Monetary easing concerns overplayed, TR remains a risk We continue to like Pak Banks despite another 50bps cut in discount rate by the State Bank of Pakistan (SBP). We believe recent underperformance of the banking sector remains unjustified given a muted 1-7% valuations impact driven by -2.2% to +0.9% earnings revision for 2015E and -5.3% to +0.6% for 2016F on the back of shift in sizable high-yielding assets to low-yielding assets during 2016. We flag the magnitude of monetary easing impact on Pak Banks has shrunk post linkage of Minimum Deposit Rate (MDR) to the interest rate corridor. Our top picks amongst Pak Banks are United Bank Limited (UBL, TP: Rs248) and Allied Bank Limited (ABL, TP Rs148), as they trade at 2015E P/B of 1.24x and 1.22x, respectively.

However, introduction of the Target Rate remains a key risk for the sector. Contrary to expectations, SBP did not mention the Target Rate in its Monetary Policy Statement (MPS), which can potentially wipe out banks’ 2016F profitability by an average 16%. However, SBP still has three more MPS announcements before its deadline to introduce the Target Rate.

Varying impact of monetary easing on banks’ profitability We believe monetary easing affects Faysal Bank (FABL) profitability the most relative to peers as the bank (1) has a lower share of PIBs in total assets, (2) a higher ADR and (3) a low savings to deposit ratio (resulting in lower cost savings). On the other hand, we expect UBL and NBP to be the least affected due to their (1) lower share of MTBs in total assets and (2) higher contribution from non-interest income.