First Capital Research expects the banking sector to have a steady phase during 2018E-20E with stable credit growth, improving GDP growth supporting lower Non Performing loans and lower interest rate volatility leading to stable net interest margins.
“We expect our banking sector universe to provide 25% average return over 1-Year period exceeding the expected market return,” FC Research said.
FC Research said with average sector return at 25 percent, current interest rates make valuations attractive on expected return despite comparatively cheap frontier market valuations.
“We recommend a strong buy on COMB.N, COMB.X, HNB.N, HNB.X, NDB and NTB, BUY on SEYB.X and HOLD on SAMP and SEYB.N.”
According to First Capital, credit growth is expected to stabilize at 16 percent to 18 percent.
“We expect private sector credit growth to slow down to remain stable at c.16% during 2018E gradually increasing to c.18% through 2019E-2020E on improving GDP growth,” FC Research said.
“It will be backed by progressing external sector performance levels and lower impairment due to better credit quality resultant to more business related credit compared to consumer credit.”
FC Research expects the banking sector interest spreads to stabilize in 2017E and thereon backed by the implementation of Inflation Targeting Framework, improved government revenue streams and increased foreign inflows into government securities market.
The introduction of Liability Management Bill will stabilize the interest rate and rate of inflation while the flexible exchange rate policy further supports it.
“Core and Total Capital Adequacy ratios were maintained at 12.2% and 15% where the regulatory minimums were 5% and 10% respectively,” FC Research said.
“Larger banks in the sector have already taken necessary steps to raise capital thus meeting the BASEL III capital requirement.”
FC Research said this move ensures more stability and paves way for the industry to be more resilient and better poised for future growth. -FC Research