1. Pakistan Banking Sector Outlook CY11 Enjoying the best of both worlds Analyst Naukhaiz Saleem, ACCA nsaleem@fs.com.pk

2. Page  2 Contents  Banking Sector Overview –Big 10 dominate –Big 5 vs. Other banks  CY11 Outlook  Individual Banks –National Bank –United Bank –MCB Bank –United Bank –Habib Bank –Allied Bank Presentation Flow

3. Page  3 Sector Overview

4. Page  4 Banking Sector Overview Local Private Banks (25) Foreign Banks (7) Public Sector Commercial Banks (4) Commercial Banks 19% of Commercial Banking assets 4% of Commercial Banking assets 77% of Commercial Banking assets  Total Assets Rs7,095bn  Total Deposits Rs5,424bn  Total Advances Rs3,363bn  Total Equity Rs695bn

5. Page  5 Banking Sector Overview Big-10 Dominate

6. Page  6 Banking Sector Overview Big-10 Dominate Total Assets (mn) Deposits (mn) Advances (mn) Investments (mn) Equity w/o surplus (mn) Equity with surplus (mn) BranchesEmployees NBP 1,038,018 832,134 478,887 301,078 105,688 130,801 1,288 16,524 HBL 924,699 747,375 459,750 254,909 86,842 95,038 1,459 13,172 UBL 725,390 567,611 341,510 231,717 63,920 72,927 1,123 11,847 MCB 570,482 431,295 254,565 215,748 71,225 81,996 1,125 13,714 ABL 449,966 371,281 253,103 121,159 31,191 35,990 806 12,633 BAFL 411,803 354,011 207,152 113,623 19,179 21,648 298 10,021 SCB 327,297 220,188 144,722 72,294 49,127 52,100 162 4,920 Askari 314,745 255,937 152,784 102,260 14,821 16,004 235 7,676 AL Habib 301,796 249,761 125,773 137,235 14,854 16,217 277 5,275 HMB 252,131 160,314 119,828 100,849 20,957 20,310 135 2,947 Total 5,316,328 4,189,907 2,538,074 1,650,872 477,804 543,031 6,908 98,729 % of Commercial banks75%77%75%78% Total Commercial Banks 7,095,554 5,424,425 3,363,135 695,455

7. Page  7 Banking Sector Overview Profitability and Efficiency Big-5 vs. Others

8. Page  8 Banking Sector Overview Big-5 vs. Others Profitability and Efficiency

9. Page  9 Banking Sector Overview Profitability and Efficiency Big-5 vs. Others

10. Page  10 Banking Sector Overview Asset Quality Big-5 vs. Others

11. Page  11 Banking Sector Overview Liquidity and Solvency Big-5 vs. Others

12. Page  12 CY11 Outlook

13. Page  13 Banking Sector Outlook CY11 Outlook Snapshot  19% earnings growth primarily driven by: Growth in net interest income and lower provisions Rs mn20092010%chg20102011F%chg Deposits 2,610,548 2,949,697 13% 2,949,697 3,311,81312% Advances 1,782,711 1,787,815 0% 1,787,815 1,959,60410% Investments 835,956 1,124,611 35% 1,124,611 1,360,04021% Interest earned 308,713 329,9477% 329,947 377,86615% Interest expensed 140,438 145,4274% 145,427 165,69314% Net interest income 168,275 184,52110% 184,521 212,17215% Provisions 45,623 33,426-27% 33,426 28,864-14% Net interest income (net of provisions) 122,652 151,09423% 151,094 183,30921% Non Interest Income 53,722 53,074-1% 53,074 55,2334% Operating expences 83,915 94,59013% 94,590 107,96514% Profit before tax 90,893 108,27519% 108,275 129,89820% Profit after tax 63,152 70,94912% 70,949 84,71319%

14. Page  14 Banking Sector Outlook CY11 Outlook Growth in NII after provisions Higher Spreads 15bps increase in spreads Asset Growth 21% NII(AP) growth 12.3% YoY growth in average earning assets Lower provisions Absence of investment provisions and de-risked loan book

15. Page  15 Banking Sector Outlook CY11 Outlook Growth in NII after provisions Balance Sheet Growth  Deposit Growth –12% YoY deposit growth to be driven by M2 growth –NFA growth (Benign external account position) –NDA growth through Government sector credit (deficit, commodity, circular debt) and Private sector credit (mainly working capital loans) –CASA outlook

