Pages from CY16 Outlook

PAKISTAN MARKET OUTLOOK 8
Economy
Pakistan's GDP has bit by bit ascended in the most recent three years from 3.7% to 4.2% with
current year FY16 focus at 5.5%. In spite of the fact that we tag the objective as idealistic and
trust it to be around 4.5% we trust the stage is set with the help from the Government's aggressive
development plan and China Pakistan Economic Corridor (CPEC) for real GDP ascending above 5%
in the medium term. Proof is as of now obvious with development spending rising 40%YoY in
1QFY16 to PkR168.786bn while net FDI from China has risen 2xYoY in 5MFY16. Further backing
would originate from the manufacturing segment which is liable to develop in the scenery of
improving energy landscape and low financing cost environment. Our point is approved through
execution of LSM record that indicated development of 4.21%YoY in the 4MFY16 versus
2.54%YoY in the CPLY.
Expected real interest rate at ~270bps in FY16 and the BoP position anticipated to show
incremental quality (CA anticipated at 1.0% of GDP), ought to bring about SBP keeping up interest
rate for the rest of FY16. However, we are of the view that the climb of 50bps in discount rate is
conceivable in the 2HCY16. FX reserves are near record highs of US$21bn (inferring 5M of import
cover), driven by lower current account deficit, IMF and loan receipts from lenders, Sukuk
Issuance and Privatization proceeds. We anticipate that FX reserves will hold-up to US$21bn in
FY16-end.
GDP growth rate (%) LSM performance improving
Source: Economic Survey, Shajar Research Source: PBS, Shajar Research
-
1
2
3
4
5
6
7
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY 14 FY15 FY16E
0
20
40
60
80
100
120
140
160
Feb-10
Jun-10
Oct-10
Feb-11
Jun-11
Oct-11
Feb-12
Jun-12
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Forex Researves vs US$ PKR Import Cover
Source: SBP & Shajar Research
98
99
100
101
102
103
104
105
106
-
5,000
10,000
15,000
20,000
25,000
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
FXFigures in US$ mn USD vs PkR (RHS)
(30)
(20)
(10)
-
10
20
30
40
50
50
60
70
80
90
100
110
120
Feb-10
Jul-10
Dec-10
May-11
Oct-11
Mar-12
Aug-12
Jan-13
Jun-13
Nov-13
Apr-14
Sep-14
Feb-15
Jul-15
Dec-15
US$ (LHS) Import Cover

Investment projects to spur demand
Investments and net exports are the primary driver of aggregate demand in Pakistan.
Consumption though the largest contributor in most developing countries, has been steady part
of aggregate demand. With development all round, Pakistan is on the verge of investment led
cycle where investment to GDP ratio is expected to be around 16.5% in FY16 growing from 15%
recorded in FY15.
The government has reaffirmed its devotion to the Five Year Plan 2013 – 2018. The arrangement
plans to accomplish an economic growth rate of 7% by 2018. As a stage towards that end, an
allotment of PkR1513bn has been designated under the National Development Program 2015-
2016. Power division stays at the top amongst priority projects as lack of vitality supply, both gas
and power, has remained the significant hindrance in the way of economic development. In FY16,
the administration has designate PKR248bn (up 24%) for the Power sector to include new and
GDP growth rate; regional comparison
Source: Economic Survey, Shajar Research
0%
2%
4%
6%
8%
10%
12%
2010 2011 2012 2013 2014 2015 2016(P)
India Bangladesh Sri Lanka Pakistan
PSDP spending short of target
Source: Economic Survey, MoF, Shajar Research
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Budgeted Revised
mn

Efficient capacities in the country. In such manner, Dasu Hydro, Diamir Bhasha, Neelum Jhelum
and Tarble-IV with combined limits of ~9,000MW and capital expenditure requirements of
PKR95bn form the lion's share of FY16 Power segment's PSDP distribution. Likewise, the federal
office additionally expects to add another ~3,000 MW through different Nuclear and Wind based
force venture.
In addition to power projects the government has put aside a substantial measure of PKR185bn
(up 65%YoY) in FY16 for the development of Highways, Motorways, Roads and Bridges. The
enormous activities that will be secured under this improvement arrangement incorporate the
Lahore-Karachi Motorway, the Multan-Sukkur segment and the re-surfacing of Islamabad-Lahore
motorway. To check start of base improvement at Gawadar, the government has allotted PkR8bn
for advancements inside of the city with PKR3.0bn for the new Gawadar International Airport,
PKR2.0bn for the Gawadar Development Authority and PKR3.0bn for essential water treatment
and supply offices. Alongside the said ventures, a housing development scheme was likewise
presented in the FY14 spending plan which still stays in the early stages. Under the plan the
government focuses to: (1) develop 1,000 colonies including 500 houses each and (2) give free
land for three Marla lodging plans.
China Pakistan Economic Corridor – The Game Changer
Pakistan is to encounter a purple patch in its street to quick economic development through
US$46bn investment under China-Pak Economic Corridor spread crosswise over energy and
infrastructure projects. Early harvest projects represent 44% of the aggregate investment that
are to be completed in 3-5Y. This would add 0.6% to GDP calculated through Incremental Capital
output ratio (ICOR) over FY16-FY19 which would lift GDP to >5% in the medium term.
Short term projects Project Size US$bn Sponsor Time Line
Karot Hydro Power 720MW 1.65 China Three Gorges Corporation 2020
Thar Coal Power 660MW Sindh Thar Power Company 2018
Thar Coal Power II 1320MW Shanghai Electric (Group) Corporation/Sino-Sindh Resources 2018
Port Qasim Power 660MW Sino Hydro & Al Mirqab 2017
Port Qasim Power 660MW Lucky Electric Power Company Limited 2019
Quaid-e-Azam Solar Park 900MW 1.33 Zonergy Company Limited 2016
China Power Hub Coal IPP 1320MW 1.80 HUBCO/China Power 2018
Nuclear Power Projects ---- 2.50 ---- ----
Transmission Line ---- 1.50 ---- ----
Gwadar-Nawabshah Natural Gas pipeline 700KM 2.00 85% Chinese Government; 15% Government of Pakistan 2017
Thar Coal I 6.5MT/year 1.30 Sino-Sindh Resources 1H2018
Thar Coal II 3.8MT/year 0.90 Sindh Engro Coal Mining Company 1H2018
Upgradation of Karachi-Lahore-Peshawar Highway 1681KM 3.70 Government of Pakistan ----
Gwadar International Airport 0.23 Chinese Government 4Q2017
Havelian-Islamabad link of the Karakoram Highway 120KM 0.93 Government of Pakistan 4Q2017
Source: News, Shajar Research
2.80
2.00

