Morgan Stanley Pak Bank Initiation

MORGAN
STANLEY
RESEARCH
ASIA/PACIFIC
Morgan Stanley Asia (Singapore) Pte.+
Matthew S Wilson, CFA

Matthew.Wilson@morganstanley.com +65 6834 6746
Samantha L Horton
Samantha.Horton@morganstanley.com +65 6834 8975
August 28, 2007
Industry View Attractive
Pakistan Banks
High Risk but Huge Opportunity
Initiate on Pakistan Banks with an Attractive View: Pakistan has obvious challenges regularly broadcast by the media. However, we believe Pakistan offers significant upside, most of which is over-shadowed by its image. In the current context of unsettled investment markets, pending elections, and uncertainty over leadership, Pakistan today may not appear to present a choice destination. However, if we look beyond the immediate future, we believe Pakistan presents an interesting real emerging market opportunity for the patient long-term investor. Bank returns are some of the widest on offer in Asia and growth potential is vast, in our view. Progress with privatization, regulation, execution, and balance sheet repair is impressive, as is the attitude to open markets. Pakistan is worth a look and visit; you may just be surprised. MCB Overweight, Rs267, 12-month PT Rs340, which equates to a total potential return of 31%. MCB is trading on 8.9x EPS, 2.5x book, with three-year earnings CAGR of 16%, an RoE of 31%, and a dividend yield of 4.1%, on our FY08 estimates. MCB offers a high-quality play on Pakistans emerging financial system. It has a well-buttressed balance sheet and a high-return franchise (RoRWA is 6.14%). The cream comes from the Mansha influence, canny investments in Adamjee Insurance (well below current market), Sui Pipelines, and a large and growing pension fund surplus. UBL Overweight, Rs171, 12-month PT Rs193, which equates to a total potential return of 16%. UBL is trading on 9.1x EPS, 2.5x book, with three-year earnings CAGR of 10%, an RoE of 32%, and a dividend yield of 4.1%, on our FY08 estimates. UBL offers leadership in retail and investment banking, and a potentially strong Middle East proposition. The balance sheet is solid and return structures are healthy. UBL is currently undertaking a comprehensive project to transform the internal business processes, replace IT platforms, and revitalize distribution. This project is expected to take two to three years to complete.
Price Target Summary

MCB (O/W) UBL (O/W) Share price Rs267 Rs171 Shares o/s (m) 628 809 Mkt cap Rs bn Rs168 Rs138 Target price Rs340 Rs193 Target P/E 11.3 10.2 Total return 31% 16%
Source: Company data, Morgan Stanley Research. As at 27 Aug 2007 Total return includes dividends but does not include transaction costs.
Return on RWAs (latest reported)

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Pakistan Indonesia Malaysia Thailand Australia Singapore Vietnam India Hong Kong China
Source: Company data, Morgan Stanley Research
Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
For analyst certification and other important disclosures, refer to the Disclosure Section.
+= Analysts employed by non-U.S. affiliates are not registered pursuant to NASD/NYSE rules.
MORGAN
STANLEY
RESEARCH
August 28, 2007 Pakistan Banks
High Risk but Huge Opportunity

Pakistan has obvious challenges regularly broadcast by the media. However, we believe Pakistan offers significant upside, most of which is over-shadowed by its image. In the current context of unsettled investment markets, pending elections, and uncertainty over leadership, Pakistan today may not appear to present a choice destination for investment capital. However, if we look beyond the immediate future, we believe Pakistan presents an interesting emerging market opportunity for the patient long-term investor. Returns are wide and growth potential is vast, in our view. Near term concerns provide an inexpensive buying opportunity. We initiate coverage of the Pakistan bank sector with an Attractive industry view and Overweight ratings on MCB and United Bank Ltd (UBL). The bank sector stands out as a key success story of economic development, structural change, and reform. The sector is in the midst of a comprehensive privatization program with 80% of banking assets now in private hands and growing. The central bank, the State Bank of Pakistan (SBP), has been instrumental in this story; prudential requirements have been re-written in consultation with leading regulators around the world and supervision standards have been improved. This has not happened overnight the process began in 1991, resulting in 16 years of learning, stumbling, and eventual improvement. It continues. Today we find banks with rebuilt and strong balance sheets, improved management (many with senior international experience), enhanced distribution, evolving product suites, and revamped risk management. They take this stronger platform into an environment that we believe has vast growth and high returns.
Exhibit 1
Positive View
The macro growth story delivers, confidence grows, law and order is maintained, politics is managed, Investment accelerates, worker remittances continue and emerging market risk aversion stabilises. Banks harness the inherent growth potential with expanded product suites, improved financial market access, crisp execution, and sensible risk management. Vast growth potential achieved
The growth potential is manifest in demographics and the extent of financial system penetration and sophistication. High returns extended
Net interest margins average 6.8% for our coverage banks and 70% of the margin originates from deposit spreads. This equates to an average return on RWAS of 5.5% for our coverage and thus rich organic capital generation. These banks can fund RWA growth of 20% and still maintain dividend payouts of at least 50%. Refer to Exhibits 5, 6 and 59. Vast opportunity equates to measured competition. Risk managed
Bank balance sheets are simple and well buttressed, with Tier I ratios of 12.7%. There is little exposure to exotic instruments and foreign currency. These are classic intermediating banks, and as such, asset quality and interest rate structures are the key risks. Gross NPL ratios average 5% and provisions represent 5% of loans. Investments represent 18% of assets with the following composition: 73% government securities, 16% corporate bonds, and 8% equities. A total of 85% of assets are denominated in Pakistan rupees.
Negative View
The macro story stumbles, hampered by protracted political issues and/or a change in policy direction. In a difficult macro setting, risk premia widen, investment slows, defaults rise, and a breakdown in law and order produces general economic chaos. Growth potential unrealized
Pakistan Snapshot
Population (mn) GDP per capita (US$) Credit/ GDP Retail credit/ GDP Deposits/ GDP Loans/ deposits Net interest margins RoRWAS No. of deposit accounts (mn) No. of loan accounts (mn) Credit cards on issue (mn) No. of mobile phones (mn)
Source: Company data, SBP, Morgan Stanley Research
156 834 29% 4% 39% 75% 6.8% 5.5% 26.6 4.9 1.5 55
Wealth growth turns negative, confidence collapses, and investment slows. Returns collapse
Slowed economic growth drives increased competition and return compression. Loan losses augment the return crunch. The risks manifest
MORGAN
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RESEARCH
Exhibit 2
Exhibit 5
Population 6th largest and 70% < 30yo

1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400
Foreign Investment open economy key to growth

FDI
4,000
US$ mn
Portfolio
as a % of GDP (rhs)
3.0%
3,400
2.6%
2,800
2.1%
2,200
1.7%
1,600
1.3%
1,000
0.9%
300 200
400 0.4%
100 0
China India United States Indonesia Brazil Pakistan Bangladesh Russia Nigeria Japan
-200 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06
0.0%
Source: US Census Bureau, Morgan Stanley Research, Data as at Dec 2006
Source: CEIC, Morgan Stanley Research
Exhibit 3
Exhibit 6
Low Total Credit Penetration and retail is only 4%

200%
Net Interest Margins wide and sustainable

8.00
%
Over-penetrated
180% 160%
Hong Kong Australia Taiwan
7.00
6.00
140%
China
Total credit/ GDP 120% 100% 80% 60%
Singapore Malaysia Thailand Korea
5.00
4.00
3.00
India
40% 20% 0% 0
Vietnam Philippines Pakistan Indo

