CS Banks - 28 Nov 2013

27 November 2013 Asia Pacific/Pakistan Equity Research Regional Banks
Pakistan Banks Sector

Research Analysts Farhan Rizvi, CFA 65 6212 3036 farhan.rizvi@credit-suisse.com Asia Financials Team Sanjay 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)
UPGRADE RATING
Fundamentals support further re-rating

Figure 1: Profitability rebound on rising NIMs and improving asset quality
25% 8.0%
20%
7.0%
15%
6.0%
10%
5.0%
5%
4.0%
0%
2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Earnings growth Gross NPL ratio NIMs (RHS)
3.0%
Source: Company data, Credit Suisse estimates
Margins to expand. NIMs have bottomed out (4.5% in 2Q13) and are likely to rise by 35-45 bp over the next 3-6 months given the rise in policy rates and shift in liability mix to lower cost deposits. MCB and UBL shall benefit most from NIM expansion given a high proportion of low cost deposits. Loan growth to pick up, fiscal financing will remain. Macro outlook has improved post political change with businesses ready to venture into new projects. 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 asset quality improvementsNPL reversals of PRs5.5 bn (7%) for UBL and MCB in 9M13. Macro recovery will further support asset quality for private banks with 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 estimates for UBL and MCB by 4-21% over 2013-15 and upgrade both banks to OUTPERFORM with revised TPs of PRs170 (implied upside 34%) & PRs350 (25% potential upside), respectively. While we upgrade the sector to OVERWEIGHT, we maintain NETURAL on NBP given near term risk to its earnings. Despite relative outperformance YTD, further re-rating of private banks appears justified given rising margins with UBL and MCB best positioned to leverage from improving business sentiment. UBL is our top pick trading at a 2014E P/B of 1.4x, 7% yield and a potential return of 41%.
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27 November 2013
Focus charts
Figure 2: Margins have bottomed and should rise from 4Q13 given the uptick in policy rates
14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2009 2010 2011 2012 2013E 2014E 2015E 3.0% 5.0% 7.0%
Figure 3: Improving business climate to lead a revival in credit growth

PRs mn 2,500,000 25.0%
6.0%
2,000,000
20.0%
15.0%
1,500,000 10.0%
4.0%
1,000,000
5.0%
500,000 0.0% -5.0% 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E Gross loans Loan growth
2.0%
Asset yields
NIM (RHS)
Regional NIMs avg. (RHS)
Figure 4: Low LDR to provide room for new lending though fiscal financing will continue
PRs mn 1,500,000
Figure 5: NPLs have peaked with reversals for private sector banks and declining credit costs
(%) 70.0
15.0%
90.0%
1,250,000
60.0
12.0%
85.0%
1,000,000
50.0
9.0%
80.0%
750,000
40.0
6.0%
75.0%
500,000
30.0
3.0%
70.0%
250,000 2009 2010 2011 2012 2013E 2014E 2015E 2016E LDR IDR Inv. in GoP securities (LHS)
20.0
0.0%
2009 2010 2011 2012 2013E 2014E 2015E Gross NPL ratio Credit cost
65.0%
Coverage (RHS)
Figure 6: Earnings momentum for private banks to pick up with a three-year CAGR of 17%
PRs mn 70,000 60,000 50,000 But will pick up with a 3 year (2013-16) CAGR of 17%
Figure 7: Banking sector performed well in a rising interest rate environment with low LDR during 2004-06
4,500.0 4,000.0 3,500.0 3,000.0 Stock performance was correlated with rising KIBOR with low LDR (<50%) BoP crisis led to market crash (LDR @76%) 16.0% 14.0% 12.0% 10.0%
40,000
30,000 20,000 10,000 0
Earnings growth subdued in 201013
2,500.0 2,000.0 1,500.0

1,000.0 500.0 0.0
8.0% 6.0%
4.0%
Banking stocks have re-rated in line with broader market
2.0% 0.0%
Jul-05
Mar-02
Mar-07
Jul-10
May-11
May-06
Mar-12
Jan-03
Jan-08
Nov-03
Nov-08
Sep-09
Jan-13
2010
2011
2012
2013E
2014E
2015E
2016E
Banking Stock performance (LHS)
6M KIBOR
Source: Bloomberg, SBP, Credit Suisse estimates
Nov-13
Sep-04
27 November 2013
Fundamentals support further rerating

Margins have bottomed out
The monetary easing cycle has reversed with two consecutive hikes of 50 bp over as many months and a further 50-100 bp hike likely in Jan 2014 as the central bank looks to tackle an uptick in CPI. This should drive asset yields and NIMs higher over the next few quarters. We believe NIMs have bottomed out (4.5% in 3Q13) and should rise by 35-45 bp over the next one to two quarters. Margin expansion will be also be driven by the shift in liability mix to lower cost deposits as banks have successfully adjusted their liability profile to minimise the impact of 500 bp of policy easing between Jul-2011 and Jun-2013. MCB should benefit the most from this margin expansion given it has the highest proportion of static/low cost deposits, though the decision by SBP to link minimum profit rate on savings accounts (including term deposits) with changes in policy rate has diluted this benefit.
Loan growth to pick up, budgetary funding to remain

Pakistan's macro outlook has improved with the change in political set-up and while the reform process has been slow thus far, we believe 2014 will be a watershed year with a flurry of economy activity led by the energy, telecommunication, textiles and cement sectors. Banks are well placed to meet the rising demand from corporates and considering low leverage (LDR of 53%) there is huge scope to fund new projects. 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 new government under IMF supervision, financing of the budget deficit will continue to fall on the banking sector, at least in the short run. We expect banks to remain active in the treasury market which will continue to be a key source of asset growth. An uptick in policy rates, particularly, make investment 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 to asset quality improvements with NPL reversals of PRs5.5 bn (7%) for UBL and MCB in 9M13 as against an average annual NPL creation of PRs9.2 bn over 2009-12. An improvement in macro fundamentals in the backdrop of economic reforms and better risk management will continue to drive improvements in asset quality of top private banks in our view, despite a likely uptick in policy rates with an estimate 100 bp decline in the NPL ratio in 2014. This, along with expansion in margins, robust growth in non-funded income and higher loan growth, should drive a strong earnings momentum over the medium term with three-year (2013-16) earnings CAGR of 17%.
Further re-rating of private banks, UBL top pick

We upgrade the sector to OVERWEIGHT (MARKET WEIGHT) and increase our estimates for 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 a revised TP of PRs170 (34% upside), while we upgrade MCB to OUTPERFORM (revised TP of PRs350). We believe likely improvement in macros support a further re-rating of the sector given low leverage, strong adequacy and cleaner balance sheet, with UBL offering an attractive value, trading at a 2014E P/B of 1.4x with 7% dividend yield and offering a potential 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 to continue in the near term as the new management stringently reviews the loan book which may result in subjective downgrades and build-up of further provisioning buffers.
27 November 2013
Valuation comparison
Figure 8: Pakistan banksvaluation comparison
2011 Core profit (PRs mn) NBP UBL MCB P/E (x) NBP UBL MCB Core ROA (%) NBP UBL MCB Dividend yield (%) NBP UBL MCB 14.4 6.0 4.2 13.5 6.7 4.6 6.7 6.8 4.6 9.6 7.2 4.9 9.6 7.6 5.3 1.6 2.1 3.1 1.3 2.2 3.0 0.6 1.8 2.8 1.0 1.9 3.0 1.0 2.0 3.1 6.3 10.0 14.9 6.8 8.6 13.6 13.6 8.8 13.2 7.5 7.6 11.3 6.5 6.2 9.7 16,964 15,500 19,274 16,163 18,007 21,153 8,120 17,457 21,774 14,850 20,369 25,462 16,956 24,705 29,531 2012 2013E 2014E 2015E Core profit growth (%) NBP UBL MCB P/B(x) NBP UBL MCB Core ROE (%) NBP UBL MCB Market cap/PPOP (x) NBP UBL MCB 3.3 5.1 7.0 3.9 5.2 8.4 5.8 6.2 9.1 5.1 5.1 7.6 4.6 4.2 6.4 13.0 21.0 22.3 11.4 21.0 21.5 5.6 18.2 19.8 10.4 19.3 21.2 11.1 20.8 21.8 0.8 1.9 3.1 0.7 1.7 2.7 0.8 1.5 2.5 0.7 1.4 2.3 0.7 1.2 2.0 -7.3 10.3 2.2 -4.7 16.2 9.7 -49.8 -3.1 2.9 82.9 16.7 16.9 14.2 21.3 16.0 2011 2012 2013E 2014E 2015E
Operational comparison
Figure 9: Pakistan banksoperational comparison
2011 Net int income growth (%) NBP UBL MCB Loan yield (%) NBP UBL MCB NBP UBL MCB PPOP growth (%) NBP UBL MCB Deposit growth (%) NBP UBL MCB NPLs / loans (%) NBP UBL MCB NBP UBL MCB 14.9 14.0 10.7 13.8 10.5 20.8 12.2 14.0 9.7 13.1 10.7 20.8 12.3 13.0 9.1 11.3 11.3 22.0 12.2 11.7 8.1 10.9 11.5 21.6 11.2 10.4 7.0 10.3 11.5 21.2 11.4 11.3 13.9 11.9 14.2 11.0 11.5 14.5 11.5 10.0 15.0 13.5 11.0 16.0 14.5 4.8 21.9 18.8 6.7 -3.8 -2.2 10.8 14.0 19.1 4.6 4.4 7.9 13.8 12.9 11.6 11.3 10.8 14.1 7.8 25.7 27.9 10.9 9.9 12.4 27.6 34.7 15.8 9.2 8.1 10.7 8.0 6.1 22.5 10.3 9.1 11.9 4.8 5.0 14.5 10.4 9.5 11.9 8.8 11.3 15.4 8.3 15.6 21.1 -6.7 -2.2 -8.2 -14.7 -5.3 -6.8 13.7 16.6 16.4 9.6 17.6 14.6 2012 2013E 2014E 2015E NIM (%) NBP UBL MCB Cost of deposits (%) NBP UBL MCB Cost-income (%) NBP UBL MCB Loan growth (%) NBP UBL MCB Loan deposit ratio (x) NBP UBL MCB NBP UBL MCB Equity Tier 1 CAR (%) NBP UBL MCB 13.8 10.5 20.8 13.1 10.7 20.8 11.3 11.3 22.0 10.9 11.5 21.6 10.3 11.5 21.2 56.6 53.1 46.0 76.4 80.1 83.8 63.3 60.6 44.0 82.0 78.0 89.2 61.2 57.9 41.4 89.8 80.8 87.4 61.6 57.4 40.9 88.8 82.4 86.7 63.9 57.9 41.8 89.0 82.5 86.4 10.0 -0.6 -9.5 23.3 11.7 5.8 9.0 7.0 4.0 10.5 12.0 11.0 14.0 16.0 16.0 53.2 43.4 35.7 62.5 48.1 38.4 62.8 47.6 36.1 62.9 47.6 34.4 60.0 45.5 32.8 5.2 4.1 4.4 5.3 4.2 4.4 4.9 3.8 4.2 5.6 4.3 4.8 5.6 4.3 4.8 5.2 6.2 8.6 4.5 5.5 6.8 3.4 4.6 5.8 3.6 4.8 6.2 3.6 5.0 6.3 2011 2012 2013E 2014E 2015E
Non int. income growth (%)
Loan loss coverage (%)
Reported Tier 1 CAR (%)
27 November 2013
Margins have bottomed out

