JS Global Capital: Cascading performance of mid-tier banks and large banks reveals that former set of banks is relatively better placed, owing to higher return on equity (ROE) generation, prevailing since CY18, based on higher deposit growth mix and operational deleveraging; albeit reflecting a divergence in trading multiples with an expanding discount during the same period.

Even though the entire banking sector currently looks very attractive, the mid-tier banks stand out with higher growth in fee income and superior asset quality, offering a higher upside, compared with the large banks.

The higher ROE generation has been a result of higher growth in the deposit base coupled with the faster pace of increase in zero-cost deposit mix, optimal use of equity on the back of a higher leverage and operational deleveraging.

Without disregarding that the overall banking sector is currently available at lucrative multiples, we believe the mid-tier banks offer a higher upside, compared with the large banks.

Conversely, preference for the mid-tier banks over large banks is recommended for investors with longer time horizons, given the relatively lesser float and; hence, liquidity available in scrip of the said segment.

With a higher growth in the core income growth, the mid-tier banks also stand out with higher growth in the fee income and superior asset quality, compared with the larger banks.

While flat earnings in the medium-term remains a concern for some quarters of the market, we believe Bank Al-Habib is currently undervalued, owing to higher growth and superior asset quality.

“We expect the bank to continue expanding its market share every year broadly through branch expansion as we assume deposit growth of 14 per cent/annum (sector: 12 per cent/annum), while maintaining a higher leverage against its assets.

Bank Alfalah (BAFL) trades below the banking stocks that generate similar ROE of 21 per cent. The bank holds a higher ratio of interest earning assets over interest bearing liabilities, as BAFL currently holds an advance to deposit ratio of 60 per cent and a zero-cost deposit mix of 47 per cent, leading to the bank ranking as one of the highest beneficiaries of the ongoing interest rate increase.

 Amreen Soorani is the lead analyst for the banking sector, consumer and insurance sector preparing financial models and performing valuations with the total coverage of 14 companies, along with the regular management conference calls, meetings and briefing. She also regularly contributes in various research publications.

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