10.0 8.6 8.8 7.6 6.2 UBL 1.9 1.7 1.5 1.4 1.2MCB 14.9 13.6 13.2 11.3 9.7 MCB 3.1 2.7 2.5 2.3 2.0

Core ROA (%) Core ROE (%)NBP 1.6 1.3 0.6 1.0 1.0 NBP 13.0 11.4 5.6 10.4 11.1UBL 2.1 2.2 1.8 1.9 2.0 UBL 21.0 21.0 18.2 19.3 20.8MCB 3.1 3.0 2.8 3.0 3.1 MCB 22.3 21.5 19.8 21.2 21.8

Dividend yield (%) Market cap/PPOP (x)NBP 14.4 13.5 6.7 9.6 9.6 NBP 3.3 3.9 5.8 5.1 4.6UBL 6.0 6.7 6.8 7.2 7.6 UBL 5.1 5.2 6.2 5.1 4.2

MCB 4.2 4.6 4.6 4.9 5.3 MCB 7.0 8.4 9.1 7.6 6.4Source: Company data, Credit Suisse estimates

Operational comparisonFigure 9: Pakistan banks operational comparison

2011 2012 2013E 2014E 2015E 2011 2012 2013E 2014E 2015ENet int income growth (%) NIM (%)

NBP 8.3 -6.7 -14.7 13.7 9.6 NBP 5.2 4.5 3.4 3.6 3.6UBL 15.6 -2.2 -5.3 16.6 17.6 UBL 6.2 5.5 4.6 4.8 5.0MCB 21.1 -8.2 -6.8 16.4 14.6 MCB 8.6 6.8 5.8 6.2 6.3

Loan yield (%) Cost of deposits (%)NBP 11.3 10.9 9.2 10.3 10.4 NBP 5.2 5.3 4.9 5.6 5.6

UBL 10.8 9.9 8.1 9.1 9.5 UBL 4.1 4.2 3.8 4.3 4.3MCB 14.1 12.4 10.7 11.9 11.9 MCB 4.4 4.4 4.2 4.8 4.8

Non int. income growth (%) Cost-income (%)NBP 7.8 27.6 8.0 4.8 8.8 NBP 53.2 62.5 62.8 62.9 60.0UBL 25.7 34.7 6.1 5.0 11.3 UBL 43.4 48.1 47.6 47.6 45.5MCB 27.9 15.8 22.5 14.5 15.4 MCB 35.7 38.4 36.1 34.4 32.8

PPOP growth (%) Loan growth (%)NBP 4.8 6.7 10.8 4.6 13.8 NBP 10.0 23.3 9.0 10.5 14.0UBL 21.9 -3.8 14.0 4.4 12.9 UBL -0.6 11.7 7.0 12.0 16.0MCB 18.8 -2.2 19.1 7.9 11.6 MCB -9.5 5.8 4.0 11.0 16.0

Deposit growth (%) Loan deposit ratio (x)NBP 11.4 11.9 11.5 10.0 11.0 NBP 56.6 63.3 61.2 61.6 63.9UBL 11.3 14.2 14.5 15.0 16.0 UBL 53.1 60.6 57.9 57.4 57.9MCB 13.9 11.0 11.5 13.5 14.5 MCB 46.0 44.0 41.4 40.9 41.8

NPLs / loans (%) Loan loss coverage (%)NBP 14.9 12.2 12.3 12.2 11.2 NBP 76.4 82.0 89.8 88.8 89.0UBL 14.0 14.0 13.0 11.7 10.4 UBL 80.1 78.0 80.8 82.4 82.5MCB 10.7 9.7 9.1 8.1 7.0 MCB 83.8 89.2 87.4 86.7 86.4

Reported Tier 1 CAR (%) Equity Tier 1 CAR (%)NBP 13.8 13.1 11.3 10.9 10.3 NBP 13.8 13.1 11.3 10.9 10.3UBL 10.5 10.7 11.3 11.5 11.5 UBL 10.5 10.7 11.3 11.5 11.5MCB 20.8 20.8 22.0 21.6 21.2 MCB 20.8 20.8 22.0 21.6 21.2


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Margins have bottomed outThe monetary easing cycle has reversed with two consecutive hikes of 50 bp each in Septand Nov-2013 and a further 50-100 bp hike likely in the next policy review (Jan-2014) asthe central bank looks to tackle an upsurge in CPI. This should drive asset yields andNIMs higher over the next few quarters. We believe NIMs have bottomed out (4.5% in3Q13) and should rise by 35-45 bp over the next one to two quarters. Margin expansionwill be also be driven by the shift in liability mix to lower cost deposits as banks havesuccessfully adjusted their liability profile to minimise the impact of 500 bp of policy easingbetween Jul-2011 and Jun-2013. MCB should benefit the most from this margin expansiongiven it has the highest proportion of static/low cost deposits, though the decision by SBPto link minimum profit rate on savings accounts with changes in policy rate have dilutedthis benefit.

Asset yields to rise amid monetary tightening The central bank is likely to maintain its monetary tightening stance due to an upsurge ininflationary pressure (Oct CPI of 9.1%) which should drive yields higher over the short tomedium term. Recent discussions with the IMF on the first review of the new ExtendedFund Facility (EFF) programme also focused on more effective monetary management to

support the exchange rate. Hence, the SBP raised policy rates by 50 bp on 13 November,with secondary market yields moving in the same direction prior to the policy decision (T-bill yields up 40 bp over the past 1M). Given further upward bias to the CPI (CS estimatesof 10.5% in December) due to pass-through of electricity tariffs, PKR depreciation andrationalisation of gas prices in December, we expect the central bank to progressivelyraise rates by a further 50-100 bp by Mar 2014. This bodes well for the interest incomeoutlook for our coverage banks, as asset growth is likely to remain strong led by acombination of a pick-up in credit demand and borrowing appetite of the government forbudgetary financing.

Figure 10: Inflationary pressures have led to an uptick in

policy rates with a corresponding increase in KIBOR

Figure 11: Secondary market yields have risen sharply in

anticipation of monetary tightening by the SBP

3.5

5.0

6.5

8.0

9.5

11.0

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2

O c t - 1 2

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2

F e b

- 1 3

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3

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Headline CPI Policy rate 6M KIBOR

(%)

8.00%

9.00%

10.00%

11.00%

12.00%

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14.00%

M a y - 1

2

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3

N o v - 1

3

6M T-BILL 10 YR PIB Policy rate

Source: FBS, SBP, Credit Suisse estimates Source: SBP, Bloomberg

Asset yields to expand in2014 as KIBOR andtreasury yields are up 80-200 bp since July 2013

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MCB to benefit the most from higher interest rate

We estimate the six-month KIBOR to average 10.3% in 2014 (9.2% 2013E), with MCBbenefitting the most given its higher proportion of interest yielding assets (84% of total) andlittle international diversification. We forecast asset yields for MCB to expand 114 bp to10.9% in 2014, leading to a 19% growth in the banks interest income. In contrast, assetyields for UBL are expected to rise by 62 bp on its higher international loan book (~25% oftotal) and for NBP by 90 bp due to its relatively lower earnings assets.

Figure 12: MCB will enjoy the highest growth in net

interest income

Figure 13: with the highest interest yields amongst peer

banks

10%

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18%

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MCB UBL NBP

2013E 2014E Growth (RHS)

PRs mn

-

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MCB UBL NBP

2013E 2014E

(%)


. but funding cost to rise by a lower quantumThe top-tier Pakistan banks have historically enjoyed very high NIMs (highest in theregion) due to a high proportion of low-cost CASA deposits (76%), which ensured that anincremental hike in funding cost was far lower than the corresponding rise in lending rates

and treasury yields. Cost of funding has remained low largely due to the fact that a largeproportion of accounts are used primarily for transactional purposes. This advantage hasstarted to disappear as the central bank first raised the minimum deposit rate on savingsaccount (36% of total deposits) to 6% (5% earlier) in April 2012 and then linked the pricingof savings, including term deposits, to the quantum of rate hike (Sept-13). As a result,margins fell to ten-year lows in 2Q13 as the fall in asset yields coincided with a hike inprofit rate on savings deposits.

Despite these changes in deposit pricing structure, cost of funding is likely to increase at alower quantum as banks continue to hold a sizeable amount of non-remunerative currentdeposits (35%) while adjustment to term deposits also takes place with a lag. Therefore,we expect funding cost to rise by 15-40 bp in 2014, significantly lower than the increase inasset yields (80 bp) helping margins to expand by an average 24 bp YoY, with MCB

benefiting the most due to its high proportion of current account (36%) and lowest termdeposit base of 12% with an expected increase of 46 bp during 2014E.

Despite regulatory changesto minimum deposit ratescost of funds will rise at alower quantum

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Figure 14: MCB has lowest proportion of expensive termdeposits

Figure 15: NIMs have remained strong due to high CASA(%)

0%

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MCB UBL NBP Sector average

Current Savings Term & others

0.0

1.5

3.0

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9.0

2011 2012 2013E 2014E 2015E

MCB UBL NBP

Source: Credit Suisse estimates (2011E) Source: Company data, Credit Suisse estimates

Figure 16: Pakistan enjoys one of the highest NIMs in theregion

Figure 17: and has continued to do so historically aswell

0.0

1.0

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ID PK PH IND IN TH CN MY KR AU HK SG TW

-

1.0

2.0

3.0

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7.0

2008 2009 2010 2011 2012 2013E 2014E 2015E

Pakistan Regional average

Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates

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Loan growth to pick up, budgetaryfunding to remainPakistan's macro outlook has improved with the change in political set-up and while thereform process has been slow thus far, we believe 2014 will be a watershed year with aflurry of economy activity led by the energy, telecommunication, textiles and cementsectors. Banks are well geared to meet the rising demand from corporates andconsidering the low leverage (LDR of 53%) for the sector there is huge scope to fund newprojects. We expect loan growth to hit double digits in 2014 with a three-year (2013-16)CAGR of 14%. Moreover, despite fiscal consolidation measures undertaken by the newgovernment under IMF supervision, financing of the budget deficit will continue to fall onthe banking sector, at least in the short run. We expect banks to remain active in thetreasury market which will continue to be a key source of asset growth. An uptick in policyrates particularly make investment in PIBs (yielding 12-13%) an attractive proposition.

Macros gradually stabilisingMacros are gradually showing signs of stability led by improvements on the fiscal side asbetter revenue administration measures coupled with rationalisation of electricity tariffshelp to contain deficit in 1Q FY14. These measures have been acknowledged andapplauded by the IMF in the first review of the EFF programme (1 st week November) and,with no let-up in the pressure on quantitative targets (launch of initiatives to enhanceindirect taxes and gas rationalisation plan to generate 0.4% of GDP savings), furtherconsolidation of the fiscal account is expected. The government successfully met allquantitative IMF targets for Sept-2013 except the target on net international reserveswhich shall pave the way for release of the next tranche of US$547 mn in Dec-2013.