The monetary easing cycle has reversed with two consecutive hikes of 50 bp each in Sept and Nov-2013 and a further 50-100 bp hike likely in the next policy review (Jan-2014) as the central bank looks to tackle an upsurge in CPI. This should drive asset yields and NIMs higher over the next few quarters. We believe NIMs have bottomed out (4.5% in 3Q13) and should rise by 35-45 bp over the next one to two quarters. Margin expansion will be also be driven by the shift in liability mix to lower cost deposits as banks have successfully adjusted their liability profile to minimise the impact of 500 bp of policy easing between Jul-2011 and Jun-2013. MCB should benefit the most from this margin expansion given it has the highest proportion of static/low cost deposits, though the decision by SBP to link minimum profit rate on savings accounts with changes in policy rate have diluted this benefit.
Asset yields to rise amid monetary tightening

The central bank is likely to maintain its monetary tightening stance due to an upsurge in inflationary pressure (Oct CPI of 9.1%) which should drive yields higher over the short to medium term. Recent discussions with the IMF on the first review of the new Extended Fund 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 (Tbill yields up 40 bp over the past 1M). Given further upward bias to the CPI (CS estimates of 10.5% in December) due to pass-through of electricity tariffs, PKR depreciation and rationalisation of gas prices in December, we expect the central bank to progressively raise rates by a further 50-100 bp by Mar 2014. This bodes well for the interest income outlook for our coverage banks, as asset growth is likely to remain strong led by a combination of a pick-up in credit demand and borrowing appetite of the government for budgetary financing.
Figure 10: Inflationary pressures have led to an uptick in policy rates with a corresponding increase in KIBOR
(%) 11.0
9.5 12.00% 8.0 11.00%
Asset yields to expand in 2014 as KIBOR and treasury yields are up 80200 bp since July 2013
Figure 11: Secondary market yields have risen sharply in anticipation of monetary tightening by the SBP
14.00% 13.00%
6.5
5.0 3.5
10.00% 9.00% 8.00%
Oct-12
Apr-13
Oct-13
Jul-12
Feb-13
Dec-12
Dec-13
Nov-12
Mar-13
Jan-13
Jul-13
May-12
May-13
Aug-12
Aug-13
Sep-12
Headline CPI
Policy rate
6M KIBOR
6M T-BILL
10 YR PIB
Policy rate
Source: FBS, SBP, Credit Suisse estimates
Source: SBP, Bloomberg
Sep-13
Nov-13
Jun-13
27 November 2013
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 MCB benefitting the most given its higher proportion of interest yielding assets (84% of total) and little international diversification. We forecast asset yields for MCB to expand 114 bp to 10.9% in 2014, leading to a 19% growth in the banks interest income. In contrast, asset yields for UBL are expected to rise by 62 bp on its higher international loan book (~25% of total) 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
PRs mn 45,000 18%
Figure 13: with the highest interest yields amongst peer banks
(%) 12.0
36,000
16%
10.0
8.0
27,000
15%
6.0
18,000 13%
4.0
9,000 12%
2.0 MCB UBL NBP
0 MCB UBL NBP
10%
2013E
2014E
Growth (RHS)
2013E
2014E
.but funding cost to rise by a lower quantum

The top-tier Pakistan banks have historically enjoyed very high NIMs (highest in the region) due to a high proportion of low-cost CASA deposits (76%), which ensured that an incremental 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 large proportion of accounts are used primarily for transactional purposes. This advantage has started to disappear as the central bank first raised the minimum deposit rate on savings account (36% of total deposits) to 6% (5% earlier) in April 2012 and then linked the pricing of 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 in profit rate on savings deposits. Despite these changes in deposit pricing structure, cost of funding is likely to increase at a lower quantum as banks continue to hold a sizeable amount of non-remunerative current deposits (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 in asset 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 term deposit base of 12% with an expected increase of 46 bp during 2014E. Despite regulatory changes to minimum deposit rates cost of funds will rise at a lower quantum
27 November 2013
Figure 14: MCB has lowest proportion of expensive term deposits

60% 50% 40% 30% 20% 10% 0% MCB Current UBL Savings NBP Term & others Sector average
Figure 15: NIMs have remained strong due to high CASA (%)
9.0 7.5 6.0 4.5 3.0 1.5 0.0 2011 2012 MCB 2013E UBL NBP 2014E 2015E
Source: Credit Suisse estimates (2011E)
Figure 16: Pakistan enjoys one of the highest NIMs in the region
7.0 6.0 5.0 4.0 3.0
Figure 17: and has continued to do so historically as well

7.0 6.0 5.0 4.0 3.0 2.0
2.0 1.0
1.0 2008 2009 2010 Pakistan 2011 2012 2013E 2014E 2015E Regional average
0.0
ID PK PH IND IN TH CN MY KR AU HK SG TW
Source: Credit Suisse estimates
27 November 2013
Loan growth to pick up, budgetary funding to remain

Pakistan's macro outlook has improved with the change in political set-up and while the reform process has been slow thus far, we believe 2014 will be a watershed year with a flurry of economy activity led by the energy, telecommunication, textiles and cement sectors. Banks are well geared to meet the rising demand from corporates and considering the low leverage (LDR of 53%) for the sector there is huge scope to fund new projects. 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 new government under IMF supervision, financing of the budget deficit will continue to fall on the banking sector, at least in the short run. We expect banks to remain active in the treasury market which will continue to be a key source of asset growth. An uptick in policy rates particularly make investment in PIBs (yielding 12-13%) an attractive proposition.
Macros gradually stabilising

Macros are gradually showing signs of stability led by improvements on the fiscal side as better revenue administration measures coupled with rationalisation of electricity tariffs help to contain deficit in 1Q FY14. These measures have been acknowledged and applauded by the IMF in the first review of the EFF programme (1st week November) and, with no let-up in the pressure on quantitative targets (launch of initiatives to enhance indirect taxes and gas rationalisation plan to generate 0.4% of GDP savings), further consolidation of the fiscal account is expected. The government successfully met all quantitative IMF targets for Sept-2013 except the target on net international reserves which shall pave the way for release of the next tranche of US$547 mn in Dec-2013.
Figure 18: Pakistan successfully met all of IMF's quantitative targets for Sept-2013 except floor on net international reserves
Sep-13 Floor on net international reserves (US$ mn) Ceiling on net domestic assets of SBP (PRs bn) Ceiling on overall budget deficit (PRs bn) Ceiling on SBP's stock of net foreign currency swaps (US$ mn) Ceiling on net government borrowing from SBP (PRs bn) Source: IMF (2,499) 2,877 419 2,255 2,690 Dec-13 (2,090) 2,901 882 2,005 2,560 Mar-14 (141) 2,571 1,209 2,005 2,390 Jun-14 2,532 2,227 1,464 1,755 2,240
Macro stabilisation measures will bear fruit in 2014
Figure 19: Disbursements under IMF EFF programme to lend support to forex reserves
Date of disbursement 4-Sep-13 2-Dec-13 2-Mar-14 2-Jun-14 2-Sep-14 2-Dec-14 2-Mar-15 2-Jun-15 2-Sep-15 2-Dec-15 2-Mar-16 2-Jun-16 2-Aug-16 Note: SDR = Special Drawing Rights. Source: IMF Amount (SDR mn) 360 360 360 360 360 360 360 360 360 360 360 360 73 Amount (US$ mn) 544 547 547 547 547 547 547 547 547 547 547 547 111
27 November 2013
Moreover, the privatisation programme for PSEs starting next year will further reduce the government's subsidy burden. Though inflationary pressures are on a rising trend due to a reduction in energy subsidies, further tightening of monetary policy will lend support to PKR in the short to medium term. Forex reserves are also expected to see a gradual buildup over the next 3-6 months as outstanding proceeds from Etisalat (US$800 mn), CSF support from the US and auction of 3G licences materialise, while return to the international debt markets next year is likely to lend further support.
Figure 20: Tax revenue growth has recovered sharply in 1Q14 after lacklustre performance in FY13
25.0%
20.0%
15.6% 15.0% 14.8% 10.0% 16.7%
21.0%
17.1%
5.0%
3.7% 0.0% FY09 FY10 FY11 FY12 FY13 1QFY14
Source: FBR, Credit Suisse estimates
Low leverage provides room for future lending

Pakistan banks embarked on a deleveraging exercise post the balance of payment crisis in 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 a result, LDR had fallen to 53% from a peak of 74% (2008) with a corresponding increase in investment-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 for banks 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 who appears ready to undertake new projects across different sectors, with a particular focus on the energy sector. Multi-billion dollar coal conversion projects are in the pipeline while the telecommunications, cement, textile and chemical sectors are also expected to leverage their balance sheet for new expansions. This should propel loan growth to approximately 10% in 2014E with a three-year (2013-16E) CAGR of 14%. LDRs at a decade low of 53% provide room to banks to meet pick-up in credit demand
27 November 2013
Figure 21: Loan growth nosedived post 2008 but is expected to pick up
PRs mn 2,500,000 25.0%
Figure 22: though banks' investment in treasures will continue

PRs mn 1,500,000
70.0
2,000,000
20.0%
15.0%
1,250,000
60.0
1,500,000 10.0% 1,000,000
1,000,000
50.0
750,000
40.0
5.0%
500,000
500,000 30.0
0.0% -5.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Gross loans Loan growth
250,000 2009 2010 2011 2012 2013E 2014E 2015E 2016E 20.0
Inv. in GoP securities (LHS)
LDR
IDR
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-toGDP ratio, which has fallen almost 9 pp below its ten-year (2003-12) average of 25%. As a result, Pakistan continues to remain the most unleveraged economy in the region with a loan-to-GDP ratio of 16% (Sep 2013), which is less than one third of India (53%) and well below even its closest peersIndonesia (33%) and the Philippines (33%).
Figure 23: Loan-to-GDP ratio has fallen well below the tenyear average
32% 28% 24% 20% 16% 12%
Loan-to-GDP of 16% makes Pakistan the most unleveraged economy in the region by a distance
Figure 24: Pakistan remains the most unleveraged economy in the region (loan to GDP %)
300
250
200
150
100
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
50
Loan to GDP
Linear (Loan to GDP)
0
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
10
27 November 2013
Figure 25: Low leverage is also reflected by lowest LDR ratio amongst regional peers (%)
140 120 100 80 60 40 20
Figure 26: Deposit to GDP is also the lowest regionally

450 400
350
300 250
200
150 100
50
0 HK SG TW CN MY JP AU TH KR IN PH ID PK
0
AU KR TH SG ID TW MY IN CN PH JP HK PK
Deposit to GDP %
Budgetary financing will continue to drive near term asset growth

Given persistent demand from the government for budgetary support, Pakistan banks are likely to continue with their strategy of investing in risk-free treasuries at least in the short term. The commercial banks sector financed PRs939 bn (51%) of the budget deficit in FY13 and based on the budgetary outlay for FY14, we expect the sector to finance approximately PRs900 bn (51%) of the deficit during the next fiscal. Our analysis is based on limited availability of external funding over the next 3-6 months with major infrastructure and other projects, including privatisation deals, likely to materialise in FY15. Fiscal financing (albeit at a lower quantum) over the next 6-12 months, together with an uptick in credit demand will allow banks to aggressively approach deposit mobilisation and balance sheet growth.
Figure 27: Banks have been sharing a bulk of the fiscal financing over the past few years
PRs mn 850,000 650,000 450,000 250,000 50,000 % 4.0 3.2 2.4 1.6 0.8
PRs 170 bn External 10%
Budgetary financing will support asset growth over the short to medium term
Figure 28: and will continue to do so in FY14 as well
PRs 569 bn Non Bank 32% Bank 58%
PRs 1,022 bn
2QFY12
1QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
(150,000)
4QFY13
0.0
Bank External
Non bank Fiscal deficit (% of GDP)
Source: MoF, Credit Suisse estimates
11
27 November 2013
Deposits and investment growth estimates tweaked