External Account: Still Challenging
Pakistan's FY16TD current account shortfall as a rate of GDP stands at 0.8% versus 2.2% in the
relating period a year ago. In total terms, current account deficit is computed at US$1.004bn
versus US$2.457bn in the CPLY. The stamped change is on the back of contracted import charge
(Imports lessened by 12.3%YoY) recording a wind fall gain from lower oil costs. Import bill of
petroleum items has plunged 41%YoY FY16TD, with 9%YoY contribution originating from
reduction in volumes.
We anticipate that CA deficit will stay around 1% of GDP in FY16 in the midst of lower commodity
prices, stagnant exports, increment in import of machinery and rising remittances. We anticipate
that things especially oil will stay under weight for the rest of FY16 (Arablite 2HFY16E: $30/bbl),
however a bounce back is seen post-FY16 as Arablite is to crawl up to US$40/bbl by CY16-end.
The lethargic pattern in export remains a worry as textile exports plunged by 8.4%YoY (5MFY16)
in dollar terms which we credit to lost export competitiveness and to the drop in cotton costs.
As things stand, we are critical of a improvement in exports and the expansion in import of plant
and machinery (Up 9.52%YoY in 5MFY16) validates our view of accretion in trade deficit.
Regardless of 65% remittances originating from Middle east, we have seen low proof of
remittance growth moderating with 5MFY16 inflows of US$8bn denoting an increment of 7.5%.
Trade deficit & CAD (US$ mn)
Source: Bloomberg & Shajar Research
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
-
5,000
10,000
15,000
20,000
25,000
FY5
FY6
FY7
FY8
FY9
FY10
FY11
FY12
FY13
FY14
FY15
Trade Deficit (LHS) CAD as % of GDP( - )
Remittance & Trade deficit (US$ mn) Low correlation between oil prices and remittances
Source: SBP, Economic survey & Shajar Research Source: SBP, bloomberg & Shajar Research
(3,000)
(2,500)
(2,000)
(1,500)
(1,000)
(500)
-
500
1,000
1,500
2,000
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Remittance Trade Deficit
0
20
40
60
80
100
120
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Remittances WTI/RHS

Recent commitments from the ADB (US$1.2-1.5bn in CY16) European Union (Euro 653mn under
MIP2014-2020) alongside tranches from the IMF (~US$2bn in CY16) ought to keep outer
financing needs enough secured, with emergence of FDI streams anticipated that would
supplant debt related streams in the medium term. With a Eurobond repayment coming in
1Q16 (US$500 mn), we trust flotation of a comparable quantum ought to cover the need. We
anticipate that FX reserves will stay stable at current level of US$21bn even with maturity of
US$5bn advances, securities and deposits (counting interest installment) developing in CY16.
US$/Parity has been unpredictable especially in the 2HCY15/1HFY16. The PKR has lost 4.3% in
2015 when contrasted with 4.5% to India. With US$1.8bn in short position, we expect 4-5%
slippage in 2016 which will likewise give relief to anguish exporters.
Import Cover Improving Mounting FX Reserves
Source: SBP, Shajar Research Source: SBP, Shajar Research
0
1
2
3
4
5
6
7
8
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Import Cover (RHS) NET RESERVES WITH SBP (LHS)Million
0
5,000
10,000
15,000
20,000
25,000
FY11
FY12
FY13
FY14
FY15
FY16E
Return of peer currencies during CY15 PkR vs. US$ Parity
Source: Bloomberg & Shajar Research Source: KSE& Shajar Research
22.8%
10.6%
9.7%
7.2% 6.5%
5.3% 5.3% 4.5% 4.3% 3.7%
0.5% -0.1%
-5%
0%
5%
10%
15%
20%
25%
Malaysia
Indonesia
Thailand
S.Korea
Singapore
India
Phillipines
China
Pakistan
Taiwan
Japan
HongKong
98
99
100
101
102
103
104
105
106
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15