2.00
Under-penetrated
5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
1.00
0.00
Indonesia Pakistan Thailand India Korea Vietnam China Malaysia Australia Singapore Taiwan HK
GDP per capita (US$)
Source: Respective central banks, CEIC, Morgan Stanley Research. Data as of 2006
Source: Company data, Morgan Stanley Research, Data as at Dec 2006
Exhibit 4
Exhibit 7
GNP per Capita and Growth growing wealth

GNP per capita
900
US
RoRWAs large generator of organic capital

5.0% 4.5% 4.0% 17
%
YoY growth (rhs)
800
14 3.5%
700
10
3.0% 2.5% 2.0%
600
500
3 1.5%
400
1.0% 0.5% 0.0%
300
-4
200 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05
-7
Pakistan
Indonesia
Malaysia
Thailand
Australia
Singapore
Vietnam
India
Hong Kong
China
Source: CEIC, Morgan Stanley Research.
Source: Company data, Morgan Stanley Research. Data as at Dec 2006
MORGAN
STANLEY
RESEARCH
Contents
High Risk but Huge Opportunity.......................................................................................................................................................... 2 Positive View....................................................................................................................................................................................... 2 Negative View ..................................................................................................................................................................................... 2 Stock Views......................................................................................................................................................................................... 5 Macro Perspective .............................................................................................................................................................................. 6 Positioned for Growth........................................................................................................................................................................ 11 Bank Sector Overview....................................................................................................................................................................... 13 Balance Sheet Analysis..................................................................................................................................................................... 21 Return Decomposition....................................................................................................................................................................... 27 MCB Bank Canny ......................................................................................................................................................................... 28 Valuation ........................................................................................................................................................................................... 29 United Bank Ltd Retailer............................................................................................................................................................... 32 Valuation ........................................................................................................................................................................................... 33 Forecasts and Assumptions .............................................................................................................................................................. 36
MORGAN
STANLEY
RESEARCH
Stock Views
MCB: Overweight, PT Rs340
We initiate coverage of MCB with an Overweight rating and a 12-month price target of Rs340, which equates to a total potential return of 31%. MCB is trading on 8.9x EPS, 2.5x book, with three-year earnings CAGR of 16%, an RoE of 30%, and a dividend yield of 4.1%, on our FY08 estimates. We believe MCB offers a high-quality play on Pakistans emerging financial system. MCB has a well-buttressed balance sheet Tier I of 16.6% and gross NPL ratio of 4% with 100% coverage. Return structures are eye-catching. MCB has a net interest margin of 7.55% driven by a strong deposit franchise with superior mix. The return on RWAs is a bumper 6.14% (the regional average is a mere 2.1%), which equates to very strong organic capital generation enough to sustain 20%+ RWA growth and a dividend payout ratio of at least 50%, in our view. The cream comes from the Mansha influence, canny investments in Adamjee (well below current market), Sui Pipelines, and a large and growing pension fund surplus.
MCB (O/W) UBL (O/W)
Exhibit 8
Price Target Summary

Share price Shares Mkt cap o/s (m) Rs bn Target price Target P/E Total return
Rs267 Rs171
628 809
Rs168 Rs138
Rs340 Rs193
11.3 10.2
31% 16%
Source: Company data, Morgan Stanley Research. Total return includes dividends but does not include transaction costs.
Exhibit 9
Investment Arithmetic
FY04 FY05 FY06 FY07e FY08e FY09e
UBL: Overweight, PT Rs193

We initiate coverage of UBL with an Overweight rating and a 12-month price target of Rs193, which equates to a total potential return of 16%. UBL is trading on 9.1x EPS, 2.5x book, with three year earnings CAGR of 10%, an RoE of 32%, and a dividend yield of 4.1%, on our FY08 estimates. UBL offers leadership in retail and investment banking, and a potentially strong Middle East proposition. The balance sheet is solid, with Tier I of 8% and a gross NPL ratio of 5.3% with 77% coverage. Return structures are healthy. UBL has a net interest margin of 6.03% due to its low-cost deposit franchise. UBL is currently undertaking a comprehensive project to transform the internal business processes, replace IT platforms, and revitalize distribution. The core banking system is currently being replaced with Genesis. This project is expected to take two to three years to complete.
ModelWare fully diluted EPS MCB Rs5.1 Rs17.3 Rs24.1 Rs27.9 Rs30.2 UBL Rs7.3 Rs11.7 Rs16.4 Rs17.5 Rs18.8 ModelWare EPS growth MCB (34.4%) 239.9% 38.9% 15.9% 8.1% UBL 35.1% 60.9% 39.4% 6.9% 7.7% ModelWare P/E MCB 52.4 15.4 11.1 9.6 8.9 UBL 23.5 14.6 10.5 9.8 9.1 Gross dividend yield MCB 0.9% 1.6% 2.8% 3.7% 4.1% UBL 0.9% 1.5% 1.8% 2.9% 4.1% Cash payout ratio MCB 49% 25% 31% 36% 36% UBL 21% 21% 18% 29% 37% Price/ NTA MCB 6.1 4.8 3.5 3.1 2.5 UBL 5.0 3.9 3.5 3.3 2.6 Price/ book MCB 6.1 4.7 3.5 3.1 2.5 UBL 5.0 3.9 3.5 3.3 2.6 Pre-goodwill ROE MCB 16.0% 45.4% 37.6% 33.9% 31.2% UBL 23.7% 30.0% 35.2% 34.6% 31.8% Price/ core profit MCB 37.4 11.9 8.5 6.6 5.6 UBL 25.8 12.4 8.3 6.4 5.5 Market cap/ deposits MCB 76.5% 73.9% 66.1% 53.2% 46.2% UBL 58.4% 46.7% 40.3% 31.4% 27.6% Tier I MCB 6.4% 9.5% 16.6% 17.9% 18.2% UBL 7.9% 7.7% 8.9% 9.2% 10.2%
Rs35.0 Rs21.1 15.9% 12.0% 7.6 8.1 4.5% 5.3% 34% 43% 2.1 2.1 2.1 2.1 29.6% 28.8% 4.8 4.9 38.0% 23.3% 18.7% 10.7%
Source: Company data, Morgan Stanley Research. e = Morgan Stanley Research estimates
MORGAN
STANLEY
RESEARCH
Macro Perspective
Real GDP growth has averaged 7% for the last five years, propelled by renewed domestic confidence, consumption, and investment supported by the buoyant global economic environment. Agriculture is critical to the economy it comprises 45% of employment, and 66% of the population lives in rural areas. Inflation has abated and is now running at 7.4%. Food, energy costs, and housing have been key drivers. Monetary policy has a dual objective of balancing growth and price stability. It is still in tightening mode. The privatization, growth, and enhancement of the financial sector have been central to recent economic stability. Fiscal policy: The fiscal deficit has improved from an average of 7% in the 1990s to 4% today. Tax reform, debt reduction and growth stimulus need to be balanced. External sector: Domestic growth and high oil prices have led to a surge in imports. Exports are highly concentrated: cotton, leather and rice. Imports are equally concentrated: machinery and oil associated products. Worker remittances are the second-largest source of foreign exchange inflow after exports, totaling 4% of GDP. Foreign direct investment is at record levels of 2.7% of GDP. The Middle East (U.A.E) is the key contributor. The telecom sector (US$1.0 bn) is the largest recipient, then energy (US$305 mn), and financial services (US$266 mn). External debt is falling. Growth has slowed from 7% in the 1990s to 2% this decade. It has fallen from 44% of GDP as of June 2000 to 26% at present. Demographics: A population of 156 million is growing at 2% per annum, with 70% under the age of 30 years. Life expectancy at birth is 64 years for males and 66 years for females. The sex ratio is 107. Punjab is the most populous province, with 56% of the population, while Karachi is the most populous city, with 10% of the population. Poverty is still a key concern. In 2005, 24% of the population lived below the poverty line, improving from 35% in 2001. Rural poverty levels have improved from 39% to 28%, and urban poverty levels from 23% to 14%. Education: The literacy rate is estimated at 53%, which is still well below the target of 80% by 2015. Low enrollment rates persist at 52% and the standard of education in the public sector is very low. Public spending on education is a mere 2.1%.
Exhibit 10
GDP Growth four years of strength