While deposit mobilisation is generally correlated with the borrowing appetite of the private sector, rising government financing needs had incentivised banks to adopt a more aggressive approach towards balance sheet growth despite lacklustre private sector demand for credit. As a result, average deposit growth was 15% over 2009-12 as against lending growth of 5%. Given rising inflationary pressures and upward revision in our credit growth estimates, we are tweaking our deposit and investment growth estimates over 2014-16E. We are lowering estimates, however, for 2013 due to weaker mobilisation in 9M amid 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 2013 2014 2015 Deposit growth (%) -NBP -UBL -MCB Investment growth (%) -NBP -UBL -MCB Net interest margin (%) -NBP -UBL -MCB 11.5 14.5 11.5 5.6 18.2 19.8 3.4 4.6 5.8 10.0 15.0 13.5 10.4 19.3 21.2 3.6 4.8 6.2 11.0 16.0 14.5 11.1 20.8 21.8 3.6 5.0 6.3 Old estimates 2013 2014 2015 13.0 14.0 12.5 10.1 17.5 22.8 3.8 4.6 5.6 13.0 13.5 13.0 11.0 17.4 21.3 3.9 4.6 5.5 13.0 14.0 14.0 11.5 17.6 20.6 4.0 4.6 5.5 % difference 2013 2014 2015 (1.5) 0.5 (1.0) (4.5) 0.7 (3.0) (0.4) (0.0) 0.2 (3.0) 1.5 0.5 (0.6) 1.9 (0.1) (0.4) 0.3 0.8 (2.0) 2.0 0.5 (0.4) 3.2 1.3 (0.4) 0.4 0.8
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27 November 2013
Asset quality improvements to augment earnings

Substantial deleveraging of the balance sheet (LDRs at a decade low of 53%) has led to asset quality improvements with NPL reversals of PRs5.5 bn (7%) for UBL and MCB in 9M13 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 risk management will continue to drive improvements in asset quality of top private banks in our view, despite a likely uptick in policy rates with an estimated 100 bp decline in NPL ratio in 2014. This, along with expansion in margins, robust growth in non-funded income and higher loan growth, should drive a strong earnings momentum for private sector banks over the medium term with three-year (2013-16) earnings CAGR of 17%.
NPL reversals to continue as macros improve

NPLs for private sector banks appear to have peaked out with net reversals of PRs5.6 bn for our coverage banks in 9M 2013. The improvements in NPLs have been driven by a change in the loan portfolio mix, more stringent lending procedures and improvement in macro indicators. 9M 2013 has witnessed significant NPL reversals, particularly for UBL (PRs4.9 bn) with reductions in both domestic and international NPLs. Clearance of the circular debt situation in the energy chain and better electricity supply resulted in NPL reversals domestically, while an improving business climate in the Middle East led to higher recoveries on the international portfolio. At the same time, coverage ratio has improved to 89%, the highest level in more than a decade. MCB has also recorded substantial 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 businessfriendly 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 2Q and 3Q
PRs mn
8,500 6,500 4,500 2,500 500 -1,500 -3,500 -5,500 -7,500 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13
MCB UBL NBP Industry
NPL and credit cost reversals for private sector banks will continue
Source: Company data
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27 November 2013
Figure 31: Quarterly NPL movement (LHS) and NPL ratio (RHS)
PRs mn 140,000 120,000 100,000 80,000 60,000 40,000 20,000 (%) 21.0 18.0 15.0 12.0
Figure 32: Credit costs on the decline as coverage improves

bp of loans 250 200 150 100 50 0 2010 (50) (100) 2011 2012 2013E 2014E 2015E 2016E
9.0 6.0 3.0 0.0

Sep -11 Mar -12
Dec -11
Jun -12
MCB
UBL
NBP
Sep -12
MCB
UBL
Sep-13
Dec-12
Mar-13
Jun-13
NBP
MCB
UBL
NBP
Average
Source: Company data
Earnings to grow at a three-year (2013-16) CAGR of 17%

We expect double-digit asset growth, higher margins, robust growth in non-funded income and lower provisions/reversals to propel the private sector banks earnings to a CAGR of 17% during 2013-16E with an average ROE of 21% (overall sector ROE of 18%). This appears favourable compared with the average earnings growth of 4% over the preceding four years. The third quarter results did, indeed, show an improvement in margins and provisioning reversals for UBL and MCB and, given the uptick in recent policy rates and gradual improvement in macros and robust growth, we expect banks to continue to post strong 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...
PRs mn 64,000 28%
Significant earnings upswing with 17% CAGR over 201316E to help ROEs to expand to 22%
Figure 34: will drive expansion in ROEs and ROAs

24.0% 2.7%
22.5%
55,000
46,000 37,000 28,000 19,000 10,000 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E Growth Earnings
2.6%
2.5% 2.4% 2.3% 2.2% 2.1%
22%
21.0%
16%
19.5%
10% 4% -2% -8%
18.0% 16.5% 15.0%
2013E
2014E
2015E
2016E
ROE (%)
ROA (%) (RHS)
2017E
2008
2009
2010
2011
2012
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27 November 2013
Comfortably placed for Basel III transition

Pakistani banks under our coverage are well capitalised with Tier 1 ratios of 11-22% under Basel II. The banks are also comfortably placed on the MCR (Minimum Capital Requirements) and leverage ratios required under the new Basel III (to be implemented in a phased manner starting Dec-2013). Our initial estimates suggest that required adjustment 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 the expected 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 leverage providing significant buffer for Basel III adjustments (2013E)
25%
Coverage banks have comfortable adequacy levels
(x) 12.0
10.0 8.0
20%
15% 6.0 10% 4.0 5% 2.0
0%
MCB Tier 1 UBL CAR Leverage (x) RHS NBP
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27 November 2013
Re-rating of private sector banks, UBL top pick

Earnings raised by 4-21% over 2013-15E
We are increasing earnings estimates for MCB and UBL by 4-21% over 2013-15 on account of 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 aggressive provisioning as we believe asset quality concerns are likely to continue in the near term, as the new management stringently reviews the asset book which is likely to result in subjective downgrades and build-up of necessary provisioning buffers. We have raised margins for MCB and UBL by 18-81 bp, tweaked deposit growth estimates by --1-2% to 2% over 201315. Moreover, we have lowered our credit cost estimates for UBL and MCB by 24-142 bp in view of better recoveries over the short to medium term. Private banks under our coverage are 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 estimates
New estimates 2013 Deposit growth (%) -NBP -UBL -MCB Investment growth (%) -NBP -UBL -MCB Net interest margin (%) -NBP -UBL -MCB Credit cost (bp) -NBP -UBL -MCB Earnings (PRs mn) -NBP -UBL -MCB Total 8,120 14,850 16,956 15,505 18,242 22,241 17,457 20,369 24,705 16,738 18,116 20,485 21,774 25,462 29,531 20,333 22,733 25,892 47,351 60,681 71,192 52,577 59,091 68,618 (47.6) 4.3 7.1 (9.9) (18.6) 12.4 12.0 2.7 (23.8) 20.6 14.1 3.8 203.7 47.6 (63.7) 86.8 41.7 (17.8) 56.9 35.8 10.4 60.0 162.0 78.1 53.0 116.3 50.4 47.0 104.0 33.9 1.4 (1.1) (1.4) 0.3 (0.7) (0.7) 0.1 (0.7) (0.2) 3.4 4.6 5.8 3.6 4.8 6.2 3.6 5.0 6.3 3.8 4.6 5.6 3.9 4.6 5.5 4.0 4.6 5.5 (0.4) (0.0) 0.2 (0.4) 0.3 0.8 (0.4) 0.4 0.8 11.5 14.5 11.5 5.6 18.2 19.8 10.0 15.0 13.5 10.4 19.3 21.2 11.0 16.0 14.5 11.1 20.8 21.8 13.0 14.0 12.5 10.1 17.5 22.8 13.0 13.5 13.0 11.0 17.4 21.3 13.0 14.0 14.0 11.5 17.6 20.6 (1.5) 0.5 (1.0) (4.5) 0.7 (3.0) (3.0) 1.5 0.5 (0.6) 1.9 (0.1) (2.0) 2.0 0.5 (0.4) 3.2 1.3 2014 2015 Old estimates 2013 2014 2015 2013 % diff 2014 2015
A 4-21% earnings revision over 2013-15E on higher margins, loan growth and lower credit costs
Target price for UBL and MCB raised on higher sustainable ROEs and further re-rating
Given improving macro fundamentals, asset quality enhancements and a stronger earnings growth outlook, we are upgrading our ratings for UBL to OUTPERFORM from Neutral and MCB to OUTPERFORM from Underperform with revised target prices of PRs170 and PRs350, respectively. However, we maintain our NEUTRAL stance on NBP with a revised TP of PRs53 given likely negative surprises on asset quality as the new management looks to clean up the balance sheet. We have assumed sustainable ROEs of 22%, 20.5% and 13% (20%, 18% and 13% previously) for MCB, UBL and NBP respectively, 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
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27 November 2013
applied a 20% and 30% premium respectively to our new target prices under the Gordon growth model. MCB has historically always traded at a 25-30% premium to its implied valuations due to high capital adequacy, better asset quality and stronger deposit franchise, while we believe UBL now justifies a valuation premium considering improvement in asset quality and business consolidation over the past five years.
Figure 37: Summary of target price and rating changes
Current price Target price (PRs) Upside COE Sustainable PRs MCB UBL NBP 278.92 126.40 54.67 New 350 170 53 Old 168 85 42 (%) (%) 25 17.4 34] 17.4 (3) 17.7 22.5 20.5 13.5 Rating Old U N N O O N 2014E P/B (x) 2.3 1.4 0.7 P/E (x) 11.3 7.6 7.5 ROE (%) New
Source: Bloomberg, Credit Suisse estimates
Figure 38: Banking stocks have done well in a rising interest rate environment when LDRs have been low reflected by strong performance between 2004 and 2006
4,500.0 16.0% 14.0%
4,000.0
3,500.0 3,000.0 2,500.0 2,000.0 1,500.0 1,000.0 500.0 0.0 Banking stocks have re-rated in line with boader market despite lower rates BoP crisis led to higher rates and broader equity market crash (LDR @ 76%)
Stock performance was correlated with rising KIBOR as LDRs were low (<50%)
12.0% 10.0% 8.0%
6.0% 4.0%
2.0% 0.0%
Jul-05
Mar-02
Mar-07
Jul-10
Mar-12
Jan-03
Jan-08
Nov-08
Jan-13
May-06
Banking Stock performance (LHS)
6M KIBOR
Figure 39: Historical and current forward P/B multiples (x)

P/B (x) 5.0
UBL MCB NBP
Figure 40: Historical and current P/E multiples (x)

(x) 25.0
UBL MCB NBP
4.0 3.0 2.0 1.0 0.0
20.0 15.0 10.0 5.0 0.0
Nov-05
Nov-06
Nov-07
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-08
Nov-05
May-11
Sep-04
Sep-09
Nov-06
Nov-07
Nov-13
Nov-08
Nov-03
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
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27 November 2013
Figure 41: UBL still trades at a discount to its historical average P/B (x)
P/B 4.2 (x) 3.6
Figure 42: .while premium valuations for MCB are justified given high adequacy and low leverage
(x) 5.4 4.5
3.0
2.4 1.8 Target P/B = 1.8x Mean P/B = 1.6x 3.6 Target P/B = 2.8x 2.7 1.8 0.9 0.0
1.2
0.6 0.0
Mean P/B = 2.1x
Jul-06
Jul-08
Jul-10
Mar-07
Mar-09
Mar-11
Jul-12
Nov-07
Nov-09
Nov-11
Mar-13
Nov-13
Nov-05
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
2.6
Source: Bloomberg, Company data, Credit Suisse estimates
Source: Bloomberg, Company data, Credit Suisse estimates
Upgrade to OVERWEIGHT, UBL top pick

We 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 as well as P/B-ROE basis compared with peers. Given improvements in macros on both the local and international front (particularly its main international market, the UAE), the bank offers the most leverage to growth, in our view. We have already seen an uptick in business activity at its international operations in 2013 with local operations expected to follow suit from next year. We also like MCB (25% upside) due to its premium franchise position, high margins, superior asset quality and reasonably strong earnings momentum.
Figure 43: UBL appears most attractive on P/B ROE
P/B (x) 2.5
We prefer UBL and MCB
Figure 44: and on P/B ROA basis as well