Fiscal Deficit – Much difficult to contain
The all development theme started by the government requires powerful tax accumulation. The
government has focused on tax revenue growth of 17% to PkR3.4tr with reliance on indirect
stream of taxes (PkR1.7tr). Verifiably in the previous seven years, the government missed the
mark regarding the objective by around 5% and we stay traditionalist on FBR accomplishing the
objective this year too. Our point is accepted when 1QFY16 execution is broke down where tax
revenues grew by 8% as against focus of 20%. This is in spite of the imposition of one time super
duty and implementation of WHT as slowdown in the collection of sales tax amid depressed
commodity prices and higher refunds negated the impact.
The recent announcement of PkR341bn agricultural package will assist deterioration of fiscal
deficit by 0.4%. To cover the setback, the government had announced PkR40bn revenue
measures through hike in customs and regulatory duty. The FBR has likewise settled amnesty plan
with traders which will be declared on Jan 1, 2016 under which non-filers will pay 1% charge upto
PkR50mn to get insusceptibility from clarifying the source. To review, the brokers and the
legislature has looked horns following the entry of Budget of FY16 over implementation of 0.3%
tax on banking transactions for non-filers.
The government closed 1QFY16 with a deficit of 1.1% in the midst of an overwhelming
dependence on bank borrowing to back the shortfall. Before, curtailment of development
expenditure has been the scape-goat for the legislature to meet targets.
On the other hand, this time PSDP expanded by 57% to reach PkR146bn as Federal PSDP was at
PkR71bn and the provincial share stood at PkR75bn. We have to highlight potential disparities in
the 1Q results as 1) 14%YoY increment in non-tax avenues where SBP profit had been stagnant
2) 12% decrease in defense spending during an era when the armed force is active on all fronts.
Entire year profit for SBP in FY15 were PkR399bn because of the booking of HBLs privatization
continues in it and this year there is nothing to laud SBPs profit so there is liable to be a decrease
of PkR100bn in FY16.
Growth in Tax revenue to be around nominal growth Expenditure overshooting -ve growth in taxes
Source: Economic Survey, Shajar Research Source: Economic Survey, Shajar Research
0%
5%
10%
15%
20%
25%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
Real GDP Inflation Growth in tax revenue
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
Tax collection (LHS bn) Fiscal deficit (RHS)

Inculcating the above said, we foresee fiscal deficit to be around 5% of GDP well above IMF target
of 4.2%. However, the picture is improved when compared to five year average of 6.4%.
Government falling short of target (PkR in '000) Tax-to-GDP ratio still not moving upwards
Source: Economic Survey, MoF, Shajar Research Source: Economic Survey, MoF, Shajar Research
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
FY10 FY11 FY12 FY13 FY14 FY15 FY16E
Budgeted Revised
0%
2%
4%
6%
8%
10%
12%
14%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E

Inflation - CPI to remain 4-4.5% owing to lower commodity prices
The month to month inflation measured through Consumer Price Index (CPI) in the wake of
touching a 47- year low of 1.35% in Sep'15 attributed to decrease in transport index (Weight:
29%) and food head (Weight: 36%) is hinting at inversion in pattern (Oct'15: 1.6%, Nov'15: 2.73%).
The adjustment in direction is generally foreseen as high base impact eliminates.
With the execution of new tax measures and commitment to change gas tariff in Jan'16, we
anticipate that FY16 CPI will clock in between 4.0%-4.5% (FY15: 4.7%), which is higher than the
SBP evaluation of 3.5%-4.5%. Our CPI projection for 2HFY15 is 5.3%YoY as we incorporate a
normal month to month expansion of 0.54% as we fuse a MoM trek in food index of 0.6%. We
don't anticipate a bull keep running in oil prices and anticipate that expansion will be in our
expressed range even if worldwide oil costs bounce back to US$50/bbl. Be that as it may, we
anticipate that administration will not completely exchange the advantage of decreased oil prices
(at present: -48%) to the masses and utilize it to cover income shortage. Lower oil costs are prone
to more than balance the effect of gas hike (expected: 10%).
Monetary Policy; a ‘moderately loose’ stance with accommodative liquidity
management
Monetary Policy in 2016 will focus on maintaining a moderately loose liquidity as SBP prioritizes
to revive economic momentum. Besides from optimizing financing and credit structures, major
tasks of SBP will also include maintaining money supply growth at a reasonable pace. In our view,
monetary policy will remain expansionary to accommodate the market demand for liquidity. It is
likely to inject sufficient liquidity through a variety of monetary tools. Accordingly, we expect
credit offtakes to register growth by PkR700bn compared to 2015’s PkR387bn. M2 is forecasted
to register growth of 8.5%YoY in 2016.
SBP will continue to adopt a wait-and-see approach for monetary tightening in 2016. Under a
‘moderately loose’ monetary stance, we expect monetary policy board to vote for stability in
interest rate later on in the year as to maintain real interest rate at its historically comfort zone
of ~200-300bps.
M2 vs CPI CPI & Crude (US$/bbl)
Source: Economic Survey, Shajar Research Source: Economic Survey, Bloomberg, Shajar Research
0%
5%
10%
15%
20%
25%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
M2 CPI
0%
5%
10%
15%
20%
25%
-
20
40
60
80
100
120
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Crude CPI

