Banking Sector Profits down 18% YoY in 1Q2018 Profits excluding pension cost & capital gains +7%

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1 Pakistan Equity Banks Sector Research May 2, 2018 REP 057 Banking Sector Profits down 18% YoY in 1Q2018 Profits excluding pension cost & capital gains +7% Umair Naseer AC Tel: Topline Securities, Pakistan Best Local Brokerage House Brokers Poll , Best Local Brokerage House

2 Profits down 18% (excluding outliers up 7%) Consolidated Income Statement Rsmn 1Q2018 1Q2017 4Q2017 YoY QoQ Mark up / Interest earned 238, , ,738 12% 3% Mark up / Interest expense 120, , ,031 16% 5% Net Mark up / Interest income 118, , ,707 9% 1% NPL Provisioning Expense/Reversal 138 (1,297) 229 NM 40% Total provisioning Expense/Reversal (976) (2,055) 3,577 NM NM Non Interest Income 45,759 49,263 45,325 7% 1% Capital lgain 8,215 13,765 3,639 40% 126% Share of Profit from associates % NM Non Interest Expense 93,218 86,845 99,894 7% 7% PBT (excluding Pension & capital gains) 64,047 60,053 57,933 7% 11% Pension cost 10,895 NM NM Profit before taxation 61,330 73,776 61,543 17% 0% Tax Expense 22,941 26,284 20,383 13% 13% Profit attributable to shareholders 38,949 47,294 41,153 18% 5% Source: PSX Notice, Topline Research Pakistan banking sector profits were down 18% YoY to Rs39bn mainly on account of one time pension cost & lower capital gains recorded during the quarter. Excluding pension & capital gains, profits were up 7% YoY to Rs64bn. For our analysis, we have taken results of all listed banks that have announced their 1Q2018 financial results. Net Interest Income (NII) of the sector was up 9% YoY to Rs118bn driven by balance sheet growth, improving deposit profile and recoveries of markup income, we believe. This led to higher profits excluding outliers. Pakistan Banks 2

3 Profits down 18% (excluding outliers up 7%) Total provisioning reversal during 1Q2018 stood at Rs976mn vs. Rs2bn in 1Q2017 whereas provisioning expense against international NPLs stood at Rs138mn in 1Q2018 vs. reversal of Rs1.3bn in 1Q2017. To recall, UBL booked an above average provision charge of Rs2bn against NPLs that kept consolidated total provisioning reversal on lower side during 1Q2018. Non Interest Income ofbanks were down 7% as capital gains remained on lower side due to high base effect. Capital gains during 1Q2018 declined by 40% to Rs8.1bn. The other key component of Non Interest Income, fee, commission & brokerage income continued to post growth on YoY basis. Growth in non markup expense stood at 7% YoY which is lower than historical average and lower than the growth seen in NII of the sector. This led to improvement in PBT of the sector (excluding pension cost & capital gains). Banks including Allied Bank (ABL), Habib Bank (HBL), MCB Bank (MCB) and United Bank (UBL) booked cumulative pension cost of Rs10.9bn during the quarter. To recall, Supreme Court had ordered these banks to increase minimum monthly pension to Rs8000/month to pensioners with an annual increase of 5%. This led to a one off charge during 1Q2018 which h impacted sector s profitability. We maintain our Overweight stance on banking Sector as the sector is anticipated to benefit from rising interest rates scenario. We anticipate SBPto increase interest rates by 275bps by BAHL and MCB are our top picks for the sector. Pakistan Banks 3