P/B (x) 2.5
2.2
1.9
MCB
2.2 MCB 1.9
1.6
1.3 HBL
ABL
1.6
ABL HBL UBL
UBL
1.3
1.0
1.0
0.7 NBP
0.7 0.4 0.6 1.0
NBP
0.4 6.0 9.0 12.0 15.0 18.0 21.0 24.0
1.4
1.8
2.2
3.0
ROE (%)
ROA (%)
Source: Bloomberg, Credit Suisse estimates (2014E)
Source: Bloomberg, Credit Suisse estimates (2014E)
Nov-13
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Summary of estimate revisions

Figure 45: UBL estimate revisions (2013-15)
PRs mn Net interest income Fee income Pre-prov. op. profit Provisions Credit cost (bp) Net profit EPS (PRs) Key drivers (%) Net interest margin Deposit growth Loan growth Investment growth Gross NPL ratio Tier 1 CAR ROE ROA New estimates 2013 2014 2015 36,529 42,607 50,117 9,596 10,984 12,678 25,297 30,647 37,468 2,016 1,936 1,897 48 42 36 17,457 20,369 24,705 14.3 16.6 20.2 4.6 14.5 7.0 14.0 13.0 11.3 18.2 1.8 4.8 15.0 12.0 10.8 11.7 11.5 19.3 1.9 5.0 16.0 16.0 13.8 10.4 11.5 20.8 2.0 Old estimates 2013 2014 2015 36,452 39,991 45,292 9,159 10,295 11,823 27,030 29,571 33,788 2,984 3,198 4,140 162 116 104 16,738 18,116 20,485 13.7 14.8 16.7 4.6 14.0 10.0 9.3 13.4 10.4 17.5 1.8 4.6 13.5 11.0 9.2 12.4 10.3 17.4 1.8 4.6 14.0 15.0 10.8 11.5 10.1 17.6 1.8 % difference 2013 2014 2015 0.2 6.5 10.7 4.8 6.7 7.2 (6.4) 3.6 10.9 (32.4) (39.5) (54.2) (1.1) (0.7) (0.7) 4.3 12.4 20.6 4.3 12.4 20.6 (0.0) 0.5 (3.0) 4.7 (0.3) 0.9 0.7 0.1 0.3 1.5 1.0 1.7 (0.7) 1.2 1.9 0.1 0.4 2.0 1.0 3.0 (1.1) 1.4 3.2 0.2
Figure 46: MCB estimate revisions (2013-15)

New estimates PRs mn Net interest income Fee income Pre-prov. op. profit Provisions Credit cost (bp) Net profit EPS (PRs) Key drivers (%) Net interest margin Deposit growth Loan growth Investment growth Gross NPL ratio Tier 1 CAR ROE ROA 2013 38,139 7,050 30,682 (1,707) (64) 21,774 21.5 5.8 11.5 4.0 1.3 9.1 22.0 19.8 2.8 2014 44,376 8,156 36,893 (514) (18) 25,462 25.2 6.2 13.5 11.0 13.7 8.1 21.6 21.2 3.0 2015 50,839 9,615 43,473 339 10 29,531 29.2 6.3 14.5 16.0 13.1 7.0 21.2 21.8 3.1 Old estimates 2013 37,631 7,227 28,783 854 78 20,333 20.1 5.6 12.5 6.0 5.8 9.1 15.7 22.8 3.3 2014 40,302 8,266 30,979 771 50 22,733 22.5 5.5 13.0 10.0 12.1 8.3 15.3 21.3 3.2 2015 45,665 9,435 35,444 1,335 34 25,892 25.6 5.5 14.0 14.0 13.6 7.8 14.8 20.6 3.2 % difference 2013 1.4 (2.4) 6.6 NM (1.4) 7.1 7.1 0.2 (1.0) (2.0) (4.5) 0.0 6.4 (3.0) (0.6) 2014 10.1 (1.3) 19.1 NM (0.7) 12.0 12.0 0.8 0.5 1.0 1.6 (0.2) 6.3 (0.1) (0.2) 2015 11.3 1.9 22.7 (74.6) (0.2) 14.1 14.1 0.8 0.5 2.0 (0.5) (0.7) 6.4 1.3 (0.1)
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27 November 2013
Figure 47: NBP estimate revisions (2013-15)

New estimates PRs mn Net interest income Fee income Pre-prov. op. profit Provisions Credit cost (bp) Net profit EPS (PRs) Key drivers (%) Net interest margin Deposit growth Loan growth Investment growth Gross NPL ratio Tier 1 CAR ROE ROA 2013 37,239 11,953 18,921 15,543 204 8,120 3.8 3.4 11.5 9.0 11.7 12.3 11.3 5.6 0.6 2014 42,345 13,087 21,676 7,271 87 14,850 7.0 3.6 10.0 10.5 1.3 12.2 10.9 10.4 1.0 2015 46,410 14,798 24,248 5,359 57 16,956 8.0 3.6 11.0 14.0 3.2 11.2 10.3 11.1 1.0 Old estimates 2013 41,871 12,043 22,521 4,595 60 15,505 7.3 3.8 13.0 10.0 15.1 11.9 11.8 10.1 1.1 2014 48,045 13,533 27,581 4,498 53 18,242 8.6 3.9 13.0 11.0 15.3 11.3 10.8 11.0 1.2 2015 55,114 15,624 33,147 4,552 47 22,241 10.5 4.0 13.0 13.0 16.1 10.5 10.1 11.5 1.3 % difference 2013 (11.1) (0.7) (16.0) 238.3 1.4 (47.6) (47.6) (0.4) (1.5) (1.0) (3.3) 0.5 (0.5) (4.5) (0.5) 2014 (11.9) (3.3) (21.4) 61.7 0.3 (18.6) (18.6) (0.4) (3.0) (0.5) (14.0) 0.9 0.1 (0.6) (0.2) 2015 (15.8) (5.3) (26.8) 17.7 0.1 (23.8) (23.8) (0.4) (2.0) 1.0 (12.9) 0.8 0.2 (0.4) (0.2)
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Asia banks: Valuation snapshot

Figure 48: Asia banksvaluation snapshot
Mkt cap 25 Nov 2013 1398 HK 939 HK 1288 HK 3988 HK 3328 HK 3968 HK 998 HK 1988 HK 3618 HK ICICIBC IB SBIN IB HDFC IB HDFCB IB KMB IB AXSB IB BOI IB PNB IB IDFC IB BOB IB UNBK IB YES IB JKBK IB 105560 KP 055550 KP 053000 KP 086790 KP 024110 KP 138930 KP 139130 KP 2881 TT 2886 TT 2891 TT 2892 TT 2880 TT 2890 TT 2801 TT 2887 TT 2884 TT 2847 TT BBRI IJ BBCA IJ BMRI IJ BDMN IJ BBNI IJ BBTN IJ BJBR IJ BTPN IJ ICBC CCB ABC BOC BCOM CMB CiticBank Minsheng ChongQing ICBK SBI HDFC HDBK Kotak Axis BOI PNB IDFC BOB Union Yes Bank J&K Bank KB Fin Shinhan Woori Hana IBK BS Financial DGB Financial Fubon Mega Chinatrust First HuaNan Sinopac ChangHwa Taishin ESun TaChong Rakyat BCA Mandiri Danamon Negara BBTN Jabar Banten BTPN (US$ bn) 226.8 200.5 141.1 130.3 52.5 46.4 29.5 38.4 4.9 19.9 19.8 20.5 25.3 9.2 8.4 2.1 3.0 2.5 4.3 1.2 2.0 0.9 14.5 19.8 9.7 10.9 6.2 2.9 2.1 14.5 10.3 9.4 5.2 5.2 4.0 4.7 3.7 3.7 0.9 16.1 21.2 15.3 3.1 6.8 0.9 0.7 2.1 Daily vol. (US$ mn) 166.4 192.2 130.7 64.9 25.3 36.5 31.0 44.0 9.1 5.5 16.3 2.1 1.8 0.7 4.3 0.8 1.2 1.8 1.1 1.1 1.9 0.4 36.9 33.3 18.1 34.3 9.1 5.9 2.7 18.4 13.6 21.7 6.0 3.2 7.2 4.0 7.2 5.8 1.5 23.0 9.4 18.6 1.8 7.5 2.8 1.0 0.1 Beta 1.30 1.09 1.10 1.29 1.19 1.43 1.27 1.12 1.55 1.28 1.15 1.04 0.96 1.03 1.22 1.05 1.05 1.38 0.91 0.97 1.28 0.83 1.20 1.05 1.27 1.38 1.08 0.93 n.a. 1.08 1.07 1.22 1.03 0.94 1.19 1.10 1.19 1.17 1.12 1.27 0.95 1.34 1.02 1.17 1.33 1.36 0.71 Rating O O O N U O O O O N N O O U O N N O O U U O O O R O O R O N N O U U N N U N O O N O U N U N N Price (loc. curr.) Current 5.52 6.24 3.94 3.72 5.74 16.40 4.47 9.19 4.06 1,073 1,805 819 659 746 1,116 217 533 104 633 122 351 1,184 39,750 44,200 12,800 39,850 12,000 16,000 16,950 41.80 24.55 19.00 17.80 17.00 14.55 18.05 14.45 19.90 10.55 7,700 10,150 7,800 3,875 4,325 1,000 830 4,275 Target 7.00 7.80 4.80 4.40 5.40 20.70 5.90 12.80 5.70 1,036 1,417 1,045 770 618 1,450 175 555 144 707 120 345 1,700 48,500 54,000 R 47,000 14,000 R 18,000 43.00 24.17 22.50 15.49 14.48 15.00 16.00 12.00 18.64 13.00 10,250 10,600 10,500 3,000 4,700 880 975 4,350 Up. (%) 27% 25% 22% 18% -6% 26% 32% 39% 40% -3% -21% 28% 17% -17% 30% -19% 4% 39% 12% -1% -2% 44% 22% 22% N/A 18% 17% N/A 6% 3% -2% 18% -13% -15% 3% -11% -17% -6% 23% 33% 4% 35% -23% 9% -12% 17% 2% Price performance (%) 3M 7.4 7.8 17.3 12.4 9.8 19.7 17.6 11.9 16.3 25.9 15.7 10.6 8.5 16.0 13.7 47.2 10.4 0.0 34.5 7.1 35.3 5.4 14.9 12.0 16.6 16.9 7.2 9.3 7.0 3.7 6.9 2.4 4.7 7.1 12.7 12.0 15.0 10.9 14.2 15.8 8.6 5.4 -6.6 17.7 -2.9 -3.5 9.6 15.0 13.6 -0.1 5.7 7.9 39.3 3.7 19.9 30.7 45.9 3.0 13.8 20.0 37.8 -2.6 25.0 16.5 54.4 -15.9 -8.2 -5.3 -29.1 -27.6 -28.5 -30.8 -34.9 -29.2 -43.3 28.6 25.0 5.6 -25.9 -1.9 -26.2 -37.2 28.8 2012 19.3 14.8 14.7 21.0 7.6 8.9 5.3 33.1 5.5 66.1 47.2 27.5 59.0 50.3 68.1 28.7 11.1 86.6 31.2 61.7 94.6 91.8 4.4 -2.3 25.1 -2.4 -5.2 2011 -20.4 -22.2 -14.4 -30.2 -23.7 -20.0 -10.2 1.2 -23.1 -40.2 -42.4 -10.8 -9.0 -4.5 -40.2 -40.8 -35.8 -49.6 -26.3 -51.2 -23.7 -12.8 -39.5 -24.9 -39.2 -17.9 -33.3
Note: Ratings O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM, R = RESTRICTED (Priced as of 25 November 2013) Source: Bloomberg, Credit Suisse estimates
21
27 November 2013