Figure 18: Pakistan successfully met all of IMF's quantitative targets for Sept-2013except floor on net international reserves

Sep-13 Dec-13 Mar-14 Jun-14Floor on net international reserves (US$ mn) (2,499) (2,090) (141) 2,532Ceiling on net domestic assets of SBP (PRs bn) 2,877 2,901 2,571 2,227Ceiling on overall budget deficit (PRs bn) 419 882 1,209 1,464Ceiling on SBP's stock of net foreign currency swaps (US$ mn) 2,255 2,005 2,005 1,755Ceiling on net government borrowing from SBP (PRs bn) 2,690 2,560 2,390 2,240Source: IMF

Figure 19: Disbursements under IMF EFF programme to lend support to forex reserves Date of disbursement Amount (SDR mn) Amount (US$ mn)4-Sep-13 360 5442-Dec-13 360 5472-Mar-14 360 5472-Jun-14 360 5472-Sep-14 360 5472-Dec-14 360 5472-Mar-15 360 5472-Jun-15 360 5472-Sep-15 360 5472-Dec-15 360 5472-Mar-16 360 5472-Jun-16 360 5472-Aug-16 73 111Note: SDR = Special Drawing Rights. Source: IMF

Macro stabilisationmeasures will bear fruit in2014

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Moreover, the privatisation programme for PSEs starting next year will further reduce thegovernment's subsidy burden. Though inflationary pressures are on a rising trend due to areduction in energy subsidies, further tightening of monetary policy will lend support toPKR in the short to medium term. Forex reserves are also expected to see a gradual build-up over the next 3-6 months as outstanding proceeds from Etisalat (US$800 mn), CSFsupport from the US and auction of 3G licences materialise, while return to theinternational debt markets next year is likely to lend further support.

Figure 20: Tax revenue growth has recovered sharply in 1Q14 after lacklustreperformance in FY13

14.8%

15.6% 16.7%

21.0%

3.7%

17.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

FY09 FY10 FY11 FY12 FY13 1QFY14

Source: FBR, Credit Suisse estimates

Low leverage provides room for future lendingPakistan banks embarked on a deleveraging exercise post the balance of payment crisisin 2008 which resulted in severe asset quality deterioration amid a sharp hike in policy

rates. Hence, exposure to risky consumers and small and medium enterprises (SMEs)was aggressively shed with increasing focus on high yielding risk-free treasuries. As aresult, LDR had fallen to 53% from a peak of 74% (2008) with a corresponding increase ininvestment-to-deposit ratio (IDR) which widened by 20% to 46% over the same period.Given low leverage and relatively clean balance sheets, there remains huge room forbanks to lend to the corporate sector as the credit cycle revives from next year, in our view.The new government has been welcomed by the business community at large whoappears ready to undertake new projects across different sectors, with a particular focuson the energy sector. Multi-billion dollar coal conversion projects are in the pipeline whilethe telecommunications, cement, textile and chemical sectors are also expected toleverage their balance sheet for new expansions. This should propel loan growth toapproximately 10% in 2014E with a three-year (2013-16E) CAGR of 14%.

LDRs at a decade low of53% provide room to banksto meet pick-up in creditdemand

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Figure 21: Loan growth nosedived post 2008 but isexpected to pick up

Figure 22: though banks' investment in treasures willcontinue

-5.0%

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25.0%

0

500,000

1,000,000

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2,500,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Gross loans Loan growth

PRs mn

20.0

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250,000

500,000

750,000

1,000,000

1,250,000

1,500,000

2009 2010 2011 2012 2013E 2014E 2015E 2016E

Inv. in GoP securities (LHS) LDR IDR

PRs mn


Pakistan remains the most unleveraged economy in the region

The lower degree of leverage in the banking sector can also be gauged from the loan-to-GDP ratio, which has fallen almost 9 pp below its ten-year (2003-12) average of 25%. As aresult, Pakistan continues to remain the most unleveraged economy in the region with aloan-to-GDP ratio of 16% (Sep 2013), which is less than one third of India (53%) and wellbelow even its closest peers Indonesia (33%) and the Philippines (33%).

Figure 23: Loan-to-GDP ratio has fallen well below the ten-year average

Figure 24: Pakistan remains the most unleveragedeconomy in the region (loan to GDP %)

12%

16%

20%

24%

28%

32%

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Loan to GDP Linear (Loan to GDP)

0

50

100

150

200

250

300

HK SG TW AU CN MY JP KR TH IN ID PH PK

Source: FBS, SBP, Credit Suisse estimates Source: SBP, CEIC, BIS, Credit Suisse estimates

Loan-to-GDP of 16% makesPakistan the mostunleveraged economy in theregion by a distance

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Figure 25: Low leverage is also reflected by lowest LDRratio amongst regional peers (%)

Figure 26: Deposit to GDP is also the lowest regionally

0

20

40

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120

140

AU KR TH SG ID TW MY IN CN PH JP HK PK

0

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100

150

200

250

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450

HK SG TW CN MY JP AU TH KR IN PH ID PK

Deposit to GDP %

Source: SBP, CEIC, BIS, Credit Suisse estimates Source: SBP, CEIC, BIS, Credit Suisse estimates

Budgetary financing will continue to drive near termasset growthGiven persistent demand from the government for budgetary support, Pakistan banks arelikely to continue with their strategy of investing in risk-free treasuries at least in the shortterm. The commercial banks sector financed PRs939 bn (51%) of the budget deficit inFY13 and based on the budgetary outlay for FY14, we expect the sector to financeapproximately PRs900 bn (51%) of the deficit during the next fiscal. Our analysis is basedon limited availability of external funding over the next 3-6 months with major infrastructureand other projects, including privatisation deals, likely to materialise in FY15. Fiscalfinancing (albeit at a lower quantum) over the next 6-12 months, together with an uptick incredit demand will allow banks to aggressively approach deposit mobilisation and balance

sheet growth.

Figure 27: Banks have been sharing a bulk of the fiscalfinancing over the past few years

Figure 28: and will continue to do so in FY14 as well

0.0

0.8

1.6

2.4

3.2

4.0

(150,000)

50,000

250,000

450,000

650,000

850,000

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

Bank Non bankExternal Fiscal deficit (% of GDP)

PRs mn %

Bank58%Non Bank

32%

External10%

PRs 569 bn

PRs 1,022 bn

PRs 170 bn

Source: MoF, Credit Suisse estimates Source: Credit Suisse estimates

Budgetary financing willsupport asset growth overthe short to medium term

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Deposits and investment growth estimates tweakedWhile deposit mobilisation is generally correlated with the borrowing appetite of the privatesector, rising government financing needs had incentivised banks to adopt a moreaggressive approach towards balance sheet growth despite lacklustre private sectordemand for credit. As a result, average deposit growth was 15% over 2009-12 as againstlending growth of 5%. Given rising inflationary pressures and upward revision in our credit

growth estimates, we are tweaking our deposit and investment growth estimates over2014-16E. We are lowering estimates, however, for 2013 due to weaker mobilisation in 9Mamid political uncertainty in first half but expect a stronger growth outlook from 2014.

Figure 29: Revision in deposit growth, investment growth and NIMs estimates New estimates Old estimates % difference

2013 2014 2015 2013 2014 2015 2013 2014 2015Deposit growth (%)-NBP 11.5 10.0 11.0 13.0 13.0 13.0 (1.5) (3.0) (2.0)-UBL 14.5 15.0 16.0 14.0 13.5 14.0 0.5 1.5 2.0-MCB 11.5 13.5 14.5 12.5 13.0 14.0 (1.0) 0.5 0.5Investment growth (%)-NBP 5.6 10.4 11.1 10.1 11.0 11.5 (4.5) (0.6) (0.4)-UBL 18.2 19.3 20.8 17.5 17.4 17.6 0.7 1.9 3.2

-MCB 19.8 21.2 21.8 22.8 21.3 20.6 (3.0) (0.1) 1.3Net interest margin (%)-NBP 3.4 3.6 3.6 3.8 3.9 4.0 (0.4) (0.4) (0.4)-UBL 4.6 4.8 5.0 4.6 4.6 4.6 (0.0) 0.3 0.4-MCB 5.8 6.2 6.3 5.6 5.5 5.5 0.2 0.8 0.8Source: Credit Suisse estimates

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Asset quality improvements toaugment earningsSubstantial deleveraging of the balance sheet (LDRs at a decade low of 53%) has led toasset quality improvements with NPL reversals of PRs5.5 bn (7%) for UBL and MCB in9M13 as against an average annual NPL creation of PRs9.2 bn over 2009-12.Improvement in macro fundamentals in the backdrop of economic reforms and better riskmanagement will continue to drive improvements in asset quality of top private banks inour view, despite a likely uptick in policy rates with an estimated 100 bp decline in NPLratio in 2014. This, along with expansion in margins, robust growth in non-funded incomeand higher loan growth, should drive a strong earnings momentum for private sector banksover the medium term with three-year (2013-16) earnings CAGR of 17%.

NPL reversals to continue as macros improveNPLs for private sector banks appear to have peaked out with net reversals of PRs5.6 bnfor our coverage banks in 9M 2013. The improvements in NPLs have been driven by achange in the loan portfolio mix, more stringent lending procedures and improvement inmacro indicators. 9M 2013 has witnessed significant NPL reversals, particularly for UBL(PRs4.9 bn) with reductions in both domestic and international NPLs. Clearance of thecircular debt situation in the energy chain and better electricity supply resulted in NPLreversals domestically, while an improving business climate in the Middle East led tohigher recoveries on the international portfolio. At the same time, coverage ratio hasimproved to 89%, the highest level in more than a decade. MCB has also recordedsubstantial provisioning reversals with net credit reversal of 80 bp or PRs2.0 bn in 9M13.We expect this trend to continue as economic recovery gathers pace with the business-friendly policies of the government and better energy supply supporting industrial activity(1Q14 LSM growth of 8.4% is a testament to that).

Figure 30: NPLs have peaked for MCB and UBL with substantial reversals for UBL in 2Qand 3Q

-7,500

-5,500

-3,500

-1,500

500

2,500

4,500

6,500

8,500

Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

MCB UBL NBP Industry

PRs mn

Source: Company data

NPL and credit costreversals for private sectorbanks will continue

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Figure 31: Quarterly NPL movement (LHS) and NPL ratio(RHS)

Figure 32: Credit costs on the decline as coverageimproves

0.0

3.0

6.0

9.0

12.0

15.0

18.0

21.0

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

S e p - 1

1

D e c - 1

1

M a r - 1

2

J u n - 1

2

S e p - 1

2

D e c -

1 2

M a r -

1 3

J u n - 1

3

S e p - 1

3

MCB UBL NBP MCB UBL NBP

PRs mn (%)

(100)

(50)

0

50

100

150

200

250

2010 2011 2012 2013E 2014E 2015E 2016E

MCB UBL NBP Average

bp of loans

Source: Company data Source: Company data, Credit Suisse estimates

Earnings to grow at a three-year (2013-16) CAGR of17%We expect double-digit asset growth, higher margins, robust growth in non-funded incomeand lower provisions/reversals to propel the private sector banks earnings to a CAGR of17% during 2013-16E with an average ROE of 21% (overall sector ROE of 18%). Thisappears favourable compared with the average earnings growth of 4% over the precedingfour years. The third quarter results did, indeed, show an improvement in margins andprovisioning reversals for UBL and MCB and, given the uptick in recent policy rates andgradual improvement in macros and robust growth, we expect banks to continue to poststrong results in coming quarters. This should help ROEs to expand to 22% by 2017(2013: 19%), while the ROAs are estimated to rise to 2.6% (2013E: 2.3%).