Money Market – Yields bottomed out; expect 75-100bps rebound
The government has assigned bank borrowing at PkR282bn (21% of the financing requirement)
when contrasted with PkR402bn brought up in FY15 envisaging a fiscal deficit of 4.3%. Whatever
remains of the financing was planned from External sources (26%) and non-bank financing (53%)
with a specific end goal to leave plentiful liquidity for the banking sector to kick begin credit
development cycle. We opine the objective as non-achievable as the administration's net
borrowing from the banking sector has reached to PkR242bn. SBP injection through OMO came
to PkR1214bn (2x since FY16) to capture liquidity crunch in the banking sector. We anticipate
expanded reliance of the banking sector to back deficit from the banks as we expect difficulty to
obtain financing from the non-bank part and fiscal deficit to reach 5.2% in FY16.
The government through Pakistan Investment Bonds (PIBs) have raised PkR284bn while through
Auction of treasury bills it retired PkR42bn in 1HFY16. The composition of PIBs came to 33% in
Oct'15 versus 31% in Oct'14 while that of Treasury bills diminished by same rate to 37% of
aggregate domestic debt. This is more in accordance with Medium Term Debt framework where
PIBs are to be around 35% of domestic debt. This is in contract to the government's goal
imparted through budget to raise financing through issuance of shorter tenor papers (T-Bills).
We attribute the adjustment in methodology to the updated inflation forecast of the
government (4.4-5.5% versus 6.0%) where it is better for it to issue longer tenor paper at yields
of 6.80-9.33% with a specific end goal to decrease debt servicing costs.
12M Moving average CPI CPI vs Core inflation
Source: Bloomberg, Shajar Research Source: SBP, Shajar Research
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Feb-10
May-10
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
DR (L.H.S) 12M Average Inflation (R.H.S)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
CPI General Core Inflation
Government's reliance on banking system for financing needs SBP Injecting liquidity through Reverse Repo (PkR in '000)
Source: Economic Survey, MoF, Shajar Research Source: SBP, Shajar Research
-20%
0%
20%
40%
60%
80%
100%
FY10
FY11
FY12
FY13
FY14
FY15
External (Net) Non-Bank Bank
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15

Further, where interest rates are relied upon to stay low in the medium term we predict low
refinancing risk emerging to maturity. As we foresee increased dependency of the government
on longer tenor papers and refinancing risk to appear on shorter tenor papers as we move in
2HCY16 amid rising interest rates, yields on longer tenor papers are expected to rebound by as
much as 75-100bps. However, yields on Treasury bills will remain in 40-50bps range of Target
Rate(TR) as the banks look to earn on spread available against raising liquidity through OMO
(Currently:6%).
From the issuance of Treasury bills, The yields of longer tenor papers have dropped to around
6.80-9.33% while 6.35-6.4% for papers of <1Y to maturity. As we foresee increased dependency
of the government on longer tenor papers and refinancing risk to appear on shorter tenor
papers as we move in 2HCY16 amid rising interest rates, yields on longer tenor papers are
expected to rebound by as much as 75-100bps. However, yields on Treasury bills will remain in
40-50bps range of Target Rate(TR) as the banks look to earn on spread available against raising
liquidity through OMO (Currently:6%).
Market Treasury Bills - Maturity Profile Pakistan Investment Bonds -Maturity Profile
Source: Bloomberg, Shajar Research Source: Bloomberg, Shajar Research
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Millions
0.0
0.1
0.2
0.3
0.4
0.5
0.6
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Millions

Key Indicators FY10 FY11 FY12 FY13 FY14 FY15 FY16F
Real
GDP (Real Growth % ) 2.6% 3.6% 3.8% 3.7% 4.0% 4.2% 4.8%
Service Sector 3.2% 3.9% 4.4% 4.9% 4.4% 5.0% 5.1%
Manufacturing Sector 1.4% 2.5% 2.1% 4.5% 4.5% 3.2% 5.6%
Agricultural Sector 0.2% 2.0% 3.6% 2.9% 2.7% 2.9% 3.0%
Investment to GDP 15.8% 14.1% 15.1% 15.0% 15.0% 15.1% 16.2%
Savings to GDP 13.6% 14.2% 13.0% 13.9% 13.7% 14.5% 15.2%
GDP (PKRbn) 14,867 18,276 20,047 22,379 25,068 27,384 29,843
Population (mn) 172 175 179 183 188 190 192
Prices
CPI (% age YoY) 10.1% 13.7% 11.0% 7.4% 8.6% 4.7% 4.2%
Policy Rate - Period end 12.8% 13.6% 12.4% 10.0% 9.8% 9.0% 6.7%
External Sector (USDbn)
Exports 19.7 25.4 24.7 24.8 25.1 24.1 24.3
Imports 31.2 35.9 40.4 40.2 41.7 41.2 42.8
Trade Terms (11.5) (10.5) (15.7) (15.4) (16.6) (17.1) (18.5)
Remittances 8.9 11.2 13.2 13.9 15.8 18.5 20.4
FX Reserves - Period end 16.8 18.2 15.0 11.0 14.1 18.7 21.0
Current Account Balance (% age of GDP) -2.2% 0.1% -2.1% -1.1% -1.3% -0.8% -1.0%
Ex change Rate (average) 85 86 89 97 103 101 106
Fiscal Accounts (%age of GDP)
Total Revenue 14.0% 12.3% 12.8% 13.3% 14.5% 14.4% 14.2%
Tax Revenue 9.9% 9.3% 10.2% 9.8% 10.2% 11.0% 10.8%
Total Expenditure 20.2% 18.9% 19.6% 21.5% 20.0% 19.7% 19.4%
Current Expenditure 16.0% 15.9% 15.6% 16.4% 16.0% 16.2% 14.5%
Development Expenditure 4.4% 2.8% 3.7% 5.1% 4.9% 4.2% 4.9%
Fiscal Deficit 6.2% 6.5% 6.8% 8.2% 5.5% 5.3% 5.2%
Source: SBP, PBS, MoF, Shajar Research