P/PPOP (x) 25 Nov 2013 1398 HK 939 HK 1288 HK 3988 HK 3328 HK 3968 HK 998 HK 1988 HK 3618 HK ICICIBC IB SBIN IB HDFC IB HDFCB IB KMB IB AXSB IB BOI IB PNB IB IDFC IB BOB IB UNBK IB YES IB JKBK IB 105560 KP 055550 KP 053000 KP 086790 KP 024110 KP 138930 KP 139130 KP 2881 TT 2886 TT 2891 TT 2892 TT 2880 TT 2890 TT 2801 TT 2887 TT 2884 TT 2847 TT BBRI IJ BBCA IJ BMRI IJ BDMN IJ BBNI IJ BBTN IJ BJBR IJ BTPN IJ ICBC CCB ABC BOC BCOM CMB CiticBank Minsheng ChongQing ICBK SBI HDFC HDBK Kotak Axis BOI PNB IDFC BOB Union Yes Bank J&K Bank KB Fin Shinhan Woori Hana IBK BS Financial DGB Financial Fubon Mega Chinatrust First HuaNan Sinopac ChangHwa Taishin ESun TaChong Rakyat BCA Mandiri Danamon Negara BBTN Jabar Banten BTPN 2013E 3.6 3.8 3.2 3.4 3.2 3.6 2.7 3.4 3.2 8.0 4.1 16.5 11.1 14.3 4.7 1.6 1.7 5.0 3.0 1.4 5.1 2.8 4.2 5.3 3.0 4.4 2.7 4.8 4.6 10.5 10.6 10.2 9.9 10.8 9.5 13.6 4.7 9.3 6.5 7.5 13.5 6.8 4.0 6.7 4.2 3.3 7.0 2014E 3.3 3.6 2.9 3.1 3.1 3.1 2.5 2.8 2.9 6.8 3.3 13.8 9.0 11.8 4.2 1.4 1.4 4.2 2.5 1.2 4.1 2.5 3.5 4.6 2.6 3.6 2.5 4.3 4.0 10.1 9.7 7.6 8.5 9.8 9.0 11.3 4.8 8.4 6.4 6.5 12.4 6.3 3.7 5.5 3.6 2.8 5.9 P/E (x) 2013E 5.7 5.7 5.8 5.2 5.3 5.8 4.1 4.8 4.8 13.6 10.5 22.6 18.6 22.7 8.8 4.3 4.4 7.8 6.3 3.2 9.6 4.8 10.7 10.8 12.8 9.1 8.4 8.5 9.1 12.6 12.6 15.0 14.3 16.2 12.1 15.1 8.1 12.9 8.8 9.8 18.4 10.7 9.2 9.3 7.5 6.3 10.6 2014E 5.5 5.6 5.1 4.9 5.5 5.5 4.1 4.1 4.4 11.8 8.3 19.1 15.1 19.0 7.8 3.6 3.6 6.6 5.3 2.8 7.7 4.6 7.3 8.7 9.0 7.3 6.6 7.6 7.4 12.1 12.2 9.5 12.6 14.7 12.0 14.7 10.1 12.2 8.1 9.9 17.3 10.0 9.1 8.8 6.0 5.4 9.7 EPS growth (%) 2013E 10.5 11.9 18.8 12.1 8.4 6.7 28.4 12.9 16.2 9.7 -16.4 13.0 25.3 11.9 9.1 9.1 -17.5 8.5 -5.6 0.7 0.5 13.9 4.2 -4.0 -37.4 -16.1 -28.9 9.2 -4.0 9.3 5.0 -28.0 2.9 6.9 1.2 5.0 36.6 17.3 54.2 3.5 15.8 9.4 0.9 23.0 3.0 7.7 15.3 5.5 1.0 13.7 6.4 -3.4 4.3 1.8 18.7 8.1 14.9 25.6 18.5 23.2 19.7 13.5 19.4 21.1 18.1 17.6 14.8 24.8 6.2 46.5 24.3 42.9 24.6 28.2 12.1 23.2 3.8 3.7 57.9 13.3 10.5 1.0 3.2 -19.6 6.0 8.0 -0.9 6.1 7.2 0.9 6.3 26.1 15.4 9.3 P/B (x) 1.2 1.1 1.2 0.9 0.8 1.1 0.7 1.1 0.8 1.7 1.2 4.6 3.6 3.2 1.4 0.5 0.5 1.0 0.8 0.4 1.6 1.0 0.6 0.8 0.5 0.6 0.5 0.9 0.8 1.2 1.3 1.4 1.1 1.1 1.1 1.2 1.1 1.3 0.8 2.4 4.1 2.1 1.2 1.6 1.1 1.1 2.4 1.0 1.0 1.0 0.8 0.7 1.0 0.6 0.9 0.7 1.5 1.0 4.1 3.1 2.7 1.2 0.5 0.5 0.9 0.7 0.4 1.4 0.8 0.6 0.7 0.5 0.5 0.4 0.8 0.7 1.1 1.2 1.3 1.0 1.0 1.1 1.1 1.0 1.2 0.8 2.0 3.5 1.9 1.1 1.4 0.9 0.9 1.9 ROE (%) 21.7 21.3 21.3 17.8 16.0 20.9 18.5 23.8 18.2 13.1 11.5 21.3 21.3 14.9 16.9 12.6 13.2 13.9 13.2 13.7 20.1 22.3 6.3 8.5 4.8 7.8 7.5 11.1 10.5 10.3 10.3 9.6 7.8 6.8 9.7 8.1 14.6 10.8 9.8 26.7 24.1 21.2 13.6 18.7 15.4 19.5 25.7 19.9 18.8 20.9 16.8 14.1 19.0 16.5 23.9 17.3 13.7 13.2 22.8 22.1 15.4 16.7 13.6 14.4 14.8 14.0 14.1 19.1 20.1 8.9 9.9 6.5 8.5 9.0 11.3 12.3 9.6 10.0 14.0 8.4 7.3 9.3 7.9 10.6 10.6 10.1 21.8 22.0 19.9 12.6 17.3 16.5 17.9 22.1 ROA (%) Yield (%) 2014E 1.40 1.36 1.29 1.19 1.01 1.45 1.12 1.45 1.22 1.56 0.76 2.63 1.96 2.03 1.62 0.66 0.89 2.92 0.78 0.68 1.52 1.43 0.68 0.76 0.33 0.51 0.50 0.82 0.78 0.73 0.81 1.36 0.56 0.47 0.72 0.55 0.66 0.68 0.69 2.77 2.78 2.31 2.16 2.28 1.22 1.65 3.14 2014E 6.4 6.2 6.8 7.1 5.5 4.5 6.2 4.4 6.8 2.6 2.8 2.4 1.3 0.2 2.2 6.0 6.9 4.3 4.6 7.7 2.3 5.1 2.3 1.6 1.6 2.0 2.1 2.5 2.4 2.6 3.7 4.4 2.2 1.7 3.3 2.0 2.5 1.6 4.0 2.0 1.9 2.0 3.9 3.4 0.0 12.7 0.0 2014E 2013E 2014E 2013E 2014E
Note: Priced as of 25 November 2013. Source: Bloomberg, Credit Suisse estimates
22
27 November 2013

Mkt cap Daily vol. 25 Nov 2013 SCB TB BBL/F TB KBANK/F TB BAY TB KTB TB TMB TB TISCO TB TCAP TB MAY MK PBKF MK CIMB MK HLBK MK HLFG MK AFG MK RHBC MK BPI PM BDO PM MBT PM SECB PM DBS SP UOB SP OCBC SP 5 HK 2888 HK 11 HK 2388 HK 23 HK 302 HK 440 HK 2356 HK UBL PK MCB PK NBP PK CBA AU WBC AU NAB AU ANZ AU SCB BBL KBANK BAY KTB TMB TISCO TCAP MAY Public CIMB HLB HLFG Alliance RHB Capital BPI BDO Metro bank Security DBS UOB OCBC HSBC STAN HSB BOC-HK BEA WHB DSF DSBG UBL MCB NBP CBA WBC NAB ANZ (US$ bn) (US$ mn) 17.0 11.4 13.0 7.3 8.2 3.7 1.0 1.3 26.5 14.1 18.0 8.3 5.0 6.0 2.3 7.5 6.0 4.6 33.4 26.5 28.9 208.6 57.2 31.0 35.8 10.1 4.2 1.7 2.2 1.5 2.7 1.1 113.7 93.5 74.2 80.5 17.0 30.4 11.7 15.8 16.0 25.3 12.0 3.8 13.0 24.6 6.5 20.4 5.7 1.2 2.3 4.2 3.6 9.4 9.1 2.8 43.0 36.9 25.0 143.1 12.8 21.5 38.5 7.8 1.8 2.0 1.3 0.7 1.2 0.8 216.0 182.8 200.3 164.8 Beta 1.17 1.12 1.13 1.20 1.33 1.10 0.98 1.04 0.90 0.71 1.22 1.21 1.26 1.09 1.17 1.04 1.13 1.17 1.20 1.02 1.02 0.97 0.98 0.97 0.74 0.98 0.92 0.94 1.20 1.10 1.23 1.40 1.08 0.95 1.14 1.15 1.09 Rating O N O N O N N N N N N N O O O O N U N N U U O U N O U N N N O O U U U N N Price (loc. curr.) Current 160 191 174 38.5 18.8 2.68 39.8 32.5 9.61 18.4 7.51 14.2 15.3 7.57 4.85 92.0 73.6 74.0 17.1 21.1 10.49 86.5 183 125.9 26.3 34.2 106.6 44.2 13.70 128.89 284.13 55.87 76.9 32.8 34.4 32.0 160 Target 185 228 228 39.0 24.5 2.60 46.0 39.0 10.30 17.5 8.20 13.8 17.1 8.80 5.63 112.0 85.0 82.0 19.0 22.0 10.20 99.2 172 135 30.8 26.9 72.0 39.9 12.20 170.00 350 53.0 76.0 33.5 36.5 34.5 185 Up. (%) 16% 20% 31% 1% 30% -3% 16% 20% 7% -5% 9% -3% 12% 16% 16% 22% 15% 11% 11% 4% -3% 15% -6% 7% 17% -21% -32% -10% -11% 32% 23% -5% -1% 2% 6% 8% 16% Price performance (%) 3M 13.1 1.9 6.4 2.0 6.8 3.1 11.2 3.2 -3.4 8.1 -0.4 2.3 7.5 4.0 -1.8 2.2 -3.3 -7.4 5.5 1.1 4.6 3.3 2.3 4.0 7.4 12.2 37.9 19.5 23.2 2.3 0.7 9.0 5.9 3.6 5.1 7.3 13.1 2012 55.8 27.4 55.4 47.7 39.8 17.7 36.8 41.1 7.2 23.5 2.6 35.6 13.2 2.8 11.4 72.1 36.8 50.1 28.8 29.7 24.3 37.8 15.4 28.8 31.0 0.9 27.1 50.3 27.1 59.7 71.4 32.3 26.3 30.2 7.0 22.0 55.8 2011 12.6 7.5 -4.6 -14.6 -13.9 -33.1 -6.7 -25.7 0.9 1.5 -12.5 23.4 31.2 -14.2 29.9 -6.4 0.9 -5.6 -19.6 -16.1 -20.7 -26.0 -19.8 -27.9 -30.4 -9.7 -40.8 -54.3 -49.8 -23.2 -35.2 -33.2 -3.1 -10.0 -1.4 -12.1 12.6
Note: Ratings O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM (Priced as of 25 November 2013) Source: Bloomberg, Credit Suisse estimates
23
27 November 2013