Figure 33: Three-year (2013-16E) earnings CAGR of 17%after subdued earnings over 2010-13E...

Figure 34: will drive expansion in ROEs and ROAs

-8%

-2%

4%

10%

16%

22%

28%

10,000

19,000

28,000

37,000

46,000

55,000

64,000

2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

Earnings Growth

PRs mn

2.1%

2.2%

2.3%

2.4%

2.5%

2.6%

2.7%

15.0%

16.5%

18.0%

19.5%

21.0%

22.5%

24.0%

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3 E

2 0 1 4 E

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

ROE (%) ROA (%) (RHS)


Significant earnings upswingwith 17% CAGR over 2013-16E to help ROEs to expandto 22%

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Comfortably placed for Basel III transitionPakistani banks under our coverage are well capitalised with Tier 1 ratios of 11-22% underBasel II. The banks are also comfortably placed on the MCR (Minimum CapitalRequirements) and leverage ratios required under the new Basel III (to be implemented ina phased manner starting Dec-2013). Our initial estimates suggest that requiredadjustment for Basel III will be around 2-4% across the sector which is not very significant

considering the high adequacy levels (total CAR of 17%). Going forward, despite theexpected rise in leverage ratios, we believe a very strong earnings momentum (21%CAGR over 2013-16E) will help keep Tier 1 ratios at comfortable levels.

Figure 35: Capital adequacy ratio under Basel II remains comfortable with low leverageproviding significant buffer for Basel III adjustments (2013E)

-

2.0

4.0

6.0

8.0

10.0

12.0

0%

5%

10%

15%

20%

25%

MCB UBL NBP

Tier 1 CAR Leverage (x) RHS

(x)


Coverage banks havecomfortable adequacy levels

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Re-rating of private sector banks,UBL top pickEarnings raised by 4-21% over 2013-15EWe are increasing earnings estimates for MCB and UBL by 4-21% over 2013-15 on accountof higher margins, lower provisions, expansion in NIMs and more upbeat loan growth outlook.In contrast, we have slashed estimates for NBP by 19-48% on account of more aggressiveprovisioning as we believe asset quality concerns are likely to continue in the near term, asthe new management stringently reviews the asset book which is likely to result in subjectivedowngrades and build-up of necessary provisioning buffers. We have raised margins forMCB and UBL by 18-81 bp, tweaked deposit growth estimates by --1-2% to 2% over 2013-15. Moreover, we have lowered our credit cost estimates for UBL and MCB by 24-142 bp inview of better recoveries over the short to medium term. Private banks under our coverageare geared for a three-year earnings CAGR of 17% over 2013-16E with ROEs rising to 22%by 2017.

Figure 36: Summary of revision in key drivers and earnings estimatesNew estimates Old estimates % diff

2013 2014 2015 2013 2014 2015 2013 2014 2015Deposit growth (%)-NBP 11.5 10.0 11.0 13.0 13.0 13.0 (1.5) (3.0) (2.0)-UBL 14.5 15.0 16.0 14.0 13.5 14.0 0.5 1.5 2.0-MCB 11.5 13.5 14.5 12.5 13.0 14.0 (1.0) 0.5 0.5Investment growth (%)-NBP 5.6 10.4 11.1 10.1 11.0 11.5 (4.5) (0.6) (0.4)-UBL 18.2 19.3 20.8 17.5 17.4 17.6 0.7 1.9 3.2-MCB 19.8 21.2 21.8 22.8 21.3 20.6 (3.0) (0.1) 1.3Net interest margin (%)-NBP 3.4 3.6 3.6 3.8 3.9 4.0 (0.4) (0.4) (0.4)-UBL 4.6 4.8 5.0 4.6 4.6 4.6 (0.0) 0.3 0.4

-MCB 5.8 6.2 6.3 5.6 5.5 5.5 0.2 0.8 0.8Credit cost (bp)-NBP 203.7 86.8 56.9 60.0 53.0 47.0 1.4 0.3 0.1-UBL 47.6 41.7 35.8 162.0 116.3 104.0 (1.1) (0.7) (0.7)-MCB (63.7) (17.8) 10.4 78.1 50.4 33.9 (1.4) (0.7) (0.2)Earnings (PRs mn)-NBP 8,120 14,850 16,956 15,505 18,242 22,241 (47.6) (18.6) (23.8)-UBL 17,457 20,369 24,705 16,738 18,116 20,485 4.3 12.4 20.6-MCB 21,774 25,462 29,531 20,333 22,733 25,892 7.1 12.0 14.1Total 47,351 60,681 71,192 52,577 59,091 68,618 (9.9) 2.7 3.8

Source: Credit Suisse estimates

Target price for UBL and MCB raised on highersustainable ROEs and further re-ratingGiven improving macro fundamentals, asset quality enhancements and a strongerearnings growth outlook, we are upgrading our ratings for UBL to OUTPERFORM fromNeutral and MCB to OUTPERFORM from Underperform with revised target prices ofPRs170 and PRs350, respectively. However, we maintain our NEUTRAL stance on NBPwith a revised TP of PRs53 given likely negative surprises on asset quality as the newmanagement looks to clean up the balance sheet. We have assumed sustainable ROEs of22%, 20.5% and 13% (20%, 18% and 13% previously) for MCB, UBL and NBPrespectively, to arrive at our new target prices under the Gordon growth model. Moreover,given stronger balance sheets, low leverage and better loan growth outlook, we have

A 4-21% earnings revisionover 2013-15E on highermargins, loan growth andlower credit costs

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applied a 20% and 30% premium respectively to our new target prices under the Gordongrowth model. MCB has historically always traded at a 25-30% premium to its impliedvaluations due to high capital adequacy, better asset quality and stronger depositfranchise, while we believe UBL now justifies a valuation premium consideringimprovement in asset quality and business consolidation over the past five years.

Figure 37: Summary of target price and rating changesCurrent price Target price (PRs) Upside COE Sustainable Rating 2014E

PRs New Old (%) (%) ROE (%) New Old P/B (x) P/E (x)MCB 278.92 350 168 25 17.4 22.5 O U 2.3 11.3UBL 126.40 170 85 34] 17.4 20.5 O N 1.4 7.6NBP 54.67 53 42 (3) 17.7 13.5 N N 0.7 7.5Source: Bloomberg, Credit Suisse estimates

Figure 38: Banking stocks have done well in a rising interest rate environment whenLDRs have been low reflected by strong performance between 2004 and 2006

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

M a r -

0 2

J a n - 0

3

N o v -

0 3

S e p - 0

4

J u l - 0 5

M a y -

0 6

M a r -

0 7

J a n - 0

8

N o v -

0 8

S e p - 0

9

J u l - 1 0

M a y -

1 1

M a r -

1 2

J a n - 1

3

N o v -

1 3

Banking Stock performance (LHS) 6M KIBOR

Stock performance was correlated withrising KIBOR as LDRs were low (

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Figure 41: UBL still trades at a discount to its historical

average P/B (x)

Figure 42: .while premium valuations for MCB are

ustified given high adequacy and low leverage

0.0

0.6

1.2

1.8

2.4

3.0

3.6

4.2

N o v - 0

5

J u l - 0 6

M a r - 0 7

N o v - 0

7

J u l - 0 8

M a r - 0 9

N o v - 0

9

J u l - 1 0

M a r - 1 1

N o v - 1

1

J u l - 1 2

M a r - 1 3

N o v - 1

3

Mean P/B = 1.6x

P/B (x)

Target P/B = 1.8x

0.0

0.9

1.8

2.7

3.6

4.5

5.4

N o v - 0

5

N o v - 0

6

N o v - 0

7

N o v - 0

8

N o v - 0

9

N o v - 1

0

N o v - 1

1

N o v - 1

2

N o v - 1

3

Mean P/B = 2.1x

Target P/B = 2.8x

(x)

Source: Bloomberg, Company data, Credit Suisse estimates Source: Bloomberg, Company data, Credit Suisse estimates

Upgrade to OVERWEIGHT, UBL top pickWe upgrade the sector to OVERWEIGHT (MARKET-WEIGHT) with UBL our top pick(34% upside to TP of PRs170) The banks remain attractive on both historical valuations aswell as P/B-ROE basis compared with peers. Given improvements in macros on both thelocal and international front (particularly its main international market, the UAE), the bankoffers the most leverage to growth, in our view. We have already seen an uptick inbusiness activity at its international operations in 2013 with local operations expected tofollow suit from next year. We also like MCB (25% upside) due to its premium franchiseposition, high margins, superior asset quality and reasonably strong earnings momentum.