Commercial Banks
2015: Annus horribilis for the banking Scrips
The Shajar’s banking universe has lost 15% value in CY15, underperforming the market by 17% in
the process. It now trades at an average P/B of 1.33 vs. 5 year historical average of 2.11. The soft
price performance has tracked 1) Slow credit growth 2) 300/350 bps reduction in DR/TR causing
concerns resulting in backing sector under our universe recording an additional tax expense of
approx. PkR10bn 4) Excessive reliance on realization of capital gains on bond portfolio (PkR29bn)
as banks favored improvement in Tier-1 Capital as against holding high-yielding bonds to arrest
decline in NIMs. As to the latter, the banking sector is expected to finish CY15 with 13%YoY
growth in profitability.
Modest performance expected in 2016
Our banking universe is forecasted to achieve 2.8%YoY growth in profitability in 2016 as we put
into perspective 1) Contraction in average spreads (3.57% in 10MCY15 vs. 4.80% CPLY) on the
back of relatively lower interest rate profile and narrowed rate interest corridor (200bps vs.
250bps previously) 2) Reinvestment risks associated with maturity of ~PkR1.4tr PIBs 3) Interest
rate hike in 4QCY16. While we do expect a declining margin trend next year (~47bps on average),
the impact on big private sector banks is likely to be contained due to continued improvement in
the liability profile via a rising proportion of current accounts and an uptick in lending spreads
due to a pick-up in fixed-term lending on the corporate side and to the consumer and SME
sectors.
Commercial Banks No of listed Companies 21
Market Cap (PkRMn) 1,350,522 Weight in KSE-100 (%) 19.56
Market Cap (US$Mn) 12,862 12Months BETA 1.01
Dividend Yield % 7.4% Sector Return 1M 6M 12M
P/E 8.23 Absolute Return 0.8% -5.0% -15.0%
P/bv 1.33 Rel. Index Return 0.1% 0.6% -16.1%
Price Performance vs. KSE P/B of the Sector
Source: Bloomberg, Shajar Research Source: Bloomberg, Shajar Research
-0.35
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
Jan-15
Jan-15
Feb-15
Mar-15
Mar-15
Apr-15
May-15
May-15
Jun-15
Jul-15
Jul-15
Aug-15
Sep-15
Oct-15
Oct-15
Nov-15
Dec-15
Dec-15
Commercial Banks KSE-100
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2015 2014 2013 2012 2011 2010 2009
Price Performance vs. KSE
Source: Bloomberg, Shajar Research
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
Jan-15
Jan-15
Feb-15
Mar-15
Mar-15
Apr-15
May-15
May-15
Jun-15
Jul-15
Jul-15
Aug-15
Sep-15
Oct-15
Oct-15
Nov-15
Dec-15
Dec-15
Fertilizer KSE-100

Private Credit: Acceleration in credit offtakes expected
Credit offtakes have been stagnant in the recent past (CY04-CY08: 21.4% CAGR vs. CY11-CY15TD:
+7.1% CAGR) as the banks adopted cautious lending strategies and inclined towards risk-free
government securities (CY11-CY15TD: 20.8% CAGR). With macro stability reflected through
narrowing fiscal deficit, lowest interest rate in decades and rising FX reserves and government
initiatives to spur private sector growth should result in advance-to-GDP ratio climbing to >20%
in contrast to <15% currently. Leading indicators are positive, led by the recent arrangement of
syndicate financing of PkR25.2bn by local banks for Karachi-Hyderabad Motorway project,
PkR17bn for NTDCL and PkR4bn for DH Fertilizers. The financial close of power plant to be
commissioned by FFBL and Sindh Coal mining project is expected in 2016 to name the few
validating our thesis for a major acceleration in credit growth (2016-18E CAGR of 12.5%).
NPLs expected to remain contained
Substantial deleveraging of the balance sheet (LDRs at a decade low of 53%) has led to asset
quality improvements for private sector banks with NPL reversals of PkR21bn in 2013 and flat
NPLs in 2014. We witnessed a marginal accretion in NPLs of PkR8.6bn in 3QCY15 as banks moved
to subjective provisioning in order to reduce risks going forward. This is against an average annual
NPL creation of PkR39bn over CY10-12. As a result, NPL ratios declined to 10.23% in 3QCY15 from
a peak of 13.76% in CY11. Improving macros and better risk management will continue to drive
asset quality improvements, in our view. We expect NPL ratios of our universe to decline 35bps
in 2015 and 2016 each causing credit costs to average 25bps and 39bps versus the average of
117bps over 2010-12. Also, we expect NPL coverage to remain strong.
Flattish growth expected in 2016 NIMs under pressure
Source: Company Accounts, Shajar Research
-
5.00
10.00
15.00
20.00
25.00
30.00
NBP HBL ABL UBL MCB BAHL BAFL
CY15E CY16F
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
NBP HBL ABL UBL MCB BAHL BAFL
CY15 CY16
Marginal Improvement in Loan-to-GDP Ratio Bank's Lending
Source: Company Accounts, Shajar Research Source: Shajar Research
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016F
-9.00%
-8.00%
-7.00%
-6.00%
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015
Credit to Private sector Credit to government sector Fiscal deficit