4 Bank wise Net Interest Income & Profitability Banks: 1Q2018 Financial Results Name Symbol NII Profits YoY QoQ (Rsmn) (Rsmn) YoY QoQ EPS Allied Bank ABL 8,013 0% 0% 3,844 5% 27% 3.4 Askari Bank AKBL 4,229 11% 1% 1,378 11% 32% Bank Al Habib BAHL 7,036 13% 5% 2,071 10% 8% 1.9 Bank Alfalah BAFL 7,555 2% 2% 3,264 17% 174% 2.0 Bank Islami BIPL 1,360 16% 2% 87 24% NM 0.1 Bank of Khyber BOK 1,397 36% 5% % 8% 0.4 Bank of Punjab BOP 4,687 42% 2% 1,940 24% 153% 0.7 Faysal Bank FABL 3,380 4% 6% 1,217 35% 76% 0.8 Habib Bank HBL 19,964 1% 5% 4,583 49% 30% 3.1 Habib Metropolitan Bank HMB 3,808 12% 3% 1,576 19% 33% 1.5 JS Bank JSBL 2,114 65% 11% % 31% MCB Bank MCB 11,340 14% 1% 4,701 20% 57% 4.0 Meezan Bank MEBL 5,845 28% 10% 1,915 27% 20% 1.8 National Bank Of Pakistan NBP 14,189 14% 11% 5,062 22% 40% 2.4 Samba Bank SBL % 0% % 4% 0.4 Silk Bank SILK 1,549 23% 8% % 32% 0 Soneri Bank SNBL 1,736 8% 1% % 60% 0.6 Standard Chartered Bank SCBPL 4,344 2% 5% 2,729 2% 42% 0.7 Summit Bank SMBL 820 8% 49% 337 NM NM 0.1 United dbank UBL 14,305 1% 3% 2,785 63% 59% Sector 118,306 9% 1% 38,949 18% 5% Source: PSX Notice, Topline Research Pakistan Banks 4

5 Analyst Certification and Disclosures The research analyst(s), denoted by an AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities/sectors and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Furthermore, it is stated that the research analyst or its close relative have neither served as a director/officer in the past 3 years nor received any compensation from the subject company in the past 12 months. Additionally, as per regulation 8(2)(i) of the Research Analyst Regulations, 2015, we currently do not have a financial interest in the securities of the subjectcompany aggregating more than 1% of the value of the company. Rating System Topline Securities employs three tier ratings system to rate a stock, as mentioned below, which is based upon the level of expected return for a specific stock. The rating is based on the following with time horizon of 12 months. Rating Expected Total Return Buy Stock will outperform the average total return of stocks in universe Neutral Stock will perform in line with the average total return of stocks in universe Sell Stock will underperform the average total return of stocks in universe For sector rating, Topline Securities employs three tier ratings system, depending upon the sector s proposed weight in the portfolio as compared to sector s weight in KSE 100 Index: Rating Sector s Proposed Weight in Portfolio Over Weight > Weight in KSE 100 Index Market Weight = Weight in KSE 100 Index Under Weight < Weight in KSE 100 Index Ratings are updated daily to account for the latest developments in the economy/sector/company, changes in stock prices and changes in analyst s assumptions or a combination of any of these factors. Valuation Methodology To arrive at our 12 months Target Price, Topline Securities uses different valuation methods which include: 1). Present value methodology, 2). Multiplier methodology, and 3). Asset basedmethodology. Research Dissemination Policy Topline Securities endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as , fax mail etc. Nevertheless, all clients may not receive the material at the same time. Disclaimer i This report has been prepared by Topline Securities and is provided for information purposes only. Under no circumstances this is to be used orconsidered as an offer to sell or solicitation of any offer to buy. While reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time, Topline Securities and/or any of its officers or directors may, as permitted by applicable laws, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided only for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report. Investments in capital markets are subject to market risk and Topline Securities accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors, who should seek further professional advice or rely upon their own judgment and acumen before making any investment. The views expressed in this report are those of Topline Research Department and do not necessarily reflect those of Topline or its directors. Topline as a firm may have business relationships, including investment banking relationships, with the companies referred to in this report. All rights reserved by Topline Securities. This report or any portion hereof may not be reproduced, distributed or published by any person for any purpose whatsoever. Nor can it be sent to a third party without prior consent of Topline Securities. Action could be taken for unauthorized reproduction, distribution or publication. Pakistan Banks 5