Figure 43: UBL appears most attractive on P/B ROE Figure 44: and on P/B ROA basis as well

NBP

UBL

ABL

HBL

MCB

0.4

0.7

1.0

1.3

1.6

1.9

2.2

2.5

6.0 9.0 12.0 15.0 18.0 21.0 24.0

ROE (%)

P/B (x)

NBP

UBL

ABL

HBL

MCB

0.4

0.7

1.0

1.3

1.6

1.9

2.2

2.5

0.6 1.0 1.4 1.8 2.2 2.6 3.0

P/B (x)

ROA (%)

Source: Bloomberg, Credit Suisse estimates (2014E) Source: Bloomberg, Credit Suisse estimates (2014E)

We prefer UBL and MCB

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Summary of estimate revisionsFigure 45: UBL estimate revisions (2013-15)

New estimates Old estimates % differencePRs mn 2013 2014 2015 2013 2014 2015 2013 2014 2015Net interest income 36,529 42,607 50,117 36,452 39,991 45,292 0.2 6.5 10.7Fee income 9,596 10,984 12,678 9,159 10,295 11,823 4.8 6.7 7.2Pre-prov. op. profit 25,297 30,647 37,468 27,030 29,571 33,788 (6.4) 3.6 10.9Provisions 2,016 1,936 1,897 2,984 3,198 4,140 (32.4) (39.5) (54.2)Credit cost (bp) 48 42 36 162 116 104 (1.1) (0.7) (0.7)Net profit 17,457 20,369 24,705 16,738 18,116 20,485 4.3 12.4 20.6EPS (PRs) 14.3 16.6 20.2 13.7 14.8 16.7 4.3 12.4 20.6Key drivers (%)Net interest margin 4.6 4.8 5.0 4.6 4.6 4.6 (0.0) 0.3 0.4Deposit growth 14.5 15.0 16.0 14.0 13.5 14.0 0.5 1.5 2.0Loan growth 7.0 12.0 16.0 10.0 11.0 15.0 (3.0) 1.0 1.0Investment growth 14.0 10.8 13.8 9.3 9.2 10.8 4.7 1.7 3.0Gross NPL ratio 13.0 11.7 10.4 13.4 12.4 11.5 (0.3) (0.7) (1.1)Tier 1 CAR 11.3 11.5 11.5 10.4 10.3 10.1 0.9 1.2 1.4ROE 18.2 19.3 20.8 17.5 17.4 17.6 0.7 1.9 3.2ROA 1.8 1.9 2.0 1.8 1.8 1.8 0.1 0.1 0.2Source: Credit Suisse estimates

Figure 46: MCB estimate revisions (2013-15) New estimates Old estimates % difference

PRs mn 2013 2014 2015 2013 2014 2015 2013 2014 2015Net interest income 38,139 44,376 50,839 37,631 40,302 45,665 1.4 10.1 11.3Fee income 7,050 8,156 9,615 7,227 8,266 9,435 (2.4) (1.3) 1.9Pre-prov. op. profit 30,682 36,893 43,473 28,783 30,979 35,444 6.6 19.1 22.7Provisions (1,707) (514) 339 854 771 1,335 NM NM (74.6)Credit cost (bp) (64) (18) 10 78 50 34 (1.4) (0.7) (0.2)Net profit 21,774 25,462 29,531 20,333 22,733 25,892 7.1 12.0 14.1EPS (PRs) 21.5 25.2 29.2 20.1 22.5 25.6 7.1 12.0 14.1Key drivers (%)Net interest margin 5.8 6.2 6.3 5.6 5.5 5.5 0.2 0.8 0.8Deposit growth 11.5 13.5 14.5 12.5 13.0 14.0 (1.0) 0.5 0.5Loan growth 4.0 11.0 16.0 6.0 10.0 14.0 (2.0) 1.0 2.0Investment growth 1.3 13.7 13.1 5.8 12.1 13.6 (4.5) 1.6 (0.5)Gross NPL ratio 9.1 8.1 7.0 9.1 8.3 7.8 0.0 (0.2) (0.7)Tier 1 CAR 22.0 21.6 21.2 15.7 15.3 14.8 6.4 6.3 6.4ROE 19.8 21.2 21.8 22.8 21.3 20.6 (3.0) (0.1) 1.3ROA 2.8 3.0 3.1 3.3 3.2 3.2 (0.6) (0.2) (0.1)Source: Credit Suisse estimates

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Figure 47: NBP estimate revisions (2013-15) New estimates Old estimates % difference

PRs mn 2013 2014 2015 2013 2014 2015 2013 2014 2015Net interest income 37,239 42,345 46,410 41,871 48,045 55,114 (11.1) (11.9) (15.8)Fee income 11,953 13,087 14,798 12,043 13,533 15,624 (0.7) (3.3) (5.3)Pre-prov. op. profit 18,921 21,676 24,248 22,521 27,581 33,147 (16.0) (21.4) (26.8)Provisions 15,543 7,271 5,359 4,595 4,498 4,552 238.3 61.7 17.7

Credit cost (bp) 204 87 57 60 53 47 1.4 0.3 0.1Net profit 8,120 14,850 16,956 15,505 18,242 22,241 (47.6) (18.6) (23.8)EPS (PRs) 3.8 7.0 8.0 7.3 8.6 10.5 (47.6) (18.6) (23.8)Key drivers (%)Net interest margin 3.4 3.6 3.6 3.8 3.9 4.0 (0.4) (0.4) (0.4)Deposit growth 11.5 10.0 11.0 13.0 13.0 13.0 (1.5) (3.0) (2.0)Loan growth 9.0 10.5 14.0 10.0 11.0 13.0 (1.0) (0.5) 1.0Investment growth 11.7 1.3 3.2 15.1 15.3 16.1 (3.3) (14.0) (12.9)Gross NPL ratio 12.3 12.2 11.2 11.9 11.3 10.5 0.5 0.9 0.8Tier 1 CAR 11.3 10.9 10.3 11.8 10.8 10.1 (0.5) 0.1 0.2ROE 5.6 10.4 11.1 10.1 11.0 11.5 (4.5) (0.6) (0.4)ROA 0.6 1.0 1.0 1.1 1.2 1.3 (0.5) (0.2) (0.2)Source: Credit Suisse estimates

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Asia banks: Valuation snapshotFigure 48: Asia banks valuation snapshot

Mkt cap Daily vol. Price (loc. curr.) Price performance (%)25 Nov 2013 (US$ bn) (US$ mn) Beta Rating Current Target Up. (%) 3M 2012 20111398 HK ICBC 226.8 166.4 1.30 O 5.52 7.00 27% 7.4 19.3 -20.4

939 HK CCB 200.5 192.2 1.09 O 6.24 7.80 25% 7.8 14.8 -22.21288 HK ABC 141.1 130.7 1.10 O 3.94 4.80 22% 17.3 14.7 -14.43988 HK BOC 130.3 64.9 1.29 N 3.72 4.40 18% 12.4 21.0 -30.23328 HK BCOM 52.5 25.3 1.19 U 5.74 5.40 -6% 9.8 7.6 -23.73968 HK CMB 46.4 36.5 1.43 O 16.40 20.70 26% 19.7 8.9 -20.0998 HK CiticBank 29.5 31.0 1.27 O 4.47 5.90 32% 17.6 5.3 -10.21988 HK Minsheng 38.4 44.0 1.12 O 9.19 12.80 39% 11.9 33.1 1.23618 HK ChongQing 4.9 9.1 1.55 O 4.06 5.70 40% 16.3 5.5 -23.1ICICIBC IB ICBK 19.9 5.5 1.28 N 1,073 1,036 -3% 25.9 66.1 -40.2SBIN IB SBI 19.8 16.3 1.15 N 1,805 1,417 -21% 15.7 47.2 -42.4HDFC IB HDFC 20.5 2.1 1.04 O 819 1,045 28% 10.6 27.5 -10.8HDFCB IB HDBK 25.3 1.8 0.96 O 659 770 17% 8.5 59.0 -9.0KMB IB Kotak 9.2 0.7 1.03 U 746 618 -17% 16.0 50.3 -4.5

AXSB IB Axis 8.4 4.3 1.22 O 1,116 1,450 30% 13.7 68.1 -40.2BOI IB BOI 2.1 0.8 1.05 N 217 175 -19% 47.2 28.7 -40.8PNB IB PNB 3.0 1.2 1.05 N 533 555 4% 10.4 11.1 -35.8IDFC IB IDFC 2.5 1.8 1.38 O 104 144 39% 0.0 86.6 -49.6BOB IB BOB 4.3 1.1 0.91 O 633 707 12% 34.5 31.2 -26.3UNBK IB Union 1.2 1.1 0.97 U 122 120 -1% 7.1 61.7 -51.2YES IB Yes Bank 2.0 1.9 1.28 U 351 345 -2% 35.3 94.6 -23.7JKBK IB J&K Bank 0.9 0.4 0.83 O 1,184 1,700 44% 5.4 91.8 -12.8105560 KP KB Fin 14.5 36.9 1.20 O 39,750 48,500 22% 14.9 4.4 -39.5055550 KP Shinhan 19.8 33.3 1.05 O 44,200 54,000 22% 12.0 -2.3 -24.9053000 KP Woori 9.7 18.1 1.27 R 12,800 R N/A 16.6 25.1 -39.2086790 KP Hana 10.9 34.3 1.38 O 39,850 47,000 18% 16.9 -2.4 -17.9024110 KP IBK 6.2 9.1 1.08 O 12,000 14,000 17% 7.2 -5.2 -33.3138930 KP BS Financial 2.9 5.9 0.93 R 16,000 R N/A 9.3139130 KP DGB Financial 2.1 2.7 n.a. O 16,950 18,000 6% 7.02881 TT Fubon 14.5 18.4 1.08 N 41.80 43.00 3% 3.7 15.0 -15.92886 TT Mega 10.3 13.6 1.07 N 24.55 24.17 -2% 6.9 13.6 -8.22891 TT Chinatrust 9.4 21.7 1.22 O 19.00 22.50 18% 2.4 -0.1 -5.32892 TT First 5.2 6.0 1.03 U 17.80 15.49 -13% 4.7 5.7 -29.12880 TT HuaNan 5.2 3.2 0.94 U 17.00 14.48 -15% 7.1 7.9 -27.62890 TT Sinopac 4.0 7.2 1.19 N 14.55 15.00 3% 12.7 39.3 -28.52801 TT ChangHwa 4.7 4.0 1.10 N 18.05 16.00 -11% 12.0 3.7 -30.82887 TT Taishin 3.7 7.2 1.19 U 14.45 12.00 -17% 15.0 19.9 -34.92884 TT ESun 3.7 5.8 1.17 N 19.90 18.64 -6% 10.9 30.7 -29.22847 TT TaChong 0.9 1.5 1.12 O 10.55 13.00 23% 14.2 45.9 -43.3

BBRI IJ Rakyat 16.1 23.0 1.27 O 7,700 10,250 33% 15.8 3.0 28.6BBCA IJ BCA 21.2 9.4 0.95 N 10,150 10,600 4% 8.6 13.8 25.0BMRI IJ Mandiri 15.3 18.6 1.34 O 7,800 10,500 35% 5.4 20.0 5.6BDMN IJ Danamon 3.1 1.8 1.02 U 3,875 3,000 -23% -6.6 37.8 -25.9BBNI IJ Negara 6.8 7.5 1.17 N 4,325 4,700 9% 17.7 -2.6 -1.9BBTN IJ BBTN 0.9 2.8 1.33 U 1,000 880 -12% -2.9 25.0 -26.2BJBR IJ Jabar Banten 0.7 1.0 1.36 N 830 975 17% -3.5 16.5 -37.2BTPN IJ BTPN 2.1 0.1 0.71 N 4,275 4,350 2% 9.6 54.4 28.8Note: Ratings O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM, R = RESTRICTED (Priced as of 25 November 2013)Source: Bloomberg, Credit Suisse estimates

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P/PPOP (x) P/E (x) EPS growth (%) P/B (x) ROE (%) ROA (%) Yield (%)25 Nov 2013 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2014E 2014E1398 HK ICBC 3.6 3.3 5.7 5.5 10.5 5.5 1.2 1.0 21.7 19.9 1.40 6.4