MCB Bank Limited: Attractive Valuations coupled with Strong Fundamentals
With ~35% bonds maturing in 2016, we estimate 3-4% reinvestment risk arising for the bank that
will reduce CY16E profitability by PkR3.5/sh. With no change in CASA (Currently 92%)
incorporated next year we see NIMs declining to 5.13% vs. estimated CY15 yield of 5.52%. A more
profound impact is witnessed in Yield on earning assets that dropped by ~100bps to 8.30%. We
have assumed the discount rate to increase by 50bps in 2HCY16. We have projected 12%YoY
growth in Balance Sheet for 2016.
Moving to Non-Fund Income Base the contribution of which has been expected to augment to
39% vs. 31% in the CPLY. The primary reason of gain realization on bonds is well acknowledged.
We expect the contribution to stabilize to 32% in the total income in 2016 as unrealized gains
reduces in tandem with time to maturity. Fee and brokerage income and FX Income are expected
to be the main drivers for NFI in 2016 as the bank ventures into consumer banking, expands it
trade business and Bancassurance and uncertainty on FX front resulting in increased demands for
FX products.
Valuation
MCB Bank Limited has lost -29.5%CYTD and is currently trading at ‘15F P/B of 1.74 vs. its 5y
historical average of 2.15. Our Dec’16 TP of PkR287/sh calculated through P/B method remains
intact as we anticipate the b ank to continue achieving an ROE of >20% going forward.
KATS Code MCB Weight in KSE-100 (%) 3.45
Bloomberg Code MCB PA 3MAvg Turnover '000 374.89
Price PkR 216.85 12MAvg. Turnover '000 368.63
Market Cap (PkRmn) 241,360.72 3MAvg DT Value (PkRmn) 83.39
Market Cap (US$mn) 2,298.67 3MAvg DT Value (US$mn) 0.79
Shares (mn) 1,113.03 Free Float (%) 40%
3MHigh (PkR) 245.85 Beta 1.15
3MLow (PkR) 205.34 Stock Performance 1M 6M 12M
12MHigh (PkR) 338.82 Absolute (%) 6.1% -12.5% -29.5%
12MLow (PkR) 205.34 Rel. Index (%) 5.4% -7.0% -30.6%
MCB 2012 2013 2014 2015E 2016F
EPS (PkR/sh) 18.53 19.02 21.52 23.01 24.22
Earning growth (%) 0% 3% 13% 7% 5%
P/E 11.70 11.40 10.08 9.43 8.95
DPS (PkR/sh) 10.74 12.73 14.00 15.00 16.00
DY (%) 5% 6% 6% 7% 7%
Book value (PkR/sh) 91.42 99.04 116.89 124.58 126.42
P/Bv (x) 2.37 2.19 1.86 1.74 1.72
ROE (%) 20% 19% 18% 18% 19%
Source: Company Reports, SCPL Research
MCB is renowned for its
Strong Asset Quality and
an Ideal Deposit mix. The
bank demonstrated
additional strength when it
deployed its low cost
funding base to high
yielding longer tenor
government bonds.
The bank had been able to
record credit reversal of
PkR2.8bn in CY13 and
PkR1bn in CY14 while we
estimate PkR0.7bn reversal
for CY15. Infection ratio has
improved by 200bps to
6.30% CY15E during three
years. We however,
remained conservative in
our forecasting and
estimated an average
credit cost of 0.2% over our
investment horizon.