Nominal GDP growth
20% 18% 16% 14%
Real GDP growth
12% 10% 8% 6% 4% 2% 0% Jun-90 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06
Exhibit 11
GDP by Sector underpinned by growth in services

Agriculture
9,000,000
PKR mn
Industry
Services
8,000,000 7,000,000 6,000,000 5,000,000

51% 53% 54%
4,000,000
53%
51% 53% 27% 27% 27% 24% 27% 24% 27% 23% 26% 24% 24% 24% 24% 21% 19% 20% 27%
3,000,000 2,000,000
50% 50% 50% 25% 25% 24% 26% 49% 49% 51%
52%
1,000,000 0
24% 26%
23%
23%
22%
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
Exhibit 12
GNP per Capita and Growth growing wealth

GNP per capita
900
US
YoY growth (rhs)

17
800
14
700
10
600
500
400
300
-4
200 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05
-7
MORGAN
STANLEY
RESEARCH
Exhibit 13
Exhibit 16
Contribution to GDP private consumption critical

Private consumption
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
SBP Policy Rate measured increases to 10.0%

22
%
Government consumption
20 18 16 14 12 10 8 6 4 2 Feb-92
Apr-93
Jun-94 Aug-95
Oct-96
Dec-97 Feb-99
Apr-00
Jun-01 Aug-02
Oct-03
Dec-04 Feb-06
Apr-07
Exhibit 14
Exhibit 17
Contribution to GDP large investment phase

Domestic savings
25%
Reserve Requirements measured increases

40
%
Total investment
35 20% 30
Statutory Liquidity Requirement (SLR)
15%
25
20 10%
15
10 5% 5
Demand
Cash Reserve Requirement (CRR) Time

0% 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 0 Jan-60 Jan-64 Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04
Exhibit 15
Exhibit 18
Inflation still above SBPs target of 6.5%

CPI - YoY chg
15
%
Money Supply and Growth tightening stance

M2
4,500
PKR
CPI - annual ave chg
YoY growth 3MMA (rhs)

35% 31% 27% 23% 19% 16% 12% 8% 4%
14 13 12 11 10 9 8 7 6 5 4 3
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 2 1 Sep-92 Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06
0% 0 Jan-88 Apr-89 Jul-90 Oct-91 Jan-93 Apr-94 Jul-95 Oct-96 Jan-98 Apr-99 Jul-00 Oct-01 Jan-03 Apr-04 Jul-05 Oct-06
MORGAN
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RESEARCH
Exhibit 19
Exhibit 22
Fiscal Deficit as a % of GDP greater discipline

10.0
%
Export Mix huge textile concentration (cotton)

Food
80%
Textile Manufactures
Petroleum & Coal
Other Manufactures
9.0 8.0 7.0 6.0 5.0 40% 4.0 30% 3.0 20% 2.0 1.0 0.0 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 10% 70%
60%
50%
0% Sep-99
Jun-00
Mar-01
Dec-01
Sep-02
Jun-03
Mar-04
Dec-04
Sep-05
Jun-06
Mar-07
Exhibit 20
Exhibit 23
Mismatch between Contributions to Growth and Taxes seeking an efficient & effective tax system
Point contribution (% - FY2005) Share in GDP Share in Taxes to GDP growth
Import Mix huge oil & machinery concentration

Food
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Sep-99
Machinery & transport
Petroleum
Chemicals
Metal
Agriculture Manufacturing Construction Electricity & gas distn Trans, Storage & Comm Wholesale & Retail Trade Finance & Insurance Public Admin & Defense Social & Comm Services Other Total
23.0 18.0 2.1 3.5 10.5 19.0 4.0 6.0 9.6 4.3 100.0
1.2 62.2 2.9 5.3 4.5 2.8 3.9 5.0 7.8 4.4 100.0
1.5 2.2 0.5 0.2 0.5 2.0 1.0 0.0 0.6 0.1 8.6
Jun-00
Mar-01
Dec-01
Sep-02
Jun-03
Mar-04
Dec-04
Sep-05
Jun-06
Mar-07
Source: SBP, Morgan Stanley Research
Exhibit 21
Exhibit 24
Current A/C surging imports (domestic demand)

BoP - Current A/C
US$m
Foreign Trade Growth import dependant

Exports, YoY% Chg 3MMA Imports, YoY% Chg 3MMA
70% 60% 50% 40% 30% 20%
as % of GDP (rhs)
5% 4% 3% 2% 1% 0% -1% 10% -2% 0% -3% -10% -4% -20% -5% -30% -6% Jul91 Jul92 Jul93
5,000 4,000 3,000 2,000 1,000 0 -1,000 -2,000 -3,000 -4,000 -5,000 -6,000 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05
Jul94
Jul95
Jul96
Jul97
Jul98
Jul99
Jul00
Jul01
Jul02
Jul03
Jul04
Jul05
Jul06
MORGAN
STANLEY
RESEARCH
Exhibit 25
Exhibit 28
Forex Reserves and Import Cover better positioned

Forex reserves
14,000
US$
Foreign Investment key to supporting growth

FDI
4,000 12
X US$ mn
Portfolio
as a % of GDP (rhs)
3.0%
Monthly import cover (rhs)
3,400
2.6%
12,000
10 2,800 2.1%
10,000
9 2,200 1.7%
8,000
7 1,600 1.3%
6,000
5 1,000 0.9%
4,000
3 400 0.4%
2,000
2 -200 0.0% FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06
0 Jan90
0 Jan91 Jan92 Jan93 Jan94 Jan95 Jan96 Jan97 Jan98 Jan99 Jan00 Jan01 Jan02 Jan03 Jan04 Jan05 Jan06 Jan07
Exhibit 29
Exhibit 26
Foreign Investment (by geo) Middle East centric

Nth America
80%
Worker Remittances (% of GDP) important sector

5% 70%
Middle East
Europe
4%
60%
50% 3% 40%
30% 2% 20%
1%
10%
0% 1997/98 0% 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06
Exhibit 30
Exhibit 27
Exchange Rate (USD:PKR) recent stability

70
Worker Remittances (by geo) Middle East centric

Middle East
90% 80% 70%
Nth Amercia
Europe
60
50
40 60% 50% 40% 20 30% 20% 10% 0% Jul-95 10 30
0 Jan-85 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06
Jan-87
Jan-89
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
MORGAN
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RESEARCH
Exhibit 31
Exhibit 34
External Debt Outstanding reducing the burden

External debt outstanding
38,000
US$
Employment Mix (2006) agri centric
as a % of GDP (rhs)
50% 46% 41% 37% 32% 28% 23% 19% 14% 10%
36,000 34,000 32,000 30,000 28,000 26,000 24,000 22,000 20,000 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Non-Agriculture Informal (41%)
Agriculture (44%)
Non-Agriculture Formal (15%)
Source: Federal Bureau of Statistics, Morgan Stanley Research
Exhibit 32
Exhibit 35
Foreign Economic Assistance