16. Page  16 Banking Sector Outlook CY11 Outlook Growth in NII after provisions Balance Sheet Growth  Loans and Advances –ADR to decline from 61% in CY10 to 59% in CY11 –Advances to increase by 10% in CY11 primarily backed by working capital loans due to higher commodity prices  Loans and Advances –ADR to decline from 61% in CY10 to 59% in CY11 –Advances to increase by 10% in CY11 primarily backed by working capital loans due to higher commodity prices

17. Page  17 Banking Sector Outlook CY11 Outlook Growth in NII after provisions Balance Sheet Growth  Investments –21% YoY growth in CY11 against 35% growth in CY10 –Aggressive 4QFY11 borrowing target of government in MTB (Rs1,150bn), PIB (Rs60bn) and Sukuk (Rs45bn). –Going forward Investments will outgrow advances due to a) limited govt. borrowing from SBP and b) limited budgetary funding from external sources  Investments –21% YoY growth in CY11 against 35% growth in CY10 –Aggressive 4QFY11 borrowing target of government in MTB (Rs1,150bn), PIB (Rs60bn) and Sukuk (Rs45bn). –Going forward Investments will outgrow advances due to a) limited govt. borrowing from SBP and b) limited budgetary funding from external sources

18. Page  18 Banking Sector Outlook CY11 Outlook Growth in NII after provisions Spreads  Spreads higher by 20-30bps –Two interest rate cuts in FY10 (Policy rate down to 12.5% in 1HCY10) –Tighter liquidity due to government and private borrowing –Yields on Investments up due to higher money market yields –Conservatively, we have assumed 15bps higher NIM in CY11  Spreads higher by 20-30bps –Two interest rate cuts in FY10 (Policy rate down to 12.5% in 1HCY10) –Tighter liquidity due to government and private borrowing –Yields on Investments up due to higher money market yields –Conservatively, we have assumed 15bps higher NIM in CY11

19. Page  19 Banking Sector Outlook CY11 Outlook Growth in NII after provisions Provisions to decline by 14% YoY  Absence of Investment provisions  4.4% increase in LLP due to:  De-risked loan book –Higher Government sector credit –Private sector credit de-risked  High provision coverage of Big-5 banks  Absence of Investment provisions  4.4% increase in LLP due to:  De-risked loan book –Higher Government sector credit –Private sector credit de-risked  High provision coverage of Big-5 banks

20. Page  20 Banking Sector Outlook CY11 Outlook Growth in NII after provisions Higher Spreads 15bps increase in spreads Asset Growth 21% NII(AP) growth 12.3% YoY growth in average earning assets Lower provisions Absence of investment provisions and de-risked loan book

21. Page  21 Banking Sector Outlook CY11 Outlook Growth in Non Interest Income  Growth in Non-interest income –Higher Fee Commission income on back of increase in trade activity and remmitances –Consumer loans have bottomed out –MNA activity to grow –Forex income to grow –Limited Capital gains assumed during CY11 –Other income to remain stable

22. Page  22 Banking Sector Outlook CY11 Outlook Snapshot Rs mn20092010%chg20102011F%chg Deposits 2,610,548 2,949,697 13% 2,949,697 3,311,81312% Advances 1,782,711 1,787,815 0% 1,787,815 1,959,60410% Investments 835,956 1,124,611 35% 1,124,611 1,360,04021% Interest earned 308,713 329,9477% 329,947 377,86615% Interest expensed 140,438 145,4274% 145,427 165,69314% Net interest income 168,275 184,52110% 184,521 212,17215% Provisions 45,623 33,426-27% 33,426 28,864-14% Net interest income (net of provisions) 122,652 151,09423% 151,094 183,30921% Non Interest Income 53,722 53,074-1% 53,074 55,2334% Operating expences 83,915 94,59013% 94,590 107,96514% Profit before tax 90,893 108,27519% 108,275 129,89820% Profit after tax 63,152 70,94912% 70,949 84,71319%

23. Page  23 CY11 Outlook FBR, reportedly, has proposed to increase the tax rate on banks This stands as a significant risk to our outlook on banking industry Roughly, for every 5% increase in tax rate, CY11 earnings of our banking universe Declines by 3-4% Probability of increase in tax rate on Banks is high Banking Sector Outlook Risk Tax Rate On Banks

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25. Page  25 Individual Banks National Bank Snapshot  CY11 estimates and forecasts –CY11 PBT expected to grow by 18.8%YoY, due to 16.5% increase in NII and absence of investment provisions worth Rs2.9bn made in CY10. –NII growth to come from 12.6% increase in average earning assets and 20bps improvement in NIM. –LLPs estimated at 1.5% of beginning gross advances (CY10 actual 1.32%). Provision coverage declined by 785bps to 70.5% in CY10 as more than 80% of the incremental NPLs consisted of govt. guaranteed loans which do not require any provisions. –Non mark-up revenues to decline by 1.9%, due to lower trading and other income, fee income to grow by 12.0%. –Administrative expenses estimated to grow by 15%.