UBL Bank Limited: Prudent fund allocation to yield quality returns
The bank was estimated to have 32% of PIBs maturing in 2016 when it swapped it for PIBs with
2017 maturity. This has resulted in bank recording a loss of 2-3% yield during CY15 but will bring
sustainability to the bank’s topline in a low interest rate environment. Where the banking sector
has 32% PIBs with 2016 maturity, UBL is different to its peers with 36% PIBs maturing in 2017. The
banking sector is widely anticipated heavily in shorter tenor papers.
The bank has been able to steadily dilute the sensitivity of Net Interest Income to the PBT by
increasing the contribution from Non-Fund Income to total income (43% in 2015E vs. 30% in 2010).
We estimate the contribution to remain stable at around 40% in the medium term with impetus
coming from commission on trade (14% of total fee Income) and commission on remittance (17%
of total fee Income) which includes UBL Omni. NFI is expected to remain stable in absolute terms
in 2016 though we incorporate reduction in Capital gains YoY.
The bank has recorded a credit charge of PkR647mn in the 9MCY15 of which ~PkR500mn is on its
overseas books. We are considerate of situation developing in Middle east however we take
guidance from discussion with management and expect credit costs to be around 0.5-1% in the
medium term, down from a high of 2.5% in 2009.
On valuation front, our Dec’16 TP of PkR208/sh arrived through P/B method offers an upside of
35%.
KATS Code UBL Weight in KSE-100 (%) 2.71
Bloomberg Code UBL PA 3MAvg Turnover '000 1,023.80
Price PkR 154.95 12MAvg. Turnover '000 1,203.00
12MHigh (PkR) 186.00 Absolute (%) -2.9% -9.5% -11.6%
12MLow (PkR) 146.38 Rel. Index (%) -3.7% -4.0% -12.8%
UBL 2012 2013 2014 2015E 2016F
EPS (PkR/sh) 14.61 15.21 17.91 21.18 23.39
Earning growth (%) 15% 4% 18% 18% 10%
P/E 10.60 10.19 8.65 7.32 6.63
DPS (PkR/sh) 6.20 7.27 12.00 12.50 15.00
DY (%) 4% 5% 8% 8% 10%
Book value (PkR/sh) 74.47 82.43 102.53 110.69 110.91
P/Bv (x) 2.08 1.88 1.51 1.40 1.40
ROE (%) 24% 24% 22% 24% 24%
UBL has also holds the advantage
of international diversification
through which it has attracted
deposits at 2.4% cost. It has lend
30% of advances through
overseas stations where as it
fetched 22% deposits. However
we want to highlight our
expectation of further slowdown
in Middle east particularly after
the US FED rate hike. Hence, Net
Interest Margins (NIMs) would
face a marginal compression of
44 bps to 5.24%.
For UBL, we calculate
investment yield to drop by
around 1.5%YoY in 2016.
Industry advances are
calculated to grow by 15% in
2016 however, we expect UBL
to record 10% surge in
advances. The banking is sailing
smoothly with a PkR435bn PIBs
in its portfolio and a
PIB/deposit ratio of 44% as of
Sep’15.
As per the company
management, exposure to oil is
less than 1% of total loan
portfolio in UAE. Similarly, loan
exposure in Yemen amounts to
6% of international loan book
(~Rs7bn). Around 70% of the
exposure in Yemen is based on
cash collateral which minimizes
the risk of NPLs. The company
has provided ~PkR500mn against
Yemen operation in CY15TD as a
precautionary measure.
However, if the remaining
amount is provided, it will have
an EPS impact of Rs0.8 (3.8%).

Fertilizer
The sector has returned an impressive 13.5% (Including Chemicals) over CY15, as compared to
market return of 2.1%. The improvement in gas supply resulting in increased urea offtakes were
the prime reasons for the strong performance. While sector dynamics are likely to remain fickle,
we flag ENGRO as an outperformer given group developments. Furthermore, diversification of
the companies into other businesses (FFC and FFBL diversified into Askari Bank Limited and Food
and power Industry) lend support to the bottomline and maintenance of high dividend yields is
expected to keep the investors interested.
Urea Margins to remain under pressure
Government of Pakistan has as of late re-examined gas costs for feed and fuel stock for fertilizer
producers. After the climb, feed stock cost increased to PkR200/MMBTU from PkR123/MMBTU
while fuel stock value jumped to PkR600/MMBTU as against PkR488/MMBTU already. Urea
makers have raised urea costs to PkR160/bag after this increment, however that has confronted
genuine mishap in the setting of weak agronomics bringing about MoM urea offtakes caving in
less than 200K tons in Sep-Oct'15. Historically, market players effectively figured out how to go
on gas cost climb that has grown at 5y CAGR of 14.4% for feedstock and 9.4% for fuel stock as
urea costs expanded at a 5-year CAGR of 18%. The buildup in the inventory to 1.12mn tons
pressurized the fertilizer producers to offer rebate of PkR80-120/bag which quickened offtakes
in Nov'15 to 623K tons however compacting their margins in the 4Q.
Absolute Urea production during 11MCY15 expanded by 8%YoY to 4.8mn tons that demonstrates
changing sector dynamics where gas availability is steadily improving. Definite offtake Urea
demand in Pakistan in the most recent 5-years arrived at the midpoint of 5.5mn tons with the
installed urea capacity of 6.4mn tons (operational limit of 5.1mn tons excluding Pakarab, DH
fertilizer and Agritech). This pattern indicates guaranteed offtake as the local manufacturers
Fertilizer No of listed Companies 7
Market Cap (PkRMn) 90,298 Weight in KSE-100 (%) 11.01
Market Cap (US$Mn) 860 12Months BETA 1.01
Dividend Yield % 6.8% Sector Return 1M 6M 12M
P/E 10.20 Absolute Return 2.0% -4.9% 13.5%
P/bv 2.64 Rel. Index Return 1.3% 0.6% 12.4%