Loans
3,500
US$
Population Mix predominantly rural

Grants
80%
Rural
Urban
3,000
70%
2,500 60% 2,000 50% 1,500 40% 1,000
500
30%
0 1960/61
20% 1964/65 1968/69 1972/73 1976/77 1980/81 1984/85 1988/89 1992/93 1996/97 2000/01 2004/05 1989/90 1991/92 1993/94 1995/96 1997/98 1999/00 2001/02 2003/04 2005/06
Exhibit 33
Exhibit 36
Population & Unemployment

Population
160
mn
Motor Vehicles rapid take up

YoY pop growth (rhs)
9.0
%
Unemployment rate (rhs)
Motor Vehicles on road per 1000/pop

50 45
Motor Vehicles sales per 1000/pop (rhs)

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Jun06
150 140 130 120 110 100 90 80 70 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
8.0 7.0 40 6.0 35 5.0 30 4.0 25 3.0 20 2.0 15 1.0 0.0 10 Jun90
Jun91
Jun92
Jun93
Jun94
Jun95
Jun96
Jun97
Jun98
Jun99
Jun00
Jun01
Jun02
Jun03
Jun04
Jun05
10
MORGAN
STANLEY
RESEARCH
Positioned for Growth

Pakistan presents a very obvious growth opportunity, in our view. 1. Demographics vast and young: It is the sixth most populous nation in the world, and 70% of its people are below 30 years of age. 3.
Exhibit 37
2.
Credit penetration - very low: Total credit outstanding is only 29% of GDP. Moreover, the valuable retail segment is a mere 4%. In addition, only 33% of the adult population has bank accounts. Growing wealth: GDP per capita is running at 5-year CAGR of 15%.
Demographics, Wealth and Credit Penetration (latest reported)

Total popn (mns) Split:<30 30-49 50+ China 1,314.5 42% 34% 23% 100% 2,746,321 2,089 India 1,096.0 61% 24% 14% 100% 1,012,026 923 Indonesia 219.2 57% 28% 15% 100% 375,078 1,711 Pakistan Philippines 156.8 85.3 70% 19% 11% 100% 135,684 865 63% 24% 13% 100% 131,516 1,543 Vietnam 84.2 62% 25% 13% 100% 60,437 718 Thailand 65.5 48% 33% 19% 100% 239,916 3,663 Korea 48.3 41% 35% 24% 100% 912,873 18,901 Malaysia 26.6 60% 26% 14% 100% 167,267 6,279 Taiwan 22.8 43% 32% 25% 100% 304,482 13,360 Australia Hong Kong 20.8 6.9 41% 30% 30% 100% 786,663 37,809 34% 37% 29% 100% 188,580 27,328 Singapore 4.2 40% 36% 24% 100% 136,606 32,218
GDP (US$m) GDP per capita (US$)
US$ mn Total credit outstanding Corporate Retail - mortgage - non-mortgage Total deposits - as % of GDP Total credit outstanding Corporate Retail - mortgage - non-mortgage Total deposits - per capita (US$) Total credit outstanding Corporate Retail - mortgage - non-mortgage Total deposits
3,315,858 2,762,546 553,311 316,066 237,246 4,813,123
497,926 356,082 141,844 81,973 59,871 636,363
89,294 51,202 38,092 8,647 29,444 146,396
38,710 33,460 5,250 831 4,419 52,401
52,902 48,448 4,454 2,222 2,233 75,494
34,328 33,641 687 0 687 40,304
227,391 167,929 59,462 41,919 17,543 254,878
751,697 375,292 376,405 233,673 142,732 709,475
175,737 83,365 92,371 48,190 44,182 245,933
462,135 242,448 219,687 159,516 60,171 609,754
1,318,027 492,754 825,273 709,446 115,828 732,320
337,972 237,566 100,406 75,969 24,437 636,049
170,307 69,320 100,987 81,263 19,724 193,472
121% 101% 20% 12% 9% 175%
49% 35% 14% 8% 6% 63%
24% 14% 10% 2% 8% 39%
29% 25% 4% 1% 3% 39%
40% 37% 3% 2% 2% 57%
57% 56% 1% 0% 1% 67%
95% 70% 25% 17% 7% 106%
82% 41% 41% 26% 16% 78%
105% 50% 55% 29% 26% 147%
152% 80% 72% 52% 20% 200%
168% 63% 105% 90% 15% 93%
179% 126% 53% 40% 13% 337%
125% 51% 74% 59% 14% 142%
2,523 2,102 421 240 180 3,662
454 325 129 75 55 581
407 234 174 39 134 668
247 213 33 5 28 334
620 568 52 26 26 885
408 400 8 0 8 479
3,472 2,564 908 640 268 3,892
15,564 7,770 7,794 4,838 2,955 14,690
6,597 3,129 3,467 1,809 1,658 9,232
20,278 10,638 9,639 6,999 2,640 26,755
63,348 23,683 39,665 34,098 5,567 35,197
48,977 34,426 14,550 11,009 3,541 92,172
40,167 16,349 23,818 19,166 4,652 45,630
Source: Respective central banks, CEIC, Morgan Stanley Research
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Exhibit 38
Exhibit 40
Total Debt to GDP vs. GDP per Capita (latest reported)

200%
Mortgage Debt to GDP vs. GDP per Capita (latest reported)

100%
Over-penetrated
180% 160%
Hong Kong Australia Taiwan

90% 80% 70% 60% 50% 40% 30% 20% 10%
Over-penetrated
Australia
China
Total credit/ GDP 120% 100% 80% 60%
Singapore Malaysia Thailand Korea
Mortgage retail debt/ GDP
140%
Singapore Taiwan Hong Kong Malaysia Thailand China
India
40% 20% 0% 0
Vietnam Philippines Pakistan Indo
Korea
Under-penetrated
5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
India Indo Philippines

5,000 10,000 15,000 20,000 25,000 0 Vietnam
Under-penetrated
30,000 35,000 40,000
Pakistan 0%
Exhibit 39
Exhibit 41
Total Retail Debt to GDP vs. GDP per Capita (latest reported)
120%
Deposits to GDP vs. GDP per Capita (latest reported)

400%
Over-penetrated
100%
Australia
350%
Hong Kong
300% Total retail debt/ GDP 80%
Taiwan
60%
Singapore
Deposits/ GDP
250%
Taiwan
200%
China Malaysia
Malaysia
40%
Hong Kong Korea
150%
Singapore
Thailand China
20%
Indo Pakistan Philippines

0% 0
India
Thailand India Vietnam Philippines 50% Pakistan Indo

100%
Korea
Australia
Under-penetrated
10,000 15,000 20,000 25,000 30,000 35,000 40,000
0% 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 GDP per capita (US$)
Vietnam
5,000
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Bank Sector Overview

The Pakistan bank and telco sectors are the success stories of economic reform in Pakistan. Commercial banks were nationalized in 1972, with the formation of five major banking groups (National Bank of Pakistan, Habib Bank, United Bank, MCB, and Allied Bank of Pakistan). This policy was reversed in 1991. MCB was the first major bank to begin the reprivatization process, with 75% of its equity divested to the private sector over two years. Ten new banking licenses were also issued. However, the process was slow and poorly executed. With little capacity and capability enhancement combined with weak supervision, the bank sector found itself in trouble. In 1997, the State Bank of Pakistan (SBP) was granted more autonomy and sole authority over the commercial banking sector. SBP set about to better equip itself, build capacity and improve banking standards. It consulted with the key overseas banking regulators, invested heavily in IT and training, and recruited staff with foreign banking and regulatory experience.
Exhibit 42
Once the SBP achieved its stronger positioning, the privatization program restarted. In the early 2000s, United Bank, Habib Bank, and Allied Bank were privatized and the remaining government stake in MCB was sold. Today 80% of banking assets are in private hands. SBP promotes an open and transparent system. Foreign banks and investors are encouraged, and they now hold around 50% of banking assets. Further strengthening of the banking system is required and is currently underway: Voluntary consolidation, particularly the smaller banks (paid-up capital requirements to be a catalyst). Ongoing strengthening of legal infrastructure. Banking Law revision to deal with future challenges. Deposit insurance scheme under consideration. Basel II implementation by 2008. Sustained ongoing improvement in disclosure, supervision, corporate governance, risk management, and product development to meet international standards.
Pakistan Banking Landscape (2006)