25 Nov 2013 SCB TB BBL/F TB KBANK/F TB BAY TB KTB TB TMB TB TISCO TB TCAP TB MAY MK PBKF MK CIMB MK HLBK MK HLFG MK AFG MK RHBC MK BPI PM BDO PM MBT PM SECB PM DBS SP UOB SP OCBC SP 5 HK 2888 HK 11 HK 2388 HK 23 HK 302 HK 440 HK 2356 HK UBL PK MCB PK NBP PK CBA AU WBC AU NAB AU ANZ AU SCB BBL KBANK BAY KTB TMB TISCO TCAP MAY Public CIMB HLB HLFG Alliance RHB Capital BPI BDO Metro bank Security DBS UOB OCBC HSBC STAN HSB BOC-HK BEA WHB DSF DSBG UBL NBP MCB CBA WBC NAB ANZ P/PPOP (x) 2013E 2014E 7.3 7.7 6.2 7.2 5.3 8.4 3.6 2.4 9.0 7.5 9.0 11.7 5.8 6.6 8.6 12.2 8.9 5.9 8.6 9.1 9.7 7.1 6.2 12.6 10.0 10.4 15.2 7.1 9.6 6.2 9.3 6.3 9.9 9.2 7.8 8.7 7.3 6.4 6.9 5.5 6.4 4.7 7.5 3.3 2.2 8.0 6.5 7.4 10.3 5.1 5.7 7.2 11.7 9.4 8.0 8.0 8.5 9.0 6.7 6.0 11.5 9.2 9.7 13.4 6.6 9.4 5.1 7.7 5.5 9.7 8.8 7.4 8.1 6.4 P/E (x) EPS growth (%) 2013E 2014E 2013E 2014E 10.8 9.8 10.1 15.2 8.3 20.0 6.5 4.3 13.3 15.2 11.9 13.5 10.7 10.6 11.8 16.8 11.9 9.3 11.7 11.8 13.7 11.6 11.3 14.9 12.7 13.7 19.2 9.5 9.4 9.0 13.2 14.6 15.5 14.7 13.7 13.9 10.8 9.6 9.6 8.9 12.3 6.9 13.3 6.2 6.7 12.3 13.0 11.3 12.0 9.3 9.0 10.6 17.1 13.7 14.2 10.7 11.4 13.1 10.1 10.7 13.7 11.7 12.7 16.5 9.0 9.5 7.7 11.3 8.0 15.3 14.4 12.6 13.1 9.6 25.3 12.3 17.1 5.1 16.2 262.7 19.3 74.9 6.2 10.5 7.8 6.2 0.3 6.7 18.2 19.7 35.6 45.5 6.6 4.3 -1.9 16.1 -1.9 -11.7 15.8 7.4 10.2 25.3 37.0 -3.1 3.3 -49.7 4.8 6.6 5.0 8.5 25.3 12.9 2.6 13.2 23.4 21.6 51.2 4.8 -34.9 8.5 16.5 6.1 12.9 15.5 18.1 11.7 -1.8 -13.0 -34.0 9.2 3.5 4.1 14.2 5.3 9.0 8.4 8.3 16.0 5.0 -1.2 16.7 16.7 82.6 1.4 2.2 8.6 6.6 12.9 P/B (x) ROE (%) ROA (%) Yield (%) 2013E 2014E 2013E 2014E 2014E 2014E 2.3 1.3 2.0 1.9 1.3 2.0 1.4 0.8 1.9 3.2 1.8 1.9 1.4 1.2 1.7 3.1 1.6 1.5 1.2 1.3 1.3 1.1 1.2 2.3 1.7 1.2 1.6 0.8 1.0 1.6 2.5 0.9 2.7 2.2 1.9 2.0 2.3 2.0 1.1 1.7 1.8 1.2 1.9 1.2 0.8 1.8 2.8 1.6 1.7 1.3 1.1 1.6 2.8 1.5 1.4 1.2 1.2 1.3 1.1 1.2 2.2 1.7 1.1 1.5 0.8 0.9 1.4 2.3 0.8 2.6 2.1 1.8 1.9 2.0 22.0 13.2 20.8 13.1 16.6 10.5 22.7 20.8 14.5 22.4 15.6 14.5 14.1 11.4 15.1 19.3 14.1 17.7 11.1 11.9 11.3 10.1 11.2 16.5 14.1 9.3 8.4 8.2 10.4 18.2 19.7 5.6 18.3 16.0 15.0 15.3 22.0 22.2 12.5 20.6 14.9 18.2 14.7 21.0 12.1 15.1 23.0 14.9 15.0 14.6 12.4 15.5 17.4 11.3 10.4 11.3 11.6 11.2 11.1 11.4 16.5 14.5 9.2 9.2 8.9 10.3 19.3 21.1 10.4 17.7 15.7 15.1 15.4 22.2 2.19 1.45 1.95 1.55 1.47 1.16 1.44 0.53 1.29 1.51 1.27 1.21 0.85 1.02 1.32 1.61 1.16 1.03 0.98 1.04 0.83 0.75 0.82 1.48 1.18 0.80 0.92 0.77 1.01 1.93 3.00 1.00 1.03 1.00 0.77 0.94 2.19 5.0 4.3 4.3 3.2 6.1 3.0 5.8 4.9 6.1 3.5 3.5 3.3 2.7 3.3 4.3 2.3 1.8 1.4 3.5 3.6 3.1 6.3 4.0 4.4 5.3 3.3 2.6 3.5 3.2 7.0 4.9 8.9 5.0 5.6 6.0 5.4 5.0
Note: Priced as of 25 November 2013) Source: Bloomberg, Credit Suisse estimates
24
27 November 2013
Asia Pacific / Pakistan Regional Banks
United Bank Limited

(UBL.KA / UBL PA)
Rating (from Neutral) OUTPERFORM* Price (26 Nov 13, PRs) 126.4 Target price (PRs) (from 85) 170 Chg to TP (%) 34.5 Market cap. (PRs bn) 154.74 (US$1.43 bn) Enterprise value (PRs bn) 47.81 Number of shares (mn) 1,224.18 Free float (%) 100.0 52-week price range 15478
*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. Target price is for 12 months.
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 international operations and the continued borrowing appetite of the government, we increase 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 appears to be bearing fruit, in our view, reflected by NPL reversals of PRs4.9 bn in 9M13 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 on monetary easing, lowering rates by 300 bp between 2H12 to 1H13. Given a rise in rates, renewed focus on balance sheet growth, continued government borrowing appetite and likely uptick in local and international credit demand, we expect earnings to grow at a 2013-16E CAGR of 18%. This should help ROEs to expand to 21% by 2015 (from 18% in 2013E). International business back at the forefront. UBLs significant international footprint made a strong recovery in 2013 (international assets up 12% YTD versus 5% growth overall). Recovery in trade, tourism and real estate in the key markets of UAE and Qatar led the overall rebound. The improving business outlook can also be gauged by significant recoveries on international NPLs (down PRs2 bn in 2013). Going forward, we expect continued positive momentum in key GCC markets to drive growth in both the funded and non-funded business of the bank. Improving business outlook justifies re-rating. UBL currently trades at an undemanding 2014E P/B of 1.4x (14% historical discount) with an ROE of 19%. We believe the bank's stronger balance sheet position, profitability upswing along with recovery in the international business (a key differentiation point) justifies a re-rating of valuation multiples. Hence, we upgrade UBL to OUTPERFORM (from Neutral) with a revised TP of PRs170 (PRs85 earlier). Any turmoil in the Middle East remains a key risk.
Research Analysts Farhan Rizvi, CFA 65 6212 3036 farhan.rizvi@credit-suisse.com
Share price performance

Price (LHS) Rebased Rel (RHS) 200 150 100 50 0 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 140 120
100 80
The price relative chart measures performance against the KARACHI SE 100 INDEX which closed at 23798.7 on 26/11/13 On 26/11/13 the spot exchange rate was PRs108./US$1
Performance over Absolute (%) Relative (%)
1M 3.5 -3.0
3M -3.4 -10.6
12M 62.1 16.6
Financial and valuation metrics Year Pre-prov op profit (PRs mn) Recurring profit (PRs mn) Pre-tax profit (PRs mn) Net profit (PRs mn) EPS (PRs) Change from previous EPS (%) IBES consensus EPS (PRs) EPS growth (%) P/E (x) Dividend yield (%) BVPS (PRs) P/B (x) ROE(%) ROA (%)
12/12A 31,061.1 27,028.9 27,028.9 18,006.7 14.7 n.a. n.a. 16.2 8.6 6.7 75.3 1.7 21.0 2.2
12/13E 25,297.0 26,467.9 26,467.9 17,457.3 14.3 4.3 13.85 -3.1 8.9 6.8 81.6 1.6 18.2 1.9
12/14E 30,646.6 30,549.9 30,549.9 20,369.4 16.6 12.4 15.38 16.7 7.6 7.2 91.0 1.4 19.3 1.9
12/15E 37,468.2 37,148.8 37,148.8 24,705.4 20.2 20.6 18.28 21.3 6.3 7.6 103.2 1.2 20.8 2.0
Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.
25
27 November 2013
United Bank Limited UBL.KA / UBL PA

Price (26 Nov 13): PRs126.40, Rating: NEUTRAL, Target Price: PRs170.00, Analyst: Farhan Rizvi
Target price scenario Scenario TP Upside 364.00 Central case 170.00 Downside 55.00 Valuation EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Income statement (PRs mn) Interest income Interest expense Net interest income Fee and commission income Trading income Insurance income (& premiums) Other income Total non-interest income Total income Personal expense Other expenses Total expenses Pre-provision profit Loan loss provisions Operating profit Associates/JV Other non-operating inc./(exp.) Pre-tax profit Taxes Net profit before minorities Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit Analyst adjustments Net profit (Credit Suisse) Balance sheet (PRs mn) Assets Gross customer loans Risk provisions Net customer loans Interbank Loans Investment & Securities Cash & cash equivalents Fixed Assets Intangibles Other assets Total assets Liabilities Interbank deposits Customer deposits Total deposits Other liabilities Total liabilities Shareholders' equity Minority interests Preferred stock Total liabilities & equity %Up/Dwn 187.97 34.49 (56.49) 12/12A 16.2 8.59 1.68 1.74 6.72 12/12A 73,507 34,948 38,560 8,163 1,863 6,639 16,541 55,100 9,846 14,318 24,163 31,061 4,061 27,000 28 27,029 9,022 18,007 18,007 18,007 12/12A 409,090 44,727 364,364 37,188 334,019 94,081 21,318 3,113 41,911 895,994 67,214 699,936 767,150 36,606 803,756 92,238 895,994 Assumptions Historical peak P/B 4.0x Justified P/B of 2.0x Trough 2009 P/B of 0.6x 12/13E 12/14E (3.1) 16.7 8.86 7.60 1.55 1.39 1.60 1.43 6.77 7.17 12/13E 12/14E 71,995 85,802 35,467 43,195 36,529 42,607 9,596 10,984 2,339 2,598 3,118 3,811 14,917 17,241 51,445 59,848 10,797 11,972 15,487 17,380 26,284 29,353 25,297 30,647 2,016 1,936 23,281 28,711 3,187 1,839 26,468 30,550 9,011 10,181 17,457 20,369 17,457 20,369 17,457 20,369 12/13E 12/14E 437,727 46,035 391,691 44,106 380,667 106,921 21,984 3,176 43,815 992,361 57,936 801,426 859,362 33,059 892,421 99,940 992,361 490,254 47,329 442,925 60,865 421,929 122,960 22,704 3,239 48,292 1,122,913 54,069 921,640 975,709 35,860 1,011,570 111,343 1,122,913 Key earnings drivers Net interest margin (%) Fee income (PKR mn) Provision for NPLs (PKR mn) 12/15E 21.3 6.26 1.22 1.26 7.55 12/15E 99,106 48,989 50,117 12,678 3,010 4,151 19,663 69,780 13,104 19,383 32,487 37,468 1,897 35,572 1,577 37,149 12,443 24,705 24,705 24,705 12/15E 568,695 48,602 520,093 68,984 480,073 142,633 23,482 3,304 53,110 1,291,679 56,353 1,069,103 1,125,455 39,875 1,165,330 126,349 1,291,679 Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) BVPS (PRs) (PRs) Tangible BVPS (PRs) DPS (PRs) Key ratios Profitability and margins ROE stated (%) ROE - CS adj. ROA - CS adj. Gearing (x) Asset quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Growth(%) Revenue Operating expense Pre-provision profit Net profit Deposit 12/12A 12/13E 12/14E 12/15E 5.51 4.63 4.84 5.00 8,163 9,596 10,984 12,678 4,061 2,016 1,936 1,897 12/12A 1,224 14.71 75 73 8.5 12/12A 21.0 21.0 2.15 9.8 14.0 52.1 15.0 10.7 10.7 6.9 18.4 (0.7) 16.2 14.2 12/13E 1,224 14.26 82 79 8.6 12/13E 18.2 18.2 1.85 9.8 13.0 48.9 15.2 11.3 11.3 (6.6) 8.8 (18.6) (3.1) 14.5 12/14E 1,224 16.64 91 88 9.1 12/14E 19.3 19.3 1.93 10.0 11.7 48.1 14.6 11.5 11.5 16.3 11.7 21.1 16.7 15.0 12/15E 1,224 20.18 103 101 9.5 12/15E 20.8 20.8 2.05 10.2 10.4 48.6 14.1 11.5 11.5 16.6 10.7 22.3 21.3 16.0

