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BANKS MARKETWEIGHT Budget Impact Positive Abdul Shakur Banking Analyst 16 BANKS: KEY BENEFICIARY! June 7, 2010 A number of favorable decisions were announced for the banking sector in Budget FY11 which are expected to have a positive impact on the sector. The following are the key elements of the Budget FY11: � In order to address the admissibility of provisions charged by banks as tax deductible expenses, provisions against advances for consumer and SME have been allowed up to 5% of total advances while for other loans it has been maintained at 1% of total advances. In addition, provision under doubtful and loss categories charged up to 2008 -which were not claimed as tax admissible – shall be allowed for the period in which advances were written off. However, in this case admissibility in case of consumer loans shall be restricted to 3% of the annual income. Considering the current practice of the banks to create deferred assets in this regard, this admissibility of provisions will not impact the bottom-line of the banks. However, it would help reduce the deferred tax issues and improve cash flows. � 10% withholding tax deductible on government securities (including T-Bills and PIBs) is proposed to be treated as final discharge of tax liability, for corporations other than commercial banks. This measure would help GoP raise investments through the corporate sector and thus reducing the crowding-out effect for the sector. Nevertheless, we believe bank lending is to remain muted in CY10 amid credit risk and liquidity constraints � The ambit of advance tax collection over cash withdrawal – subject to tax @0.3% - has been enhanced to include various transactions including TDR, CDR, TT, online transfer, pay order and demand draft. However, the impact of the said development is neutral for banks as the same is passed on to the customers Outlook CY10: Positive Taking into account the above mentioned amendments in the Finance Bill, the banking sector is expected to remain the major beneficiary considering improving private credit which yields higher than govt. securities. On the other hand, non materialization of the anticipated change regarding higher corporate tax rate for banks having 5% or higher spreads is also expected to tune-in further positive sentiments. Upward revision for NSS targets by 14% to PKR213bn would however exert further pressure over banking deposit rates. This factor would further intensify the impact due the prevailing liquidity issues, therefore we expect banking spreads to adjust downward. Our liking remains limited to banks having relatively better spreads and lower liquidity risk with our top pick being MCB. Comparative Analysis of Spreads 11% 8% 5% 2% 6% 7% 8% 4% NBP UBL MCB BAFL FABL HBL ABL Source: Company Reports, BMA Research 4% 7% 5%
E&P MARKETWEIGHT Budget Impact Neutral Hamad Aslam Head of Research 17 E&P: VALUATIONS WITH CONVICTION June 7, 2010 With the E&P sector being governed under Petroleum Policies, the federal budget normally has limited implications on the sector. However through its announcement on allowance of decommissioning cost as a tax deductible expense, the budget has resolved a long pending tax issue between FBR and E&P companies. Decommissioning cost: Deduction allowed over a period of ten years but one-off expense to be incurred by E&P companies It was announced that ‘Decommission Cost’ incurred by E&P companies shall be allowed as a tax deductible expense to be depleted over a period of ten years or the life of the development and production lease, whichever is less. Based on our preliminary understanding, the E&P companies currently expense out the aforementioned cost at the time of actual decommissioning of respective wells. However FBR had up till now not allowed the expense to be tax deductible, as a result of which a total amount of PKR6bn is estimated to be pending against the sector. Based on latest financial reports, Pakistan Petroleum (PPL) and Pakistan Oilfield (POL) have respective amounts of PKR578mn and PKR447mn pending against this head. For OGDC, recall that the company booked an additional tax amount of PKR11.6bn in FY08 (and ~PKR3bn in FY09), thereby clearing off its pending dues against the tax liability. One-off expense to be booked by E&P companies Source: BMA Research However, the above amount will now be reversed over the remaining life (or the remaining of ten years, whichever is less). Moreover, now that the expense has been allowed to be depleted over ten years, the company will earn the inherent benefit of time value by front loading the expense. As a result, we expect a marginal improvement in the bottomline of the E&P companies from FY11 onwards. Circular debt largely ignored in the budget: Attrition in cash reserves to continue To our disappointment, no concrete measures were announced with regards to resolving the energy chain circular debt; which for E&P companies (particularly OGDC and PPL) may mean continued attrition in cash reserves, low dividend payouts and inability to meet desired exploration efforts. (Refer to the section on Power Sector for details on the current situation on circular debt). Market weight maintained on the sector Amount (PKR'mn) EPS (PKR) POL 578 2.4 PPL 447 0.5 OGDC - - We maintain MARKETWEIGHT stance on the E&P sector as it continues to offer cash rich balance sheets, low leverage, good quality of earnings, stable cash flows and high conviction on earnings. Moreover, with the revenue stream denominated in USD, the sector offers a hedge against devaluation in Pak Rupee.
Page 1 and 2: 65 Federal Budget 2010-11 Cautious
Page 3 and 4: 3 TABLE OF CONTENTS Budget FY11: No
Page 5 and 6: 5 June 7, 2010 package will have li
Page 7 and 8: 7 June 7, 2010 against an average o
Page 9 and 10: 9 Sector wise Budget Impact and BMA
Page 11 and 12: ECONOMY Budget Impact Positive Abdu
Page 13 and 14: 13 June 7, 2010 announced in the bu
Page 15: 15 KEY MEASURES Income tax June 7,
Page 19 and 20: OMC OVERWEIGHT Budget Impact Neutra
Page 21 and 22: 21 June 7, 2010 Moreover, seemingly
Page 23 and 24: CEMENTS OVERWEIGHT Budget Impact Ne
Page 25 and 26: CHEMICALS MARKETWEIGHT Budget Impac
Page 27 and 28: 27 Outlook FY11E June 7, 2010 Incre
Page 29 and 30: 29 Top Investment Ideas June 7, 201
Page 31 and 32: BUY Fair Value: PKR 282 Current Pri

omc: no mention; hence safe - BMA Capital Management

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