PKR millions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. National Bank of Pakistan Habib Bank Limited United Bank Ltd. MCB Bank Ltd. Bank Alfalah Ltd. Standard Chartered Bank Allied Bank Limited Askari Commercial Bank Ltd. The Bank of Punjab ABN AMRO Bank N.V. Faysal Bank Ltd. Bank AL Habib Ltd. Metropolitan Bank Ltd. Citibank N.A. Zarai Taraqiati Bank Ltd. Soneri Bank Ltd. PICIC Commercial Bank Ltd. SaudiPak Commercial Bank Ltd Habib Bank AG Zurich NIB Bank Limited Meezan Bank Limited The Bank of Khyber KASB Bank Ltd. Assets Share Deposits Share Branches 483,232 16% 411,246 14% 308,065 10% 251,092 8% 214,843 7% 156,878 5% 198,030 7% 122,701 4% 114,898 4% 95,736 3% 78,229 3% 88,003 3% 60,377 2% 61,905 2% 2,645 0% 50,931 2% 53,150 2% 40,692 1% 33,191 1% 21,709 1% 29,447 1% 19,440 1% 19,051 1% 1,250 1,425 1,056 994 195 115 700 53 266 80 75 157 82 18 342 72 129 50 25 41 63 29 35 Share 17% 20% 15% 14% 3% 2% 10% 1% 4% 1% 1% 2% 1% 0% 5% 1% 2% 1% 0% 1% 1% 0% 0% 625,592 16% 513,876 13% 388,177 10% 317,608 8% 261,499 7% 246,318 6% 232,178 6% 152,484 4% 139,223 3% 124,000 3% 116,847 3% 108,205 3% 94,298 2% 89,088 2% 85,479 2% 67,014 2% 65,349 2% 49,480 1% 45,186 1% 40,258 1% 38,831 1% 26,522 1% 23,461 1%
While there are around 38 banks in the banking system, operations tend to be concentrated with the larger banks. The top seven banks manage 65% of system assets, hold 67% of system deposits, and run 79% of branches. In the following sections, we focus on: 1. Loan books predominantly commercial, huge scope to grow into consumer and SME. Auto, unsecured, and cards are key to consumer growth; housing is structurally challenged and will take much time. Deposit books 68% of system deposits are low cost. This is a huge spread driver. As deposits are largely a function of faith and culture, dramatic change is unlikely, despite efforts by SBP to encourage greater TD usage. Net interest margins wide and largely driven by deposit spreads (70%). Gradual deposit migration and competition is likely to be offset by improving loan mix (more SME and consumer). Asset quality improving and adequately covered. Capital Intensity rich organic capital generation. SBP regulations a vigilant and proactive regulator.
2.
Other
25. 26. 27. 28.
HSBC Bank Deutsche Bank AG American Express Bank Ltd. The Bank of Tokyo - Mitsubishi
15,544 7,581 6,660 6,097
0% 0% 0% 0%
10,753 2,649 5,581 1,209
0% 0% 0% 0%
5 2 1 1 7,261 7,014 1,545
0% 0% 0% 0% 100% 97% 21%
3.
System - gross Domestic bank share - Public sector bank share
4,005,491 97% 3,346,381 84% 791,337 20%
3,012,836 97% 2,567,781 85% 617,570 20%
4. 5. 6.
Source: State Bank of Pakistan, Company data, Morgan Stanley Research
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1) Loan Books
Exhibit 43 Exhibit 46
System Loan & Deposit Growth sustained growth

Deposits, YoY% chg
40%
Corporate Mix (2006) large corporate centric

Other, 4% Commodity ops, 8%
Loans, YoY% chg
35%
30%
Agri production, 7%
25%
20%
15%
SME, 19% Corporate, 62%
10%
5%
0% Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07
Exhibit 44
System Loans/ Deposits gradual liquidity soak up

90%
Credit outstanding amounts to only 29% of GDP, split 25% corporate and 4% retail, and there are only 5 mn loan accounts. Corporate loan growth is running at 15% YoY. As economic development continues in Pakistan, capacity and infrastructure investment will continue to drive corporate loan growth. Moreover, SME is still very much an immature banking segment and hence an untapped opportunity.
Exhibit 47
85%
80%
75%
70%
65%
60%
Personal Loan Mix (2006) autos and unsecured

Other 1% Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Housing 16%
55%
50% Jan-02
Exhibit 45
Unsecured 40%
Loan Mix only 16% is personal

Government
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec-01 Credit cards 12%
Personal
Commercial
Auto's 31%
Consumer loans are growing at 19% YoY. Unsecured personal loans represent 33% of this growth, housing loans 25%, and auto loans 23%.
Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06
Housing loans represent a mere 2% of system lending outstanding or 16% of consumer lending outstanding. Access to housing is a structural problem in Pakistan, with poverty, red tape, and a chronic lack of supply. The housing shortfall is
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estimated at 6.2 million units. Moreover, the present stock is rapidly ageing: 50% is over 50 years old. Estimates suggest that around 50% of the urban population now lives in slums and squatter settlements. This is not lost on the government, which has implemented policies to incentivise the construction industry and the private sector builders/ developers. This ambitious policy offers the following, inter alia: Identify state and other lands for housing development, and provide land at concessionary rates for housing schemes, provided the subsidy is passed on. Encourage banks to originate mortgages. Increase annual HBFC loan disbursement from Rs1.2 bn to Rs7.0 bn. Simplify land and mortgage transaction paperwork. Reduce stamp duties and registration fees; no stamp duty shall be charged for a housing mortgage. Reduce property tax on rented property from 25% to 5%.
2) Deposit Books
Deposit penetration is also very low, with only 26 million deposit accounts (retail and corporate) versus a population of 156 million. As a % of GDP deposits represent 39%, in line with Indonesias.
Exhibit 48
Deposit Mix by Customer

Government
60%
Commercial
Personal
50%
40%
30%
20%
10%
0% Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Exhibit 49
Deposit Mix by Account 68% of deposits low cost

Current
60%
Savings
Fixed
Other
Exempt construction of housing plots up to 150 sq. yards and flats/ apartments of 1,000 sq. ft from all types of taxes for a period of five years.
50%
40%
Credit cards are also a very immature segment with only 1.5 mn cards on issue. Before a bank can extend loans in the consumer space, the SBP must be satisfied that the bank has sufficient capability in IT, risk management, and personnel. Moreover, a separate provisioning policy has been enforced requiring banks to set aside a general provision as follows: 5% general provision for unsecured consumer. 1.5% general provision for secured consumer.
30%
20%
10%
0% Jun-97
Mar-98
Dec-98
Sep-99
Jun-00
Mar-01
Dec-01
Sep-02
Jun-03
Mar-04
Dec-04
Sep-05
Jun-06
While higher interest rates and competition are seeing some migration to higher-yielding deposits, Pakistan is characterized by its large proportion of low-cost deposits 68% of the systems. This is a function of a number of factors, such as faith (sharia prohibits interest), risk aversion (customers not willing to lock away money for a period of time), convenience (at-call access), fragmentation (rural based and small value), and lack of sophistication. This will only gradually change. With a system loan/deposit ratio of 75% and prospects of continued high double-digit loan growth, banks must continue to strive to grow deposits and increase penetration. Financial access remains immature.
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3) Net Interest Margins