939 HK CCB 3.8 3.6 5.7 5.6 11.9 1.0 1.1 1.0 21.3 18.8 1.36 6.21288 HK ABC 3.2 2.9 5.8 5.1 18.8 13.7 1.2 1.0 21.3 20.9 1.29 6.83988 HK BOC 3.4 3.1 5.2 4.9 12.1 6.4 0.9 0.8 17.8 16.8 1.19 7.13328 HK BCOM 3.2 3.1 5.3 5.5 8.4 -3.4 0.8 0.7 16.0 14.1 1.01 5.53968 HK CMB 3.6 3.1 5.8 5.5 6.7 4.3 1.1 1.0 20.9 19.0 1.45 4.5998 HK CiticBank 2.7 2.5 4.1 4.1 28.4 1.8 0.7 0.6 18.5 16.5 1.12 6.21988 HK Minsheng 3.4 2.8 4.8 4.1 12.9 18.7 1.1 0.9 23.8 23.9 1.45 4.43618 HK ChongQing 3.2 2.9 4.8 4.4 16.2 8.1 0.8 0.7 18.2 17.3 1.22 6.8ICICIBC IB ICBK 8.0 6.8 13.6 11.8 9.7 14.9 1.7 1.5 13.1 13.7 1.56 2.6SBIN IB SBI 4.1 3.3 10.5 8.3 -16.4 25.6 1.2 1.0 11.5 13.2 0.76 2.8HDFC IB HDFC 16.5 13.8 22.6 19.1 13.0 18.5 4.6 4.1 21.3 22.8 2.63 2.4HDFCB IB HDBK 11.1 9.0 18.6 15.1 25.3 23.2 3.6 3.1 21.3 22.1 1.96 1.3KMB IB Kotak 14.3 11.8 22.7 19.0 11.9 19.7 3.2 2.7 14.9 15.4 2.03 0.2

AXSB IB Axis 4.7 4.2 8.8 7.8 9.1 13.5 1.4 1.2 16.9 16.7 1.62 2.2BOI IB BOI 1.6 1.4 4.3 3.6 9.1 19.4 0.5 0.5 12.6 13.6 0.66 6.0PNB IB PNB 1.7 1.4 4.4 3.6 -17.5 21.1 0.5 0.5 13.2 14.4 0.89 6.9IDFC IB IDFC 5.0 4.2 7.8 6.6 8.5 18.1 1.0 0.9 13.9 14.8 2.92 4.3BOB IB BOB 3.0 2.5 6.3 5.3 -5.6 17.6 0.8 0.7 13.2 14.0 0.78 4.6UNBK IB Union 1.4 1.2 3.2 2.8 0.7 14.8 0.4 0.4 13.7 14.1 0.68 7.7YES IB Yes Bank 5.1 4.1 9.6 7.7 0.5 24.8 1.6 1.4 20.1 19.1 1.52 2.3JKBK IB J&K Bank 2.8 2.5 4.8 4.6 13.9 6.2 1.0 0.8 22.3 20.1 1.43 5.1105560 KP KB Fin 4.2 3.5 10.7 7.3 4.2 46.5 0.6 0.6 6.3 8.9 0.68 2.3055550 KP Shinhan 5.3 4.6 10.8 8.7 -4.0 24.3 0.8 0.7 8.5 9.9 0.76 1.6053000 KP Woori 3.0 2.6 12.8 9.0 -37.4 42.9 0.5 0.5 4.8 6.5 0.33 1.6086790 KP Hana 4.4 3.6 9.1 7.3 -16.1 24.6 0.6 0.5 7.8 8.5 0.51 2.0024110 KP IBK 2.7 2.5 8.4 6.6 -28.9 28.2 0.5 0.4 7.5 9.0 0.50 2.1138930 KP BS Financial 4.8 4.3 8.5 7.6 9.2 12.1 0.9 0.8 11.1 11.3 0.82 2.5139130 KP DGB Financial 4.6 4.0 9.1 7.4 -4.0 23.2 0.8 0.7 10.5 12.3 0.78 2.42881 TT Fubon 10.5 10.1 12.6 12.1 9.3 3.8 1.2 1.1 10.3 9.6 0.73 2.62886 TT Mega 10.6 9.7 12.6 12.2 5.0 3.7 1.3 1.2 10.3 10.0 0.81 3.72891 TT Chinatrust 10.2 7.6 15.0 9.5 -28.0 57.9 1.4 1.3 9.6 14.0 1.36 4.42892 TT First 9.9 8.5 14.3 12.6 2.9 13.3 1.1 1.0 7.8 8.4 0.56 2.22880 TT HuaNan 10.8 9.8 16.2 14.7 6.9 10.5 1.1 1.0 6.8 7.3 0.47 1.72890 TT Sinopac 9.5 9.0 12.1 12.0 1.2 1.0 1.1 1.1 9.7 9.3 0.72 3.32801 TT ChangHwa 13.6 11.3 15.1 14.7 5.0 3.2 1.2 1.1 8.1 7.9 0.55 2.02887 TT Taishin 4.7 4.8 8.1 10.1 36.6 -19.6 1.1 1.0 14.6 10.6 0.66 2.52884 TT ESun 9.3 8.4 12.9 12.2 17.3 6.0 1.3 1.2 10.8 10.6 0.68 1.62847 TT TaChong 6.5 6.4 8.8 8.1 54.2 8.0 0.8 0.8 9.8 10.1 0.69 4.0

BBRI IJ Rakyat 7.5 6.5 9.8 9.9 3.5 -0.9 2.4 2.0 26.7 21.8 2.77 2.0BBCA IJ BCA 13.5 12.4 18.4 17.3 15.8 6.1 4.1 3.5 24.1 22.0 2.78 1.9BMRI IJ Mandiri 6.8 6.3 10.7 10.0 9.4 7.2 2.1 1.9 21.2 19.9 2.31 2.0BDMN IJ Danamon 4.0 3.7 9.2 9.1 0.9 0.9 1.2 1.1 13.6 12.6 2.16 3.9BBNI IJ Negara 6.7 5.5 9.3 8.8 23.0 6.3 1.6 1.4 18.7 17.3 2.28 3.4BBTN IJ BBTN 4.2 3.6 7.5 6.0 3.0 26.1 1.1 0.9 15.4 16.5 1.22 0.0BJBR IJ Jabar Banten 3.3 2.8 6.3 5.4 7.7 15.4 1.1 0.9 19.5 17.9 1.65 12.7BTPN IJ BTPN 7.0 5.9 10.6 9.7 15.3 9.3 2.4 1.9 25.7 22.1 3.14 0.0Note: Priced as of 25 November 2013.Source: Bloomberg, Credit Suisse estimates

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Mkt cap Daily vol. Price (loc. curr.) Price performance (%)25 Nov 2013 (US$ bn) (US$ mn) Beta Rating Current Target Up. (%) 3M 2012 2011SCB TB SCB 17.0 30.4 1.17 O 160 185 16% 13.1 55.8 12.6

BBL/F TB BBL 11.4 11.7 1.12 N 191 228 20% 1.9 27.4 7.5KBANK/F TB KBANK 13.0 15.8 1.13 O 174 228 31% 6.4 55.4 -4.6BAY TB BAY 7.3 16.0 1.20 N 38.5 39.0 1% 2.0 47.7 -14.6KTB TB KTB 8.2 25.3 1.33 O 18.8 24.5 30% 6.8 39.8 -13.9TMB TB TMB 3.7 12.0 1.10 N 2.68 2.60 -3% 3.1 17.7 -33.1TISCO TB TISCO 1.0 3.8 0.98 N 39.8 46.0 16% 11.2 36.8 -6.7TCAP TB TCAP 1.3 13.0 1.04 N 32.5 39.0 20% 3.2 41.1 -25.7MAY MK MAY 26.5 24.6 0.90 N 9.61 10.30 7% -3.4 7.2 0.9PBKF MK Public 14.1 6.5 0.71 N 18.4 17.5 -5% 8.1 23.5 1.5CIMB MK CIMB 18.0 20.4 1.22 N 7.51 8.20 9% -0.4 2.6 -12.5HLBK MK HLB 8.3 5.7 1.21 N 14.2 13.8 -3% 2.3 35.6 23.4HLFG MK HLFG 5.0 1.2 1.26 O 15.3 17.1 12% 7.5 13.2 31.2

AFG MK Alliance 6.0 2.3 1.09 O 7.57 8.80 16% 4.0 2.8 -14.2

RHBC MK RHB Capital 2.3 4.2 1.17 O 4.85 5.63 16% -1.8 11.4 29.9BPI PM BPI 7.5 3.6 1.04 O 92.0 112.0 22% 2.2 72.1 -6.4BDO PM BDO 6.0 9.4 1.13 N 73.6 85.0 15% -3.3 36.8 0.9MBT PM Metro bank 4.6 9.1 1.17 U 74.0 82.0 11% -7.4 50.1 -5.6SECB PM Security 33.4 2.8 1.20 N 17.1 19.0 11% 5.5 28.8 -19.6DBS SP DBS 26.5 43.0 1.02 N 21.1 22.0 4% 1.1 29.7 -16.1UOB SP UOB 28.9 36.9 1.02 U 10.49 10.20 -3% 4.6 24.3 -20.7OCBC SP OCBC 208.6 25.0 0.97 U 86.5 99.2 15% 3.3 37.8 -26.05 HK HSBC 57.2 143.1 0.98 O 183 172 -6% 2.3 15.4 -19.82888 HK STAN 31.0 12.8 0.97 U 125.9 135 7% 4.0 28.8 -27.911 HK HSB 35.8 21.5 0.74 N 26.3 30.8 17% 7.4 31.0 -30.42388 HK BOC-HK 10.1 38.5 0.98 O 34.2 26.9 -21% 12.2 0.9 -9.723 HK BEA 4.2 7.8 0.92 U 106.6 72.0 -32% 37.9 27.1 -40.8302 HK WHB 1.7 1.8 0.94 N 44.2 39.9 -10% 19.5 50.3 -54.3440 HK DSF 2.2 2.0 1.20 N 13.70 12.20 -11% 23.2 27.1 -49.82356 HK DSBG 1.5 1.3 1.10 N 128.89 170.00 32% 2.3 59.7 -23.2UBL PK UBL 2.7 0.7 1.23 O 284.13 350 23% 0.7 71.4 -35.2MCB PK MCB 1.1 1.2 1.40 O 55.87 53.0 -5% 9.0 32.3 -33.2NBP PK NBP 113.7 0.8 1.08 U 76.9 76.0 -1% 5.9 26.3 -3.1CBA AU CBA 93.5 216.0 0.95 U 32.8 33.5 2% 3.6 30.2 -10.0WBC AU WBC 74.2 182.8 1.14 U 34.4 36.5 6% 5.1 7.0 -1.4NAB AU NAB 80.5 200.3 1.15 N 32.0 34.5 8% 7.3 22.0 -12.1

ANZ AU ANZ 17.0 164.8 1.09 N 160 185 16% 13.1 55.8 12.6Note: Ratings O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM (Priced as of 25 November 2013)Source: Bloomberg, Credit Suisse estimates