12MF P/E multiple
12 10 8 6 4 2 0 2008
2009
2010
2011
2012
2013
12MF P/B multiple

2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2008
2009
2010
2011
2012
2013
Source: IBES
26
27 November 2013
MCB Bank Limited

(MCB.KA / MCB PA)
Rating (from Underperform) OUTPERFORM* Price (26 Nov 13, PRs) 278.92 Target price (PRs) (from 168) 350 Chg to TP (%) 25.5 Market cap. (PRs bn) 282.22 (US$2.61 bn) Enterprise value (PRs bn) 219.23 Number of shares (mn) 1,011.85 Free float (%) 100.0 52-week price range 317170
Dominant franchise position to continue

Raising NIMs, deposit and asset growth estimates. Given expectation of further tightening, better private sector credit appetite and continued fiscal borrowings by the government we are raising NIMs, deposits and loan growth estimates over 2013-15. We believe a stubborn inflationary outlook should keep interest rates higher, while higher quasi-fiscal funding would continue to incentivise banks to aggressively mobilise deposits. Hence, we increase our earnings estimates by 7-14% over 2013-15E and our target price to PRs350 (PRs168 earlier). MCBs superior asset quality (NPL ratio of 9% versus peer average 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 as reflected by its CASA of 88%. Given a high proportion of interest yielding assets (84%) MCB would likely be the biggest beneficiary of higher interest rates with NIMs estimated to expand by 46 bp in 2014. Provisioning reversals to augment earnings growth. MCB's superior asset quality due to better risk management and customer knowledge base continues to support its earnings profile with provision reversals of PRs1.9 bn in 9M13. Given low LDRs (46%) and gradual improvement in macros we expect provisioning reversals to continue which, along with higher margins and 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 2014E P/B of 2.2x on an ROE of 21%. While the valuation may appear expensive compared to peers, a premium appears justified given its higher ROE and NIMs and superior asset quality. Offering a 2014E dividend yield of 5% and 25% potential upside on our new target price of PRs350 (from PRs168), we upgrade MCB to OUTPERFORM from Underperform since we expect it to remain a dominant franchise in the local banking space.

400 300 200 100 0 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Price (LHS) Rebased Rel (RHS) 140 120
100 80
1M 3.4 -2.6
3M 4.4 -2.6
12M 64.7 18.4
12/12A 32,732.5 32,476.5 32,476.5 21,153.2 21.2 n.a. n.a. 9.7 13.2 4.2 115.2 2.4 21.4 3.0
12/13E 31,030.7 32,630.9 32,630.9 21,773.8 21.9 7.1 21.53 3.3 12.8 4.6 112.5 2.5 19.7 2.8
12/14E 37,254.9 37,855.0 37,855.0 25,462.4 25.5 12.0 23.60 16.7 10.9 4.9 125.2 2.2 21.1 3.0
12/15E 43,887.5 43,905.4 43,905.4 29,531.1 29.6 14.1 25.47 16.0 9.4 5.2 141.9 2.0 21.8 3.1
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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 scenario Scenario TP Upside 500.00 Central Case 350.00 Downside 80.00 Valuation EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Income statement (PRs mn) Interest income Interest expense Net interest income Fee and commission income Trading income Insurance income (& premiums) Other income Total non-interest income Total income Personal expense Other expenses Total expenses Pre-provision profit Loan loss provisions Operating profit Associates/JV Other non-operating inc./(exp.) Pre-tax profit Taxes Net profit before minorities Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit Analyst adjustments Net profit (Credit Suisse) Balance sheet (PRs mn) Assets Gross customer loans Risk provisions Net customer loans Interbank Loans Investment & Securities Cash & cash equivalents Fixed Assets Intangibles Other assets Total assets Liabilities Interbank deposits Customer deposits Total deposits Other liabilities Total liabilities Shareholders' equity Minority interests Preferred stock Total liabilities & equity %Up/Dwn 79.26 25.48 (71.32) 12/12A 9.7 13.2 2.42 2.44 4.24 12/12A 68,444 27,503 40,940 6,385 824 2,333 8,491 49,431 7,564 10,447 18,011 32,733 294 32,439 296.6 3.0 32,477 11,241 21,235 82.0 21,153 21,415 12/12A 262,598 22,809 239,789 2,788 401,306 57,420 23,356 789 46,011 771,458 88,961 544,988 633,949 31,035 664,983 105,974 501.3 771,458 Assumptions Peak P/B of 4.0x Justified P/B of 2.8x Trough P/B of 0.6x 12/13E 3.3 12.8 2.48 2.50 4.61 12/13E 65,220 27,081 38,139 7,050 853 3,782 9,361 47,500 8,007 11,135 19,141 31,031 (1,707) 32,738 676.5 (434.6) 32,631 10,773 21,858 84.5 21,774 22,122 12/13E 273,101 21,680 251,421 3,102 406,509 62,991 25,602 827 48,533 798,984 47,195 607,662 654,856 29,799 684,655 113,819 510.2 798,984 Key earnings drivers Net interest margins (%) Fee income (PKR mn) Provision for NPLs (PKR mn) 12/14E 16.7 10.9 2.23 2.24 4.94 12/14E 78,353 33,977 44,376 8,156 979 4,240 10,870 55,247 8,765 12,093 20,858 37,255 (514) 37,768 793.8 (345.2) 37,855 12,294 25,561 98.8 25,462 25,824 12/14E 303,143 21,168 281,975 3,491 462,236 71,494 28,152 922 52,179 900,449 50,054 689,696 739,750 33,453 773,203 126,727 519.2 900,449 12/15E 16.0 9.4 1.97 1.98 5.20 12/15E 89,596 38,758 50,839 9,615 1,109 4,710 12,694 63,533 9,540 13,260 22,800 43,888 339 43,548 818.6 (46.5) 43,905 14,260 29,646 114.5 29,531 29,946 12/15E 351,645 21,360 330,286 3,981 522,641 81,861 30,986 1,046 57,659 1,028,461 59,350 789,702 849,052 35,276 884,328 143,604 528.5 1,028,461 Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) BVPS (PRs) (PRs) Tangible BVPS (PRs) DPS (PRs) Key ratios Profitability and margins ROE stated (%) ROE - CS adj. ROA - CS adj. Gearing (x) Asset quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Growth(%) Revenue Operating expense Pre-provision profit Net profit Deposit 12/12A 6.76 6,385 294 12/12A 1,012 21.16 115 114 11.8 12/12A 21.4 21.6 3.00 7.21 9.7 44.0 22.3 20.8 20.8 (4.4) 4.3 (8.6) 9.7 11.0 12/13E 5.76 7,050 (1,707) 12/13E 1,012 21.86 113 112 12.9 12/13E 19.7 20.0 2.82 7.11 9.1 41.4 23.0 22.0 22.0 (1.3) 6.3 (5.2) 3.3 11.5 12/14E 6.22 8,156 (514) 12/14E 1,012 25.52 125 124 13.8 12/14E 21.1 21.4 3.04 7.03 8.0 40.9 22.5 21.6 21.6 15.9 9.0 20.1 16.7 13.5 12/15E 6.29 9,615 339 12/15E 1,012 29.60 142 141 14.5 12/15E 21.8 22.1 3.10 7.11 7.0 41.8 22.2 21.2 21.2 14.8 9.3 17.8 16.0 14.5

12MF P/E multiple
16 14 12
10
8 6 4
2
0 2008 2009 2010 2011 2012 2013
12MF P/B multiple

3.0 2.5
2.0
1.5 1.0 0.5 0.0 2008
2009
2010
2011
2012
2013
Source: IBES
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National Bank of Pakistan

(NBPK.KA / NBP PA)
Rating NEUTRAL* Price (26 Nov 13, PRs) 55 Target price (PRs) (from 42) 53 Chg to TP (%) -3.1 Market cap. (PRs bn) 116.31 (US$1.08 bn) Enterprise value (PRs bn) -57.34 Number of shares (mn) 2,127.51 Free float (%) 100.0 52-week price range 6038
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 of more negative surprises on asset quality and monetary tightening by the SBP. Moreover, we lower our deposit growth estimates by 1.5-3.0% on account of the new management's strategy to consolidate and clean-up the balance sheet after a sharp expansion over the last few years. NBP's earnings are estimated to decline by 50% in 2013 as management looks to build necessary provisioning buffers given probable asset quality issues. We therefore maintain our NEUTRAL stance on the scrip at current levels. Negative surprises on asset quality likely. Recent changes in political setup and bank's top management has increased the risk of negative news flow on asset quality. NBP recorded PRs4 bn of general provisions in 3Q as a buffer to deal with future NPLs and considering more aggressive lending in the 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 major government owned bank, NBP will continue to act as a key lender to troubled 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 squeeze liquidity forcing the bank to generate extra liability buffers. Moreover, weaker earnings in 2013 will significantly reduce the full year dividend payout in Feb. Maintain NEUTRAL, asset quality remains the biggest challenge. Given near term weakness in earnings and uncertainty on asset quality, we are reducing our estimates by 19-48% over 2013-15E. Our Gordon growthbased target price of PRs53 implies a target P/B of 0.7x and a potential downside of 3%. We therefore maintain our NEUTRAL stance on NBP. The sharp fall in earnings may also result in lower payout with 2014E dividend yield of 9% versus previous three-year average yield of 15%.