Pakistan enjoys very wide margins, second only to Indonesia in the broader region at 6.40%. The well-placed full-suite banks with far reaching deposit franchises earn net interest margins of between 7% and 8%. This makes for a strong banking platform. However, while Indonesia derives much of its margin from assets very wide spreads on micro and consumer lending Pakistans key source is rich deposit spreads, which are a function of structurally high interest rates and indifferent depositors.
Pro-forma Net Interest Margin/Income Breakdown

Margin reconciliation Earning rate Funding rate Net interest spread Free funds Net interest margin 10.64% 2.14% 8.50% 0.22% 8.72%
System Net Interest Spreads

7.0%
Net interest income/ margin de-composition Loan spread 67,070 Deposit spread 229,441 Liquidity reserve (17,069) Excess liquidity 0 Free funds 33,718 Net interest income 313,160
21% 73% (5%) 0% 11% 100%
1.87% 6.39% (0.48%) 0.00% 0.94% 8.72%
6.0%
5.0%
Exhibit 53
4.0%
Pro-forma System Balance Sheet

Rs mns Yield 0.00% 9.25% 12.01% 10.50% 14.00% 13.00% 13.00% 20.00% 10.50% 9.25% 10.64% Cost Deposits Savings Current Fixed Bearing liabilities Equity Net 3,226,117 1,354,969 838,790 1,032,357 3,226,117 364,515 3,590,632 313,160 2.14% 1.25% 0.05% 5.00% 2.14% Income 0 53,715 291,854 165,854 51,032 6,318 22,114 38,881 7,655 36,566 382,135 Expense 68,974 16,937 419 51,618 68,974 Spread (9.25%) 0.00% 2.76% 1.25% 4.75% 3.75% 3.75% 10.75% 1.25% 0.00% 1.39% (17,069) 0 67,070 19,744 17,314 1,823 6,379 20,899 911 0 50,001 Contn (5%) 0% 21% 6% 6% 1% 2% 7% 0% 0% 16% CRR SLR Loans Corporate SME Housing Auto Unsecured Gov't Liquidity Earning assets 184,534 580,701 2,430,090 1,579,559 364,514 48,602 170,106 194,407 72,903 395,307 3,590,632
3.0%
2.0%
1.0%
0.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006
Exhibit 51
Regional Average Net Interest Margins

8.00
%
Spread 7.11% 8.00% 9.20% 4.25% 7.11% 9.25% 229,441 108,398 77,169 43,875 229,441 33,718 313,160 73% 35% 25% 14% 73% 11% 100%
7.00
6.00
5.00
4.00
3.00

2.00
1.00
0.00
Indonesia Pakistan Thailand India Korea Vietnam China Malaysia Australia Singapore Taiwan HK
In the following tables, we model a basic system pro-forma balance sheet comprising required liquidity and loans, and funded by deposits and equity, to illustrate the de-composition of Pakistan net interest margins. Around 73% of net interest income is derived from deposit spreads.
The Pakistan banks have been able to secure a very low cost of funds. Why? Refer to the above section on deposit books. Is it sustainable? Yes, in the near term, we dont see these reasons changing. Financial access and fair returns are a key focus of the SBP. and while it encourages banks to offer fair returns on time deposits, they cannot compel the population to take up the offer. Given the SBPs respect for market forces, we also dont see it legislating a minimum return, as is the case in Malaysia. Continued efforts to improve financial access, literacy, and a touch of moral suasion will see deposit spreads only gradually correct. Funding pressure from continued loan growth can be offset by greater deposit penetration.
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Exhibit 54
Pro-forma Spread Decomposition

Mix Liquidity CRR SLR Loans Corporate SME Housing Auto Unsecured Gov't Yield 0.00% 9.25% 65% 15% 2% 7% 8% 3% 100% 10.50% 14.00% 13.00% 13.00% 20.00% 10.50% Loan Spread (9.25%) 0.00% 1.25% 4.75% 3.75% 3.75% 10.75% 1.25% Transfer price 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% 100% 12.01% 2.76% 7.11% 2.14% Weighted total Deposit Spread Cost of funds 8.00% 9.20% 4.25% 1.25% 0.05% 5.00% Mix 42% 26% 32% Deposits Savings Current Fixed
Weighted total
Moreover, active management of the asset mix will also offset gradual deposit spread compression. As capital markets continue to develop, we would expect large ticket corporate loans to be dis-intermediated, and at the same time lending to the higher-margin consumer and SME sector should accelerate.
Exhibit 55
4) Asset Quality
Asset quality has recovered from the woes of the mid- to late 1990s. The system gross NPL ratio is 5.6% and provision coverage is 78%. The SBP has implemented more stringent credit risk management practices. However, a key problem area remains the textile industry, which represents around 17% of the banks loans books and 25% of current NPLs. While provisions have already been recognized for this sector, the smaller textile players may continue to struggle, given higher interest rates and increasing supply/raw material costs. Going forward, the consumer segment will likely be a source of deterioration. However, given its small size and provision requirements, the impact should be mitigated. Banks do tend to learn lessons, and for the Pakistan banks the 1990s remain in vivid memory.
Exhibit 57
Yield Curve still flat

3 yr bond - KIBOR
1.40
%
5 yr bond - KIBOR
10 yr bond - KIBOR
1.00
0.60
0.20
-0.20
-0.60
-1.00
-1.40 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07
Source: SBP, Datastream, Morgan Stanley Research
Exhibit 56
Lending vs. Funding Rates still rising

SBP repo rate
12.0
%
System Asset Quality sustained improvement

Provision coverage (rhs)
25
%
Gross NPL ratio
Net NPLs/ Net Loans

80
%
Marginal deposit rate (WA)
Marginal loan rate (WA)
11.0 10.0 9.0
20
64
15
8.0 7.0 6.0 5.0 4.0 3.0 2.0
48
10
32
16
0
1.0 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07
0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1Q07
Source: CEIC, State Bank of Pakistan, Morgan Stanley Research
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Exhibit 58
Specific Bank Asset Quality (Dec. 2006, Rs mn)

Agri Mining/ Quarry Textiles Chemicals Cement Sugar Footwear / leather Auto/ trans equip Electronics Construction Utilities Exports/ imports Logistics Finance Insurance Services Individuals Public sector commodities Other Gross NPLs Public/ govt Private MCB 320 4 1,088 33 1 36 93 45 303 160 2 421 27 65 168 262 5,544 8,571 53 8,518 8,571 5,953 2,618 2,655 100% 4% 0% 13% 0% 0% 0% 1% 1% 4% 2% 0% 5% 0% 1% 0% 2% 3% 0% 65% 100% 1% 99% 100% NBP 1,615 4% 0% 11,884 33% 1,554 4% 2,183 6% 1,524 4% 178 0% 318 1% 146 0% 138 0% 978 3% 3,880 11% 223 1% 66 0% 0% 9 0% 355 1% 0% 11,208 31% 36,260 100% 1,138 35,122 36,260 29,529 6,731 2,731 89% 3% 97% 100% UBL 914 5% 0% 4,804 29% 752 4% 25 0% 37 0% 147 1% 145 1% 96 1% 451 3% 154 1% 551 3% 0% 138 1% 0% 340 2% 3,156 19% 0% 5,037 30% 16,746 100% 61 16,685 16,746 12,410 4,336 1,416 83% 0% 100% 100%
5) Capital Intensity Rich Organic Growth