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P/PPOP (x) P/E (x) EPS growth (%) P/B (x) ROE (%) ROA (%) Yield (%)25 Nov 2013 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2014E 2014ESCB TB SCB 7.3 6.4 10.8 9.6 25.3 12.9 2.3 2.0 22.0 22.2 2.19 5.0BBL/F TB BBL 7.7 6.9 9.8 9.6 12.3 2.6 1.3 1.1 13.2 12.5 1.45 4.3KBANK/F TB KBANK 6.2 5.5 10.1 8.9 17.1 13.2 2.0 1.7 20.8 20.6 1.95 4.3BAY TB BAY 7.2 6.4 15.2 12.3 5.1 23.4 1.9 1.8 13.1 14.9 1.55 3.2KTB TB KTB 5.3 4.7 8.3 6.9 16.2 21.6 1.3 1.2 16.6 18.2 1.47 6.1TMB TB TMB 8.4 7.5 20.0 13.3 262.7 51.2 2.0 1.9 10.5 14.7 1.16 3.0TISCO TB TISCO 3.6 3.3 6.5 6.2 19.3 4.8 1.4 1.2 22.7 21.0 1.44 5.8TCAP TB TCAP 2.4 2.2 4.3 6.7 74.9 -34.9 0.8 0.8 20.8 12.1 0.53 4.9MAY MK MAY 9.0 8.0 13.3 12.3 6.2 8.5 1.9 1.8 14.5 15.1 1.29 6.1PBKF MK Public 7.5 6.5 15.2 13.0 10.5 16.5 3.2 2.8 22.4 23.0 1.51 3.5CIMB MK CIMB 9.0 7.4 11.9 11.3 7.8 6.1 1.8 1.6 15.6 14.9 1.27 3.5HLBK MK HLB 11.7 10.3 13.5 12.0 6.2 12.9 1.9 1.7 14.5 15.0 1.21 3.3HLFG MK HLFG 5.8 5.1 10.7 9.3 0.3 15.5 1.4 1.3 14.1 14.6 0.85 2.7

AFG MK Alliance 6.6 5.7 10.6 9.0 6.7 18.1 1.2 1.1 11.4 12.4 1.02 3.3

RHBC MK RHB Capital 8.6 7.2 11.8 10.6 18.2 11.7 1.7 1.6 15.1 15.5 1.32 4.3BPI PM BPI 12.2 11.7 16.8 17.1 19.7 -1.8 3.1 2.8 19.3 17.4 1.61 2.3BDO PM BDO 8.9 9.4 11.9 13.7 35.6 -13.0 1.6 1.5 14.1 11.3 1.16 1.8MBT PM Metro bank 5.9 8.0 9.3 14.2 45.5 -34.0 1.5 1.4 17.7 10.4 1.03 1.4SECB PM Security 8.6 8.0 11.7 10.7 6.6 9.2 1.2 1.2 11.1 11.3 0.98 3.5DBS SP DBS 9.1 8.5 11.8 11.4 4.3 3.5 1.3 1.2 11.9 11.6 1.04 3.6UOB SP UOB 9.7 9.0 13.7 13.1 -1.9 4.1 1.3 1.3 11.3 11.2 0.83 3.1OCBC SP OCBC 7.1 6.7 11.6 10.1 16.1 14.2 1.1 1.1 10.1 11.1 0.75 6.35 HK HSBC 6.2 6.0 11.3 10.7 -1.9 5.3 1.2 1.2 11.2 11.4 0.82 4.02888 HK STAN 12.6 11.5 14.9 13.7 -11.7 9.0 2.3 2.2 16.5 16.5 1.48 4.411 HK HSB 10.0 9.2 12.7 11.7 15.8 8.4 1.7 1.7 14.1 14.5 1.18 5.32388 HK BOC-HK 10.4 9.7 13.7 12.7 7.4 8.3 1.2 1.1 9.3 9.2 0.80 3.323 HK BEA 15.2 13.4 19.2 16.5 10.2 16.0 1.6 1.5 8.4 9.2 0.92 2.6302 HK WHB 7.1 6.6 9.5 9.0 25.3 5.0 0.8 0.8 8.2 8.9 0.77 3.5440 HK DSF 9.6 9.4 9.4 9.5 37.0 -1.2 1.0 0.9 10.4 10.3 1.01 3.22356 HK DSBG 6.2 5.1 9.0 7.7 -3.1 16.7 1.6 1.4 18.2 19.3 1.93 7.0UBL PK UBL 9.3 7.7 13.2 11.3 3.3 16.7 2.5 2.3 19.7 21.1 3.00 4.9MCB PK NBP 6.3 5.5 14.6 8.0 -49.7 82.6 0.9 0.8 5.6 10.4 1.00 8.9NBP PK MCB 9.9 9.7 15.5 15.3 4.8 1.4 2.7 2.6 18.3 17.7 1.03 5.0CBA AU CBA 9.2 8.8 14.7 14.4 6.6 2.2 2.2 2.1 16.0 15.7 1.00 5.6WBC AU WBC 7.8 7.4 13.7 12.6 5.0 8.6 1.9 1.8 15.0 15.1 0.77 6.0NAB AU NAB 8.7 8.1 13.9 13.1 8.5 6.6 2.0 1.9 15.3 15.4 0.94 5.4

ANZ AU ANZ 7.3 6.4 10.8 9.6 25.3 12.9 2.3 2.0 22.0 22.2 2.19 5.0Note: Priced as of 25 November 2013)Source: Bloomberg, Credit Suisse estimates

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Asia Pacific / PakistanRegional Banks

United Bank Limited(UBL.KA / UBL PA) Rising growth dynamics merit richer multiples Raising estimates and target price. In view of rising interest rates, the

expected uptick in private sector credit from both local and internationaloperations and the continued borrowing appetite of the government, weincrease our NIMs estimate by 27-40 bp, deposits and loan growth by 1-2%over 2014-15. Management's efforts to clean up the balance sheet appearsto be bearing fruit, in our view, reflected by NPL reversals of PRs4.9 bn in9M13 and low LDRs (down to 49% from a peak of 77%). As a result, we

raise our earnings estimates by 4-21% over 2013-15E. Earnings to rebound in 2014. UBL's earnings fell 8% in 9M13 primarily on

account of falling margins (down 104 bp) as the central bank embarked onmonetary easing, lowering rates by 300 bp between 2H12 to 1H13. Given arise in rates, renewed focus on balance sheet growth, continued governmentborrowing appetite and likely uptick in local and international credit demand,we expect earnings to grow at a 2013-16E CAGR of 18%. This should helpROEs to expand to 21% by 2015 (from 18% in 2013E).

International business back at the forefront. UBLs significantinternational footprint made a strong recovery in 2013 (international assetsup 12% YTD versus 5% growth overall). Recovery in trade, tourism and realestate in the key markets of UAE and Qatar led the overall rebound. Theimproving business outlook can also be gauged by significant recoveries oninternational NPLs (down PRs2 bn in 2013). Going forward, we expectcontinued positive momentum in key GCC markets to drive growth in boththe funded and non-funded business of the bank.

Improving business outlook justifies re-rating. UBL currently trades at anundemanding 2014E P/B of 1.4x (14% historical discount) with an ROE of19%. We believe the bank's stronger balance sheet position, profitabilityupswing along with recovery in the international business (a keydifferentiation point) justifies a re-rating of valuation multiples. Hence, weupgrade UBL to OUTPERFORM (from Neutral) with a revised TP of PRs170(PRs85 earlier). Any turmoil in the Middle East remains a key risk.

Share price performance

80

100

120140

050

100150200

Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13

Price (LHS) Re based Rel (RHS)

The price relative chart measures performance against theKARACHI SE 100 INDEX which closed at 23798.7 on 26/11/13On 26/11/13 the spot exchange rate was PRs108./US$1

Performance over 1M 3M 12M Absolute (%) 3.5 -3.4 62.1Relative (%) -3.0 -10.6 16.6

Financial and valuation metricsear 12/12A 12/13E 12/14E 12/15E

Pre-prov op profit (PRs mn) 31,061.1 25,297.0 30,646.6 37,468.2Recurring profit (PRs mn) 27,028.9 26,467.9 30,549.9 37,148.8Pre-tax profit (PRs mn) 27,028.9 26,467.9 30,549.9 37,148.8Net profit (PRs mn) 18,006.7 17,457.3 20,369.4 24,705.4EPS (PRs) 14.7 14.3 16.6 20.2Change from previous EPS (%) n.a. 4.3 12.4 20.6IBES consensus EPS (PRs) n.a. 13.85 15.38 18.28EPS growth (%) 16.2 -3.1 16.7 21.3P/E (x) 8.6 8.9 7.6 6.3Dividend yield (%) 6.7 6.8 7.2 7.6BVPS (PRs) 75.3 81.6 91.0 103.2P/B (x) 1.7 1.6 1.4 1.2ROE(%) 21.0 18.2 19.3 20.8ROA (%) 2.2 1.9 1.9 2.0Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Rating (from Neutral) OUTPERFORM*Price (26 Nov 13, PRs) 126.4Target price (PRs) (from 85) 170Chg to TP (%) 34.5Market cap. (PRs bn) 154.74 (US$1.43 bn)Enterprise value (PRs bn) 47.81Number of shares (mn) 1,224.18Free float (%) 100.052-week price range 154 78

*Stock ratings are relative to the coverage universe in eachanalyst's or each team's respective sector.Target price is for 12 months.