Price (LHS) Rebased Rel (RHS) 60 50 40 30 20 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 120 100
80 60
1M 9.8 3.8
3M 14.0 6.9
12M 33.5 -12.8
12/12A 28,439.0 23,257.7 23,257.7 16,162.6 7.6 n.a. n.a. -11.4 7.2 12.8 81.8 0.67 11.4 1.3
12/13E 18,952.9 7,588.7 7,588.7 8,119.6 3.8 -47.6 7.6 -49.8 14.3 6.4 64.9 0.84 5.6 0.6
12/14E 21,712.2 19,389.8 19,389.8 14,849.5 7.0 -18.6 8.3 82.6 7.8 9.1 69.5 0.79 10.4 1.0
12/15E 24,256.5 22,710.4 22,710.4 16,955.8 8.0 -23.8 10.5 14.0 6.9 9.1 73.5 0.74 11.1 1.0
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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 scenario Scenario TP Upside 140.00 Central Case 53.00 Downside 28.00 Valuation EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Income statement (PRs mn) Interest income Interest expense Net interest income Fee and commission income Trading income Insurance income (& premiums) Other income Total non-interest income Total income Personal expense Other expenses Total expenses Pre-provision profit Loan loss provisions Operating profit Associates/JV Other non-operating inc./(exp.) Pre-tax profit Taxes Net profit before minorities Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit Analyst adjustments Net profit (Credit Suisse) Balance sheet (PRs mn) Assets Gross customer loans Risk provisions Net customer loans Interbank Loans Investment & Securities Cash & cash equivalents Fixed Assets Intangibles Other assets Total assets Liabilities Interbank deposits Customer deposits Total deposits Other liabilities Total liabilities Shareholders' equity Minority interests Preferred stock Total liabilities & equity %Up/Dwn 156.08 (3.05) (48.78) 12/12A (11.4) 7.2 0.67 0.67 12.8 12/12A 100,092 56,418 43,674 10,707 3,703 6,222 20,631 64,306 25,710 10,187 35,897 28,439 7,527 20,912 2,376 23,258 7,095 16,163 16,163 16,193 12/12A 730,141 72,760 657,381 38,495 306,665 158,333 27,909 41.3 120,516 1,309,339 64,618 1,037,785 1,102,403 55,658 1,158,062 151,278 1,309,339 Assumptions Historical peak P/B of 2.2x Justified P/B of 0.7x Trough P/B of 0.45x 12/13E 12/14E (49.7) 82.6 14.3 7.8 0.84 0.79 0.84 0.79 6.4 9.1 12/13E 12/14E 96,058 117,412 58,819 75,068 37,239 42,345 11,953 13,087 3,683 4,044 5,448 5,753 21,084 22,883 58,323 65,228 27,230 30,275 12,172 13,276 39,402 43,551 18,953 21,712 15,543 7,271 3,410 14,441 4,210 4,984 7,589 19,390 (531) 4,540 8,120 14,850 8,120 14,850 8,151 14,885 12/13E 12/14E 795,854 87,954 707,900 61,852 342,655 173,648 27,878 22.4 110,112 1,424,068 74,017 1,157,130 1,231,147 54,867 1,286,014 138,054 1,424,068 879,418 94,898 784,520 62,401 347,244 205,555 27,847 0.5 130,130 1,557,698 81,258 1,272,843 1,354,101 55,700 1,409,802 147,896 1,557,698 Key earnings drivers Net interest margins Fee income (PKR mn) Provisions (PKR mn) 12/15E 14.0 6.9 0.74 0.74 9.1 12/15E 129,164 82,753 46,410 14,798 4,489 6,201 25,488 71,898 33,372 14,279 47,651 24,257 5,359 18,898 3,821 22,710 5,755 16,956 16,956 16,965 12/15E 1,002,537 99,938 902,599 71,654 358,337 211,918 27,814 7.0 147,227 1,719,556 91,420 1,412,856 1,504,276 59,015 1,563,290 156,266 1,719,556 Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) BVPS (PRs) (PRs) Tangible BVPS (PRs) DPS (PRs) Key ratios Profitability and margins ROE stated (%) ROE - CS adj. ROA - CS adj. Gearing (x) Asset quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Growth(%) Revenue Operating expense Pre-provision profit Net profit Deposit 12/12A 4.46 10,707 7,527 12/12A 2,128 7.61 81.8 81.7 7.00 12/12A 11.4 11.4 1.32 8.7 12.2 63.3 16.5 13.1 13.1 0.8 18.6 (15.3) (11.4) 11.9 12/13E 3.43 11,953 15,543 12/13E 2,128 3.83 64.9 64.9 3.50 12/13E 5.6 5.6 0.60 9.4 12.3 61.2 14.7 11.3 11.3 (9.3) 9.8 (33.4) (49.7) 11.5 12/14E 3.55 13,087 7,271 12/14E 2,128 7.00 69.5 69.5 5.00 12/14E 10.4 10.4 1.00 10.4 12.2 61.6 14.2 10.9 10.9 11.8 10.5 14.6 82.6 10.0 12/15E 3.56 14,798 5,359 12/15E 2,128 7.97 73.5 73.4 5.00 12/15E 11.1 11.2 1.04 10.8 11.2 63.9 13.3 10.3 10.3 10.2 9.4 11.7 14.0 11.0

12MF P/E multiple
8 7 6
5
4 3 2
1
0 2008 2009 2010 2011 2012 2013
12MF P/B multiple

1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 2008
2009
2010
2011
2012
2013
Source: IBES
30
27 November 2013
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 Disclosures
I, Farhan Rizvi, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for MCB Bank Limited (MCB.KA)
MCB.KA Date 29-Nov-10 27-Apr-11 28-Jun-11 29-Jul-11 26-Oct-11 22-Feb-12 18-Apr-12 14-Aug-12 02-Jan-13 12-Feb-13 06-May-13 Closing Price (PRs) 154.02 170.45 163.55 154.07 131.43 146.88 157.55 164.23 185.76 194.03 216.72 Target Price (PRs) 132.98 138.84 190.08 192.56 173.55 161.98 157.27 150.00 158.18 168.18 168.20
Rating U N
U
U N D ERPERFO RM N EU T RA L
* Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for National Bank of Pakistan (NBPK.KA)
NBPK.KA Date 28-Jun-11 29-Aug-11 29-Mar-12 14-Aug-12 02-Jan-13 08-Apr-13 Closing Price (PRs) 39.27 28.60 39.31 38.06 41.89 38.18 Target Price (PRs) 53.75 52.17 47.83 42.61 41.74 42.00
Rating O
O U T PERFO RM N EU T RA L
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27 November 2013
3-Year Price and Rating History for United Bank Limited (UBL.KA)
UBL.KA Date 28-Jun-11 28-Feb-12 16-Apr-12 14-Aug-12 02-Jan-13 23-Apr-13 Closing Price (PRs) 62.11 70.14 75.76 82.02 81.24 87.69 Target Price (PRs) 78.00 85.00 83.50 79.00 82.00 85.00
Rating O
O U T PERFO RM N EU T RA L
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts stock rating are defined as follows:

Outperform (O) : The stocks total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stocks total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stocks total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stocks total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutra ls the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stocks total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stocks total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stocks absolute total return potential to its current share price and (2) the relative attractiveness of a stocks total return potential within an analysts coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stocks total return relative to the average total re turn of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analysts expectations for the fundamentals and/or valuation of the sector* relative to the groups historic fundamentals and/or valuation: Overweight : The analysts expectation for the sectors fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analysts expectation for the sectors fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analysts expectation for the sectors fundamentals and/or valuation is cautious over the next 12 months.
*An analysts coverage sector consists of all companies covered by the analyst within the relevan t sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy* 42% (55% banking clients) Neutral/Hold* 41% (49% banking clients) Underperform/Sell* 15% (40% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a r elative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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27 November 2013
Credit Suisses policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for MCB Bank Limited (MCB.KA) Method: Our target price of PRs350 for MCB Bank is derived using the Gordon growth model. We have used BVPS for 2014E and a target P/B multiple of 2.8x based on sustainable ROE of 22.5%, COE of 17.5%, and growth internal equity of 12.5%. COE is based on a RFR of 11.0%, market premium of 5.8% and beta of 1.12. We have applied 25% preiumum for MCB's superior asset quality and best deposit franchise. Risk: Potential risks to our target price of PRs 350 for MCB Bank include regulatory risks, future international acquisitions, and changes in interest rates and/or minimum deposit rate on savings account.
Price Target: (12 months) for National Bank of Pakistan (NBPK.KA) Method: Our PRs53 target price for National Bank of Pakistan is based on sum of the parts (SOTP) valuation whereby we have valued the bank using the Gordon growth model and its investment in Bank Al-Jazira at current market price less 20% float discount. We have used 2014E book value per share (BVPS) and a target price/book (P/B) multiple of 0.7x based on sustainable return on equity (ROE) of 13.5%, cost of equity (COE) of 17.5%, and growth in internal equity of 5%. COE is based on a risk-free rate of 11.0%, market premium of 5.8% and beta of 1.15 Risk: Potential risks to our target price of PRs53 for National Bank of Pakistan include any regulatory penalties and public sector risk as it is susceptible to supporting government's populist schemes as it is one of the few public sector banks remaining which would impact asset quality and NIMs. Industry risks include changes in policy rates and/or the minimum satutory saving deposit rate than currently estimated and policy.
Price Target: (12 months) for United Bank Limited (UBL.KA) Method: Our PRs170 target price for United Bank is derived using the Gordon growth model. We have used a 2014E BVPS and a target P/B multiple of 1.9x based on sustainable ROE of 20.5%, COE of 17.4%, and growth internal equity of 11.5%. COE is based on a RFR of 11.0%, market premium of 5.8% and beta of 1.1. We have also applied a 20% premium to the target multiple on account of the bank strong balance sheet position and re-emergence of its international franchise. Risk: Potential risks to our target price of PRs170 for United Bank include: (1) asset quality deterioration in the bank's corporate and international loan portfolio which would subsequently impact margins and could have an impact on the bank's capital base and (2) turmoil in the Middle East which could severely impact the international operations of the bank. Industry risks include changes in policy rate and/or the minimum satutory saving deposit rate than currently estimated.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (MCB.KA, NBPK.KA, UBL.KA) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided non-investment banking services to the subject company (MCB.KA, NBPK.KA, UBL.KA) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (NBPK.KA) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (MCB.KA, NBPK.KA, UBL.KA) within the past 12 months
Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (MCB.KA, NBPK.KA, UBL.KA) within the past 12 months
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27 November 2013
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Singapore Branch ...........................................................................................................................................Farhan Rizvi, CFA For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.
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27 November 2013
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CS Banks - 28 Nov 2013

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CS Banks - 28 Nov 2013

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27 November 2013 Asia Pacific/Pakistan Equity Research Regional Banks

Pakistan Banks Sector

Fundamentals support further re-rating

Source: Company data, Credit Suisse estimates

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS

BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

Figure 3: Improving business climate to lead a revival in credit growth

Regional NIMs avg. (RHS)

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Earnings growth subdued in 201013

2,500.0 2,000.0 1,500.0

Banking stocks have re-rated in line with broader market

Banking Stock performance (LHS)

Source: Company data, Credit Suisse estimates

Source: Bloomberg, SBP, Credit Suisse estimates

Pakistan Banks Sector

Fundamentals support further rerating

Loan growth to pick up, budgetary funding to remain

Asset quality improvement to support earnings

Further re-rating of private banks, UBL top pick

Pakistan Banks Sector

Source: Company data, Credit Suisse estimates

Non int. income growth (%)

Loan loss coverage (%)

Reported Tier 1 CAR (%)

Source: Company data, Credit Suisse estimates

Pakistan Banks Sector

Margins have bottomed out

Asset yields to rise amid monetary tightening

10.00% 9.00% 8.00%

Source: FBS, SBP, Credit Suisse estimates

Source: SBP, Bloomberg

Pakistan Banks Sector

2.0 MCB UBL NBP

0 MCB UBL NBP

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

.but funding cost to rise by a lower quantum

Pakistan Banks Sector

Figure 14: MCB has lowest proportion of expensive term deposits

Source: Credit Suisse estimates (2011E)

Source: Company data, Credit Suisse estimates

Figure 17: and has continued to do so historically as well

Source: Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Pakistan Banks Sector

Loan growth to pick up, budgetary funding to remain

Macros gradually stabilising

Macro stabilisation measures will bear fruit in 2014

Pakistan Banks Sector

Source: FBR, Credit Suisse estimates

Low leverage provides room for future lending

Pakistan Banks Sector

Figure 22: though banks' investment in treasures will continue

1,500,000 10.0% 1,000,000

Inv. in GoP securities (LHS)

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Linear (Loan to GDP)

Source: FBS, SBP, Credit Suisse estimates

Source: SBP, CEIC, BIS, Credit Suisse estimates