The Pakistan banks are expected to experience significant growth and as such would be very capital hungry. However, returns are wide enough to fund the growth from internal capital generation. Pakistans high return on risk-weighted assets is a function of the wide deposit spreads, which generate 73% of net interest income. Deposits are very capital friendly and dont generate risk-weighted assets.
Exhibit 59
Capital Intensive but High Return wide deposit spreads equal rich return on RWAs
MCB FY06 FY07e FY08e FY09e
Cash earnings RoRWAs O/B RWA C/B RWA - growth (Rs mns) - growth (%) Target tier one Capital retention Cash for distribution - implied pay-out rate NBP Cash earnings RoRWAs O/B RWA C/B RWA - growth (Rs mn) - growth (%) Target Tier I Capital retention Cash for distribution - implied payout rate UBL Cash earnings RoRWAs O/B RWA C/B RWA - growth (Rs mn) - growth (%) Target Tier I Capital retention Cash for distribution - implied payout rate
12,496 6.09% 191,056 219,321 28,265 15% 10% (2,827) 9,670 77% FY06 17,243 4.42% 362,980 416,411 53,431 15% 10% (5,343) 11,900 69% FY06 9,529 3.43% 239,225 316,288 77,063 32% 10% (7,706) 1,823 19%
16,398 7.24% 219,321 233,754 14,434 7% 10% (1,443) 14,954 91%
18,961 7.14% 233,754 297,490 63,736 27% 10% (6,374) 12,587 66%
21,982 6.61% 297,490 367,582 70,092 24% 10% (7,009) 14,973 68%
Specific provisions Net NPLs General provision Provision coverage NPL ratio Agri Mining/ Quarry Textiles Chemicals Cement Sugar Footwear / leather Auto/ trans equip Electronics Construction Utilities Exports/ imports Logistics Finance Insurance Services Individuals Public sector commodities Other Gross NPL ratio Net NPL ratio
16.9% 1.1% 3.8% 0.7% 0.0% 0.6% 5.9% 6.1% 13.0% 0.1% 2.0% 0.2% 0.4% 0.0% 3.7% 1.3% 7.8% 4.1% 1.3%
5.4% 21.1% 33.1% 19.2% 23.4% 16.1% 7.0% 3.2% 4.6% 2.6% 33.9% 1.5% 0.5% 0.0% 0.3% 0.4% 23.4% 10.4% 1.9%
8.6% 8.9% 16.7% 0.6% 0.4% 5.2% 4.8% 2.3% 3.2% 1.1% 4.5% 0.0% 1.9% 13.6% 5.8% 7.8% 6.2% 1.6%
FY07e 12,740 3.68% 316,288 376,555 60,266 19% 10% (6,027) 6,713 53%
FY08e 15,244 3.69% 376,555 448,909 72,355 19% 10% (7,235) 8,008 53%
FY09e 17,078 3.48% 448,909 531,855 82,946 18% 10% (8,295) 8,784 51%
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Exhibit 60
Regional Avg. RoRWAs (latest reported)

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Pakistan Indonesia Malaysia Thailand Australia Singapore Vietnam India Hong Kong China
Total credit exposure to any single person shall not exceed 30% of the banks equity. Total credit exposure to any single group shall not exceed 50% of the banks equity. Total unsecured lending exposure shall not exceed the amount of a banks equity. Banks shall not own equity in any company in excess of 5% of their own equity. Banks shall not own stakes in any company in excess of 30%. Restructuring of NPLs shall not change the status of classification until the revised terms have been fully met for one year and at least 10% of the outstanding amount is recovered in cash (unless the borrower has repaid more than 50%). For performing consumer loans, banks must maintain a general reserve of at least 1.5% of secured loans and 5% for unsecured loans. Credit card limits shall not exceed Rs500,000 per person. However, prime customer limits may extend to Rs2 million. Credit cards shall be classified as loss when 180 days past due. Consumer auto loan tenures shall not exceed seven years and require a minimum 10% down payment. Total monthly amortization payments of consumer loans (housing plus other) cannot exceed 50% of the net disposable income of the borrower. Housing loan tenures cannot exceed 20 years and the maximum debt-to-equity ratio is 85:15. Unsecured personal lending shall not exceed Rs500,000 to any one person. Prime customers are an exception, up to Rs2 million. Maximum tenure is five years (or seven years if for educational purposes). Know your customer rules are in place to ensure integrity and prevent money laundering.
6) Regulation
The SBP is the central banking and monetary authority in Pakistan. It regulates the banking sector through certain laws and prudential requirements. The SBP has extensive powers of supervision, inspection and direction. It can remove senior executives and directors with a replacement of their choosing. The SBP has set forth five sets of prudential regulations to cover 1) Agriculture Financing, 2) Corporate/ Commercial Banking, 3) SME Financing, 4) Consumer Financing, and 5) Micro Financing. The salient points as follows: All banks must hold a credit rating (updated annually) from an SBP-approved rating agency. Before the appointment of directors, CEO and key executives, the SBP must be satisfied that such persons meet the Fit and Proper Test. Executive director positions are limited to two.
Exhibit 61
Classification and Provisioning for Assets

Classification Determinant Treatment of Income Provisions 25% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realisable without recourse to a Court of Law and adjusted forced sale value of mortgaged assets as valued by approved valuers.
Substandard
90 days past due
Only cash recognition
Doubtful 180 days past due 365 days past due as above as above, except provision is 50%
Loss
as above
as above, except provision is 100%
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Statutory Liquidity and Cash Reserve Requirements

The SBP has set the following liquidity requirements. These are revised depending on the monetary stance and goals with respect to deposit mix and yield. For example, the CRR was revised from a flat 5% of time and demand deposits to 3% for time and 7% for demand, we think to encourage banks to raise time deposits and offer customers a better return proposition on their savings: Statutory Liquidity Requirement (SLR) 18% of time and demand (including current) deposits. Cash Reserve Requirement (CRR) 7% of demand (including current) and 3% of time.
Capital Requirements
Commercial banks are required to maintain a minimum amount of paid-up capital (net of losses) in accordance with the table below. A banks subscribed capital must be at least half of its authorized capital and its paid-up capital must be at least half of its subscribed capital.
Exhibit 62
Minimum Paid-up Capital Requirements

Date of increase Minimum Paid-Up Capital Rs mn US$ mn
31-Dec-06 31-Dec-07 31-Dec-08 31-Dec-09

3,000 4,000 5,000 6,000
50 67 83 100
Banks are also required to maintain a minimum ratio of combined Tier I and Tier II capital to risk-weighted assets of 8%. From 1 January 2008, banks are required to comply with the standardized approach of Basel II. The banks are currently running in parallel and reporting to the SBP. Credit rating agencies also dictate specific capital requirements for banks; in most cases these would be in excess of 8% total CAR. Banks are also required to maintain a statutory reserve account that together with any share premium account must equal the amount of its paid-up capital. Banks can gradually get to this requirement by crediting no less than 20% of profit after tax. Once this threshold is met, banks must credit no less than 10% of its profit after tax to the statutory reserve.
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Balance Sheet Analysis

The growth potential in Pakistan is plainly obvious to us. What do the risks look like? In this section, we analyse the composition of the balance sheets. Balance sheets appear quite simple. Assets: Cash and interbank represent 15% of assets. Loans (including loans to FIs) represent 61% of assets, and are largely composed of large corporate loans. Textiles represent the largest industry concentration, at 17% of the loan book. Loans/deposits average 71%. Provisions represent 6% of loans. Investments represent 18% of assets, with the following composition: 73% government securities; 16% corporate bonds and 8% equities. 81% of assets are denominated in Pakistan rupees.
Liabilities: Deposits represent 87% of liabilities. Borrowings represent 7% of liabilities. 82% of liabilities are denominated in Pakistan rupees. Equity/assets averages 11%. Equity is vanilla ordinary.
Exhibit 63
Balance Sheets (Dec. 2006 Rs mn)