Research Analysts


[email protected]

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United Bank Limited UBL.KA / UBL PA Price (26 Nov 13): PRs126.40 , Rating: NEUTRAL , Target Price: PRs170.00 , Analyst: Farhan Rizvi

Target price scenarioScenario TP %Up/Dwn AssumptionsUpside 364.00 187.97 Historical peak P/B 4.0xCentral case 170.00 34.49 Justified P/B of 2.0xDownside 55.00 (56.49) Trough 2009 P/B of 0.6x

Key earnings drivers 12/12A 12/13E 12/14E 12/15ENet interest margin (%) 5.51 4.63 4.84 5.00Fee income (PKR mn) 8,163 9,596 10,984 12,678Provision for NPLs (PKR mn) 4,061 2,016 1,936 1,897

Valuation 12/12A 12/13E 12/14E 12/15EEPS growth (%) 16.2 (3.1) 16.7 21.3P/E (x) 8.59 8.86 7.60 6.26P/B (x) 1.68 1.55 1.39 1.22P/TB (x) 1.74 1.60 1.43 1.26Dividend yield (%) 6.72 6.77 7.17 7.55Income statement (PRs mn) 12/12A 12/13E 12/14E 12/15E

Interest income 73,507 71,995 85,802 99,106Interest expense 34,948 35,467 43,195 48,989Net interest income 38,560 36,529 42,607 50,117Fee and commission income 8,163 9,596 10,984 12,678Trading income 1,863 2,339 2,598 3,010Insurance income (& premiums) Other income 6,639 3,118 3,811 4,151Total non-interest income 16,541 14,917 17,241 19,663Total income 55,100 51,445 59,848 69,780Personal expense 9,846 10,797 11,972 13,104Other expenses 14,318 15,487 17,380 19,383Total expenses 24,163 26,284 29,353 32,487Pre-provision profit 31,061 25,297 30,647 37,468Loan loss provisions 4,061 2,016 1,936 1,897Operating profit 27,000 23,281 28,711 35,572

Associates/JV Other non-operating inc./(exp.) 28 3,187 1,839 1,577Pre-tax profit 27,029 26,468 30,550 37,149Taxes 9,022 9,011 10,181 12,443Net profit before minorities 18,007 17,457 20,369 24,705Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit 18,007 17,457 20,369 24,705

Analyst adjustments Net profit (Credit Suisse) 18,007 17,457 20,369 24,705Balance sheet (PRs mn) 12/12A 12/13E 12/14E 12/15E

AssetsGross customer loans 409,090 437,727 490,254 568,695Risk provisions 44,727 46,035 47,329 48,602Net customer loans 364,364 391,691 442,925 520,093Interbank Loans 37,188 44,106 60,865 68,984Investment & Securities 334,019 380,667 421,929 480,073Cash & cash equivalents 94,081 106,921 122,960 142,633Fixed Assets 21,318 21,984 22,704 23,482Intangibles 3,113 3,176 3,239 3,304Other assets 41,911 43,815 48,292 53,110Total assets 895,994 992,361 1,122,913 1,291,679LiabilitiesInterbank deposits 67,214 57,936 54,069 56,353Customer deposits 699,936 801,426 921,640 1,069,103Total deposits 767,150 859,362 975,709 1,125,455Other liabilities 36,606 33,059 35,860 39,875Total liabilities 803,756 892,421 1,011,570 1,165,330Shareholders' equity 92,238 99,940 111,343 126,349Minority interests Preferred stock Total liabilities & equity 895,994 992,361 1,122,913 1,291,679

Per share data 12/12A 12/13E 12/14E 12/15EShares (wtd avg.) (mn) 1,224 1,224 1,224 1,224EPS (Credit Suisse) 14.71 14.26 16.64 20.18BVPS (PRs) 75 82 91 103Tangible BVPS (PRs) 73 79 88 101DPS (PRs) 8.5 8.6 9.1 9.5Key ratios 12/12A 12/13E 12/14E 12/15E

Profitability and marginsROE stated 21.0 18.2 19.3 20.8ROE - CS adj. 21.0 18.2 19.3 20.8ROA - CS adj. 2.15 1.85 1.93 2.05Gearing (x) 9.8 9.8 10.0 10.2Asset quality (%)NPL/ gross loans 14.0 13.0 11.7 10.4B/S loan loss coverage Loan/ deposit ratio 52.1 48.9 48.1 48.6Capital ratios (%)Capital adequacy ratio 15.0 15.2 14.6 14.1Tier 1 ratio 10.7 11.3 11.5 11.5Equity Tier 1 ratio 10.7 11.3 11.5 11.5Growth(%)Revenue 6.9 (6.6) 16.3 16.6Operating expense 18.4 8.8 11.7 10.7Pre-provision profit (0.7) (18.6) 21.1 22.3Net profit 16.2 (3.1) 16.7 21.3Deposit 14.2 14.5 15.0 16.0


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MCB Bank Limited(MCB.KA / MCB PA) Dominant franchise position to continue Raising NIMs, deposit and asset growth estimates. Given expectation of

further tightening, better private sector credit appetite and continued fiscalborrowings by the government we are raising NIMs, deposits and loan growthestimates over 2013-15. We believe a stubborn inflationary outlook should keepinterest rates higher, while higher quasi-fiscal funding would continue toincentivise banks to aggressively mobilise deposits. Hence, we increase ourearnings estimates by 7-14% over 2013-15E and our target price to PRs350

(PRs168 earlier). MCBs superior asset quality (NPL ratio of 9% versus peeraverage of 12%) and lower LDR make it the safest stock in the banking sector. Biggest beneficiary of higher interest rates. MCB continues to enjoy the

highest NIMs among peers due to a better asset liability franchise asreflected by its CASA of 88%. Given a high proportion of interest yieldingassets (84%) MCB would likely be the biggest beneficiary of higher interestrates with NIMs estimated to expand by 46 bp in 2014.

Provisioning reversals to augment earnings growth. MCB's superiorasset quality due to better risk management and customer knowledge basecontinues to support its earnings profile with provision reversals of PRs1.9bn in 9M13. Given low LDRs (46%) and gradual improvement in macros weexpect provisioning reversals to continue which, along with higher marginsand stronger balance sheet growth, will drive an earnings CAGR of 17%over 2013-16E.

Upgrade to OUTPERFORM, further re-rating likely. MCB trades at a 2014EP/B of 2.2x on an ROE of 21%. While the valuation may appear expensivecompared to peers, a premium appears justified given its higher ROE and NIMsand superior asset quality. Offering a 2014E dividend yield of 5% and 25%potential upside on our new target price of PRs350 (from PRs168), we upgradeMCB to OUTPERFORM from Underperform since we expect it to remain adominant franchise in the local banking space.


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Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against theKARACHI SE 100 INDEX which closed at 23776.64 on26/11/13On 26/11/13 the spot exchange rate was PRs108./US$1

Performance over 1M 3M 12M Absolute (%) 3.4 4.4 64.7Relative (%) -2.6 -2.6 18.4


Pre-prov op profit (PRs mn) 32,732.5 31,030.7 37,254.9 43,887.5Recurring profit (PRs mn) 32,476.5 32,630.9 37,855.0 43,905.4Pre-tax profit (PRs mn) 32,476.5 32,630.9 37,855.0 43,905.4Net profit (PRs mn) 21,153.2 21,773.8 25,462.4 29,531.1EPS (PRs) 21.2 21.9 25.5 29.6Change from previous EPS (%) n.a. 7.1 12.0 14.1IBES consensus EPS (PRs) n.a. 21.53 23.60 25.47EPS growth (%) 9.7 3.3 16.7 16.0P/E (x) 13.2 12.8 10.9 9.4Dividend yield (%) 4.2 4.6 4.9 5.2BVPS (PRs) 115.2 112.5 125.2 141.9P/B (x) 2.4 2.5 2.2 2.0ROE(%) 21.4 19.7 21.1 21.8ROA (%) 3.0 2.8 3.0 3.1Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Rating (from Underperform) OUTPERFORM*Price (26 Nov 13, PRs) 278.92Target price (PRs) (from 168) 350Chg to TP (%) 25.5Market cap. (PRs bn) 282.22 (US$2.61 bn)Enterprise value (PRs bn) 219.23Number of shares (mn) 1,011.85Free float (%) 100.052-week price range 317 170


Research Analysts


[email protected]

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MCB Bank Limited MCB.KA / MCB PA Price (26 Nov 13): PRs278.92 , Rating: OUTPERFORM , Target Price: PRs350.00 , Analyst: Farhan Rizvi

Target price scenarioScenario TP %Up/Dwn AssumptionsUpside 500.00 79.26 Peak P/B of 4.0xCentral Case 350.00 25.48 Justified P/B of 2.8xDownside 80.00 (71.32) Trough P/B of 0.6x

Key earnings drivers 12/12A 12/13E 12/14E 12/15ENet interest margins (%) 6.76 5.76 6.22 6.29Fee income (PKR mn) 6,385 7,050 8,156 9,615Provision for NPLs (PKR mn) 294 (1,707) (514) 339

Valuation 12/12A 12/13E 12/14E 12/15EEPS growth (%) 9.7 3.3 16.7 16.0P/E (x) 13.2 12.8 10.9 9.4P/B (x) 2.42 2.48 2.23 1.97P/TB (x) 2.44 2.50 2.24 1.98Dividend yield (%) 4.24 4.61 4.94 5.20Income statement (PRs mn) 12/12A 12/13E 12/14E 12/15E

Interest income 68,444 65,220 78,353 89,596Interest expense 27,503 27,081 33,977 38,758Net interest income 40,940 38,139 44,376 50,839Fee and commission income 6,385 7,050 8,156 9,615Trading income 824 853 979 1,109Insurance income (& premiums) Other income 2,333 3,782 4,240 4,710Total non-interest income 8,491 9,361 10,870 12,694Total income 49,431 47,500 55,247 63,533Personal expense 7,564 8,007 8,765 9,540Other expenses 10,447 11,135 12,093 13,260Total expenses 18,011 19,141 20,858 22,800Pre-provision profit 32,733 31,031 37,255 43,888Loan loss provisions 294 (1,707) (514) 339Operating profit 32,439 32,738 37,768 43,548

Associates/JV 296.6 676.5 793.8 818.6Other non-operating inc./(exp.) 3.0 (434.6) (345.2) (46.5)Pre-tax profit 32,477 32,631 37,855 43,905Taxes 11,241 10,773 12,294 14,260Net profit before minorities 21,235 21,858 25,561 29,646Minority interests 82.0 84.5 98.8 114.5Preferred dividends Exceptionals/extraordinaries Reported net profit 21,153 21,774 25,462 29,531


AssetsGross customer loans 262,598 273,101 303,143 351,645Risk provisions 22,809 21,680 21,168 21,360Net customer loans 239,789 251,421 281,975 330,286Interbank Loans 2,788 3,102 3,491 3,981Investment & Securities 401,306 406,509 462,236 522,641Cash & cash equivalents 57,420 62,991 71,494 81,861Fixed Assets 23,356 25,602 28,152 30,986Intangibles 789 827 922 1,046Other assets 46,011 48,533 52,179 57,659Total assets 771,458 798,984 900,449 1,028,461LiabilitiesInterbank deposits 88,961 47,195 50,054 59,350Customer deposits 544,988 607,662 689,696 789,702Total deposits 633,949 654,856 739,750 849,052Other liabilities 31,035 29,799 33,453 35,276Total liabilities 664,983 684,655 773,203 884,328Shareholders' equity 105,974 113,819 126,727 143,604Minority interests 501.3 510.2 519.2 528.5Preferred stock Total liabilities & equity 771,458 798,984 900,449 1,028,461

Per share data 12/12A 12/13E 12/14E 12/15EShares (wtd avg.) (mn) 1,012 1,012 1,012 1,012EPS (Credit Suisse) 21.16 21.86 25.52 29.60BVPS (PRs) 115 113 125 142Tangible BVPS (PRs) 114 112 124 141DPS (PRs) 11.8 12.9 13.8 14.5Key ratios 12/12A 12/13E 12/14E 12/15E

Profitability and marginsROE stated 21.4 19.7 21.1 21.8ROE - CS adj. 21.6 20.0 21.4 22.1ROA - CS adj. 3.00 2.82 3.04 3.10Gearing (x) 7.21 7.11 7.03 7.11Asset quality (%)NPL/ gross loans 9.7 9.1 8.0 7.0B/S loan loss coverage Loan/ deposit ratio 44.0 41.4 40.9 41.8Capital ratios (%)Capital adequacy ratio 22.3 23.0 22.5 22.2Tier 1 ratio 20.8 22.0 21.6 21.2Equity Tier 1 ratio 20.8 22.0 21.6 21.2Growth(%)Revenue (4.4) (1.3) 15.9 14.8Operating expense 4.3 6.3 9.0 9.3Pre-provision profit (8.6) (5.2) 20.1 17.8Net profit 9.7 3.3 16.7 16.0Deposit 11.0 11.5 13.5 14.5


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National Bank of Pakistan(NBPK.KA / NBP PA) Asset quality concerns limit upside potential Raise provisions and margins, lower deposit growth estimates. We

increase our provisions and margin estimates for 2013-15E given risk ofmore negative surprises on asset quality and monetary tightening by theSBP. Moreover, we lower our deposit growth estimates by 1.5-3.0% onaccount of the new management's strategy to consolidate and clean-up thebalance sheet after a sharp expansion over the last few years. NBP'searnings are estimated to decline by 50% in 2013 as management looks to

build necessary provisioning buffers given probable asset quality issues. Wetherefore maintain our NEUTRAL stance on the scrip at current levels.