26. Page  26 Individual Banks National Bank Snapshot  Valuation –December 2011 TP of Rs.63.1/share based on sum of parts valuation  Key assumptions –COE: 20%, Sustainable ROE: 16%, Growth: 9%, Justified PB multiple: 0.6x, Average CY11-13 Pay- Out: 51%, BAJ valued at 30% discount to the market price

27. Page  27 Individual Banks United Bank Snapshot  CY11 estimates and forecasts –CY11 PBT projected to grow by 19.3%YoY, mainly on the back of 13.6% jump in NII and 4.0% decline in credit costs. –NII growth to come from 14.0% increase in average earning assets. –LLPs estimated at 2.0% of beginning gross advances as international loan book could come under stress due to turmoil in the Middle-East. –Non mark-up income to increase by 8.9%, fee income by 12.0%, forex income to fall by 10%. –Administrative expenses estimated to increase by 15.0% after restricted growth of 7.0% and 6.6% in CY09 and CY10, respectively.

28. Page  28 Individual Banks United Bank Snapshot  Valuation –December 2011 TP of Rs67.7/share based on two- stage Gordon growth model  Key assumptions –COE: 20%, Sustainable ROE: 19.5%, Growth: 11%, Justified PB multiple: 0.9x, Average CY11-13 Pay- Out: 37%

29. Page  29 Individual Banks MCB Bank Snapshot  CY11 estimates and forecasts –CY11 PBT expected to grow by 22.2%YoY, mainly on the back of 15.8% increase in NII and 11.6% decline in loan loss provisions. –NII growth to come from 13.5% increase in average earning assets and 16bps improvement in NIM. –LLPs estimated at 1.0% of beginning gross advances (CY10 actual 1.2%) as 85% of NPLs now reside in the loss category, provision coverage has increased to 80% and loan book has been significantly de-risked. –Non mark-up revenues to grow by 13.9%, fee income by 15.0%, forex income by 10.0%. –Administrative expenses estimated to grow by 18.5% due to 22.4% decline in pension reversals to Rs2.5bn. Excluding above, administrative expenses are expected to grow by 10%YoY.

30. Page  30 Individual Banks MCB Bank Snapshot  Valuation –December 2011 TP of Rs.184/share based on two- stage Gordon growth model  Key assumptions –COE: 20%, Sustainable ROE: 24%, Growth: 12%, Justified PB multiple: 1.5x, Average CY11-13 Pay- Out: 47%

31. Page  31 Individual Banks Habib Bank Snapshot  CY11 estimates and forecasts –CY11 PBT projected to grow by 20.3%YoY, mainly on the back of 14.7% jump in NII and a contained 10.0% increase in administrative expenses. –NII growth to come from 10.6% increase in average earning assets and 23bps improvement in NIM –Non mark-up income to increase by 6.8%, fee income by 12.0%, forex income to decline by 10%. –LLPs estimated at 1.5% of beginning gross advances. (CY10 actual 1.75%) as provision coverage has increased to 80%. –Administrative expenses estimated to increase by 10.0% due to contained growth in salary expenses.

32. Page  32 Individual Banks Habib Bank Snapshot  Valuation –December 2011 TP of Rs109.5/share based on two- stage Gordon growth model  Key assumptions –COE: 20%, Sustainable ROE: 20%, Growth: 10%, Justified PB multiple: 1.0x, Average CY11-13 Pay- Out: 39%

33. Page  33 Individual Banks Allied Bank Snapshot  CY11 estimates and forecasts –CY11 PBT expected to grow by 17.7%YoY, mainly on the back of 13.4% increase in NII and 27.7% decline in provisions (Rs1.2bn in investment provisions in CY10). –NII growth to come from 10.8% increase in average earning assets and 14bps improvement in NIM. –LLPs estimated at 1.1% of beginning gross advances (CY10 actual 1.3%) as 70% of NPLs now reside in the loss category, provision coverage has increased to 83%. –Non mark-up revenues to decline by 0.8%, fee income and forex income grow by 10.0%. –Administrative expenses estimated to grow by 15% due to contained growth in salary expenses.

34. Page  34 Individual Banks Allied Bank Snapshot  Valuation –December 2011 TP of Rs.67.8/share based on two- stage Gordon growth model  Key assumptions –COE: 20%, Sustainable ROE: 23%, Growth: 10%, Justified PB multiple: 1.3x, Average CY11-13 Pay- Out: 31%

35. Page  35 Thank you for your attention! Any Questions?