managed to offload all of their inventories during CY14. Be that as it may, with another gas price
hike around the corner amidst decreasing difference between local and international prices, we
see another pricing challenge for the fertilizer manufacturers in CY16. In this backdrop, fertilizer
companies receiving subsidized gas (EFERT and FFBL) will be the major beneficiaries.
DAP sales to remain strong
DAP demonstrated soaring sales volume in 4QCY15TD as they bounced ~1.5x to 1.07mn tons on
the back of PkR500/bag subsidy declared in Oct'15 as farmers had deferred their buys to Oct'15
in expectation of subsidy announcement. The beginning of Rabi Season additionally gave
incitement to offtakes. This leads all out DAP sales for 11MCY15 to 1.6mn tons, a chronicled high
itself. Resultantly, FFBL sales expanded by 61%YoY/9%YoY in 2M4Q/11MCY14. FFBL has produced
13% of the demand while the rest is being met through its inventories (8K as of Nov'15) and
imports (+29%YoY). The diminishing in gas curtailment to 31% instead of 41% further helped the
organization in profiting from the expanded demand. Additionally, average local DAP prices have
varied between premium/discount to global costs; price discount used to be as high as 26% in
Mar’09 which is near standard with international DAP prices. Worldwide DAP prices have fallen
by 6% CY15TD whereas costs of phosphoric acid has taken an alternate direction expanding by
12%YoY in the same period. Resultantly, primary DAP margins in Nov'15 is lessened to
US$180/ton as opposed to US$292/ton in the CPLY. We trust Primary DAP margins ought to stay
under US$200/ton for local producers in CY16. Any devaluation in US$/PkR equality ought to look
good for FFBL as essential DAP margins are gaged in US$ terms.
Reduction in discount between Local Urea prices and International prices Offtakes improving with decline in urea prices
Source: Shajar Research Source: Shajar Research
0
500
1000
1500
2000
2500
3000
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
International Local
1500
1550
1600
1650
1700
1750
1800
1850
1900
1950
2000
0
200000
400000
600000
800000
1000000
1200000
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Offtakes (LHS) Urea prices (RHS)
DAP offtakes
Source: Shajar Research
-
100,000
200,000
300,000
400,000
500,000
600,000
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
CY15 CY14

Engro Fertilizer: Gaining on Urea and DAP offtakes
The scrip has outperformed the market by 1.2% during CY15 as the company posted record
profitability in 9MCY15 on the back of 1) application of concessionary gas since Mar’15 on Mari
and SNGPL network 2) continued supply of 60mmcfd gas to its old plant 3) Consolidation of Engro
Eximp. The company urea sales faced churned by 2% as they dropped to 1.2mn tonnes but gross
margins improved by 3.3%. Hence, it bagged PkR9.6mn profits during the said period as against
PkR5.5mn in the CPLY. Uncertainty surrounding continuation of additional 60mmcfd gas post
Dec’15 to the old plant remains.
As we incorporate the discontinuation of 60mmcfd additional gas in our calculation, CY16F EPS
forecast is reduced by PkR2.13/sh while TP has dropped PkR3/sh. Forthcoming Mari expansions
(200mmcfd to add in the system in couple of months) and viability of LNG for power generation
will increased the probability of gas availability in the long term. Hence, we have assumed the
company operating Enven plant at a 102% capacity utilization. However, our sensitivity analysis
suggest one month applicability to improve EPS by PkR0.2/sh.
The rising demand of DAP bode well for EFERT where it import DAP through Engro Eximp. We
expect the company to import 400k tons of DAP in CY16 leading towards improvement in
annualized after tax earnings by PKR 1,192bn (EPS: PKR 0.9).
We maintain “BuY” on the scrip with our Dec’16 TP of PKR106/sh offering an upside of 26% to
last closing.
KATS Code EFERT Weight in KSE-100 (%) 1.60
Bloomberg Code EFERT PA 3MAvg Turnover '000 1,154.03
Price PkR 84.13 12MAvg. Turnover '000 3,840.05
12MHigh (PkR) 99.35 Absolute (%) 3.8% -4.7% 3.1%
12MLow (PkR) 73.47 Rel. Index (%) 3.0% 0.8% 1.9%
EFERT 2012 2013 2014 2015E 2016F
EPS (PkR/sh) (2.20) 4.13 6.17 11.65 9.42
Earning growth (%) 0% -288% 49% 89% -19%
P/E (38.24) 20.37 13.64 7.22 8.93
DPS (PkR/sh) - - 5.00 5.50 5.00
DY (%) 0% 0% 6% 7% 6%
Book value (PkR/sh) 11.87 18.84 25.91 31.73 36.44
P/Bv (x) 7.09 4.47 3.25 2.65 2.31
ROE (%) -19% 22% 24% 37% 26%
EFERT has been offering
discount of ~PkR80/50kg in
Nov’15 as to simulate
demand to reduce inventory
levels that has jumped to
269k tonnes in Oct’15 vs.
34ktons in the CPLY. As a
result offtakes surged
18%YoY/5.3xMoM to
200ktons. Given the
movement of international
prices, we now see increased
risk of price discounts lasting
well into 1HCY16 due to weak
fertilizer demand following
poor agriculture economies in
Pakistan. Hence, gross
margins are calculated to face
compression of ~2%.
The impact of expected gas
tariff hike cannot be gauged
at present and hence, not
accounted for. We believe
feed prices will remain at
current level considering
lower prices of crops, decline
in farm income and lower
international urea prices.
Whereas according to IMF
review document, quantum
of fuel price increase is
capped equivalent to
imported LNG price.

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