Negative surprises on asset quality likely. Recent changes in political set-up and bank's top management has increased the risk of negative news flowon asset quality. NBP recorded PRs4 bn of general provisions in 3Q as abuffer to deal with future NPLs and considering more aggressive lending inthe last few years, negative surprise on asset quality cannot be ruled out.We expect provisions of PRs16 bn in 2013 and PRs7 bn in 2014.

Skewed lending to PSE will restrict NIM expansion. Being the only majorgovernment owned bank, NBP will continue to act as a key lender totroubled Public Sector Enterprises (PSEs) such as PIA, Pakistan Steel,Railways, and WAPDA. This would continue to restrict NIM expansion as

PSEs generally have delayed debt servicing patterns and tend to squeezeliquidity forcing the bank to generate extra liability buffers. Moreover, weakerearnings in 2013 will significantly reduce the full year dividend payout in Feb.

Maintain NEUTRAL, asset quality remains the biggest challenge. Givennear term weakness in earnings and uncertainty on asset quality, we arereducing our estimates by 19-48% over 2013-15E. Our Gordon growth-based target price of PRs53 implies a target P/B of 0.7x and a potentialdownside of 3%. We therefore maintain our NEUTRAL stance on NBP. Thesharp fall in earnings may also result in lower payout with 2014E dividendyield of 9% versus previous three-year average yield of 15%.


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The price relative chart measures performance against theKARACHI SE 100 INDEX which closed at 23776.64 on26/11/13On 26/11/13 the spot exchange rate was PRs108./US$1

Performance over 1M 3M 12M Absolute (%) 9.8 14.0 33.5Relative (%) 3.8 6.9 -12.8


Pre-prov op profit (PRs mn) 28,439.0 18,952.9 21,712.2 24,256.5

Recurring profit (PRs mn) 23,257.7 7,588.7 19,389.8 22,710.4Pre-tax profit (PRs mn) 23,257.7 7,588.7 19,389.8 22,710.4Net profit (PRs mn) 16,162.6 8,119.6 14,849.5 16,955.8EPS (PRs) 7.6 3.8 7.0 8.0Change from previous EPS (%) n.a. -47.6 -18.6 -23.8IBES consensus EPS (PRs) n.a. 7.6 8.3 10.5EPS growth (%) -11.4 -49.8 82.6 14.0P/E (x) 7.2 14.3 7.8 6.9Dividend yield (%) 12.8 6.4 9.1 9.1BVPS (PRs) 81.8 64.9 69.5 73.5P/B (x) 0.67 0.84 0.79 0.74ROE(%) 11.4 5.6 10.4 11.1ROA (%) 1.3 0.6 1.0 1.0Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Rating NEUTRAL*Price (26 Nov 13, PRs) 55Target price (PRs) (from 42) 53Chg to TP (%) -3.1Market cap. (PRs bn) 116.31 (US$1.08 bn)Enterprise value (PRs bn) -57.34Number of shares (mn) 2,127.51Free float (%) 100.052-week price range 60 38


Research Analysts


[email protected]

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National Bank of Pakistan NBPK.KA / NBP PA Price (26 Nov 13): PRs54.67 , Rating: NEUTRAL , Target Price: PRs53.00 , Analyst: Farhan Rizvi

Target price scenarioScenario TP %Up/Dwn AssumptionsUpside 140.00 156.08 Historical peak P/B of 2.2xCentral Case 53.00 (3.05) Justified P/B of 0.7xDownside 28.00 (48.78) Trough P/B of 0.45x

Key earnings drivers 12/12A 12/13E 12/14E 12/15ENet interest margins 4.46 3.43 3.55 3.56Fee income (PKR mn) 10,707 11,953 13,087 14,798Provisions (PKR mn) 7,527 15,543 7,271 5,359

Valuation 12/12A 12/13E 12/14E 12/15EEPS growth (%) (11.4) (49.7) 82.6 14.0P/E (x) 7.2 14.3 7.8 6.9P/B (x) 0.67 0.84 0.79 0.74P/TB (x) 0.67 0.84 0.79 0.74Dividend yield (%) 12.8 6.4 9.1 9.1Income statement (PRs mn) 12/12A 12/13E 12/14E 12/15E

Interest income 100,092 96,058 117,412 129,164Interest expense 56,418 58,819 75,068 82,753Net interest income 43,674 37,239 42,345 46,410Fee and commission income 10,707 11,953 13,087 14,798Trading income 3,703 3,683 4,044 4,489Insurance income (& premiums) Other income 6,222 5,448 5,753 6,201Total non-interest income 20,631 21,084 22,883 25,488Total income 64,306 58,323 65,228 71,898Personal expense 25,710 27,230 30,275 33,372Other expenses 10,187 12,172 13,276 14,279Total expenses 35,897 39,402 43,551 47,651Pre-provision profit 28,439 18,953 21,712 24,257Loan loss provisions 7,527 15,543 7,271 5,359Operating profit 20,912 3,410 14,441 18,898

Associates/JV Other non-operating inc./(exp.) 2,376 4,210 4,984 3,821Pre-tax profit 23,258 7,589 19,390 22,710Taxes 7,095 (531) 4,540 5,755Net profit before minorities 16,163 8,120 14,850 16,956Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit 16,163 8,120 14,850 16,956


AssetsGross customer loans 730,141 795,854 879,418 1,002,537Risk provisions 72,760 87,954 94,898 99,938Net customer loans 657,381 707,900 784,520 902,599Interbank Loans 38,495 61,852 62,401 71,654Investment & Securities 306,665 342,655 347,244 358,337Cash & cash equivalents 158,333 173,648 205,555 211,918Fixed Assets 27,909 27,878 27,847 27,814Intangibles 41.3 22.4 0.5 7.0Other assets 120,516 110,112 130,130 147,227Total assets 1,309,339 1,424,068 1,557,698 1,719,556LiabilitiesInterbank deposits 64,618 74,017 81,258 91,420Customer deposits 1,037,785 1,157,130 1,272,843 1,412,856Total deposits 1,102,403 1,231,147 1,354,101 1,504,276Other liabilities 55,658 54,867 55,700 59,015Total liabilities 1,158,062 1,286,014 1,409,802 1,563,290Shareholders' equity 151,278 138,054 147,896 156,266Minority interests Preferred stock Total liabilities & equity 1,309,339 1,424,068 1,557,698 1,719,556

Per share data 12/12A 12/13E 12/14E 12/15EShares (wtd avg.) (mn) 2,128 2,128 2,128 2,128EPS (Credit Suisse) 7.61 3.83 7.00 7.97BVPS (PRs) 81.8 64.9 69.5 73.5Tangible BVPS (PRs) 81.7 64.9 69.5 73.4DPS (PRs) 7.00 3.50 5.00 5.00Key ratios 12/12A 12/13E 12/14E 12/15E

Profitability and marginsROE stated 11.4 5.6 10.4 11.1ROE - CS adj. 11.4 5.6 10.4 11.2ROA - CS adj. 1.32 0.60 1.00 1.04Gearing (x) 8.7 9.4 10.4 10.8Asset quality (%)NPL/ gross loans 12.2 12.3 12.2 11.2B/S loan loss coverage Loan/ deposit ratio 63.3 61.2 61.6 63.9Capital ratios (%)Capital adequacy ratio 16.5 14.7 14.2 13.3Tier 1 ratio 13.1 11.3 10.9 10.3Equity Tier 1 ratio 13.1 11.3 10.9 10.3Growth(%)Revenue 0.8 (9.3) 11.8 10.2Operating expense 18.6 9.8 10.5 9.4Pre-provision profit (15.3) (33.4) 14.6 11.7Net profit (11.4) (49.7) 82.6 14.0Deposit 11.9 11.5 10.0 11.0


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Companies Mentioned (Price as of 26-Nov-2013) Allied Bank Limited (ABL.KA, PRs85.2) Habib Bk (HBL.KA, PRs160.11) MCB Bank Limited (MCB.KA, PRs278.92, OUTPERFORM, TP PRs350.0) National Bank of Pakistan (NBPK.KA, PRs54.67, NEUTRAL, TP PRs53.0) United Bank Limited (UBL.KA, PRs126.4, OUTPERFORM, TP PRs170.0)

For other ocmpanies mentioned please refer to Figures 48-51 on pages 21-24.

Disclosure Appendix

Important Global DisclosuresI, Farhan Rizvi, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies andsecurities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed inthis report.

3-Year Price and Rating History for MCB Bank Limited (MCB.KA)

MCB.KA Closing Price Target PriceDate (PRs) (PRs) Rating29-Nov-10 154.02 132.98 U27-Apr-11 170.45 138.8428-Jun-11 163.55 190.08 N29-Jul-11 154.07 192.5626-Oct-11 131.43 173.5522-Feb-12 146.88 161.9818-Apr-12 157.55 157.2714-Aug-12 164.23 150.0002-Jan-13 185.76 158.18 U12-Feb-13 194.03 168.1806-May-13 216.72 168.20

* Asterisk signifies initiation or assumption of coverage.

UNDERPERFORM

N E U T R A L

3-Year Price and Rating History for National Bank of Pakistan (NBPK.KA)

NBPK.KA Closing Price Target PriceDate (PRs) (PRs) Rating28-Jun-11 39.27 53.75 O29-Aug-11 28.60 52.1729-Mar-12 39.31 47.8314-Aug-12 38.06 42.61 N02-Jan-13 41.89 41.7408-Apr-13 38.18 42.00

* Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

N E U T R A L

CS Banks - 28 Nov 2013

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