MCB Rs mn Assets Cash/ liquidity Interbank Loans to FIs Investments Net Loans Other Liabilities Bills Borrowings Deposits Sub debt Other Ratios Loan/ deposits Loans/ assets Equity to assets Loan - deposit spread Loan mix Commercial Mortgage Consumer Provisions Net Loans Deposit mix Current Savings Low cost Fixed/ term Other 32,466 6,650 21,082 64,451 198,237 20,293 343,178 7,090 23,943 257,185 1,597 11,177 300,993 77% 64% 12% 8.9% 186,077 2,498 18,270 206,845 8,608 198,237 84,590 137,122 221,712 33,297 2,452 257,462 90% 1% 9% 100% 4% Mix 9% 2% 6% 19% 58% 6% 100% 2% 8% 85% 1% 4% 100% Rate 4.35% 5.77% 9.13% 9.22% 10.10% Rs mn 78,863 41,413 23,164 140,740 316,456 37,314 637,949 10,606 12,682 502,017 0 29,577 554,882 63% 53% 13% 7.3% 269,544 5,500 73,672 348,716 32,260 316,456 192,531 209,431 401,962 100,054 0 502,017 77% 2% 21% 100% 9% NBP Mix 12% 6% 4% 22% 50% 6% 100% 2% 2% 90% 0% 5% 100% Rate 3.05% 5.43% 5.07% 8.56% 10.08% Rs mn 49,024 19,418 29,572 65,735 254,670 17,470 435,890 4,628 38,680 343,805 5,998 9,601 402,712 74% 65% 8% 7.7% 214,123 6,506 47,868 268,497 13,826 254,670 93,897 124,004 217,901 118,251 7,653 343,805 80% 2% 18% 100% 5% UBL Mix 11% 4% 7% 15% 58% 4% 100% 1% 10% 85% 1% 2% 100% Rate 4.30% 7.00% 8.00% 8.00% 11.00%
5.56% 1.17% 11.75% to 15.75%
3.78% 2.78%
3.0% to 14.0% 0.2% to 10.7% 10.20%
33% 53% 86% 13% 1% 100%
38% 42% 80% 20% 0% 100%
27% 36% 63% 34% 2% 100%
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Exhibit 64
Exhibit 66
Loan Mix (Dec. 2006, Rs mn) very commercial

Agri Mining/ Quarry Textiles Chemicals Cement Sugar Footwear / leather Auto/ trans equip Electronics Construction Utilities Exports/ imports Logistics Finance Insurance Services Individuals Public sector commodities Other MCB 1,890 389 28,933 4,994 6,609 6,055 1,561 739 2,331 3,154 21,419 17,294 15,158 204 4,509 20,768 0 70,840 206,845 27,704 179,141 206,845 186,077 2,498 18,270 206,845 1% 0% 14% 2% 3% 3% 1% 0% 1% 0% 2% 10% 8% 7% 0% 2% 10% 0% 34% 100% 13% 87% 100% 90% 1% 9% 100% NBP 29,889 9% 0 0% 56,453 16% 4,693 1% 11,369 3% 6,510 2% 1,103 0% 4,550 1% 4,569 1% 3,002 1% 37,277 11% 11,448 3% 14,614 4% 12,884 4% 7 0% 2,962 1% 79,172 23% 20,273 6% 47,942 14% 348,716 100% 63,218 285,498 348,716 269,544 5,500 73,672 348,716 18% 82% 100% 77% 2% 21% 100% UBL 10,590 4% 0 0% 53,755 20% 4,511 2% 4,152 2% 8,724 3% 2,795 1% 3,012 1% 4,145 2% 14,266 5% 13,627 5% 12,359 5% 7,448 3% 7,348 3% 0 0% 2,494 1% 54,374 20% 0 0% 64,897 24% 268,497 100% 25,567 242,930 268,497 214,123 6,506 47,868 268,497 10% 90% 100% 80% 2% 18% 100%
Investment Mix by Type mainly govt securities

Dec 2006, Rs mns Federal govt securities Provincial govt securities Foreign govt securities Listed equities/ mutual funds Unlisted equities Listed pref shares Unlisted pref shares Corporate bonds/ debt Associates Other MCB 46,953 74% 0 0% 0 0% 46,953 74% 5,875 437 6,312 62 100 162 7,388 9% 1% 10% 0.1% 0.2% 0.3% 12% NBP 80,133 70% 37 0% 5,693 5% 85,863 75% 8,644 332 8,976 72 327 398 16,142 8% 0% 8% 0.1% 0.3% 0.3% 14% UBL 43,781 66% 0 0% 3,060 5% 46,842 71% 3,747 497 4,244 8 0 8 14,206 6% 1% 6% 0.0% 0.0% 0.0% 22%
2,323 4% 5 0% 63,144 100%
1,133 1% 2,417 2% 114,928 100%
587 1% 86 0% 65,973 100%
Looking at each banks investment portfolio in detail:

Public/ govt Private
MCB
Exhibit 67
Commercial Mortgages Personal
Federal Government Securities

Dec 2006 Rs mn Details
Exhibit 65
Investment Mix by Class mainly AFS

Dec 2006, Rs mns Held for trading - Federal govt securities - Listed equities/ mutual funds Available for sale - Federal govt securities - Listed equities/ mutual funds - Unlisted equities - Corporate bonds - Other Held to maturity - Federal govt securities - Corporate bonds - Other Associates Other MCB 0 0 0 46,155 38,225 5,937 537 1,451 5 14,666 8,728 5,938 0 60,821 0% NBP 405 0 405 72,807 55,001 8,969 8,374 463 38,629 30,862 7,768 0 111,842 0% UBL 137 46 91 43,708 37,147 3,664 497 2,400 21,540 9,648 11,806 86 65,386 0%
Market treasury bills Pakistan investment bonds Federal govt securities Government comp. bonds Euro bonds Sukuk Bonds
36,873 For liquidity purposes 3,791 Market value is Rs1,978mn 826 Sri Lanka Govt TBonds 871 6% and 9% Public Sector 3,019 US$ at 6.75% 1,573 US$, LIBOR+2.2%, KIBOR+0.35% 46,953
73% 61% 9% 1% 2% 0% 23% 14% 9% 0% 96%
63% 48% 8% 7% 0% 34% 27% 7% 0% 97%
66% 56% 6% 1% 4% 0% 33% 15% 18% 0% 99%
MCBs key equity holding is Sui Northern Gas Pipelines (SNGPL), a quoted public security scheduled for privatisation. MCB own a 12% stake with board representation, while the government owns 54%. SNGPL is the largest gas transmission and distribution company (2.5 million customers) in Pakistan, with a franchise area comprising the provinces of Punjab and North West Frontier Province (NWFP). The company received a 30-year license from OGRA beginning 25 March 2002 to carry out the regulated activities of transmission, distribution, and sale of natural gas in the provinces of Punjab and NWFP. This license gives exclusive rights to SNGPL to distribute and sell natural gas to its existing customers who contracted with it on or before 30 June 2005. The SNGPL transmission system extends from Sui in Balochistan to Peshawar in NWFP, comprising 6,121 km of high-pressure pipeline ranging from 6 inches to 36 inches in diameter.
2,323 4% 0 0% 2,323 4% 63,144 100% (363) 1,670 64,451
1,133 1% 1,954 2% 3,087 3% 114,928 100% (1,256) 27,067 140,740
587 1% 0 0% 587 1% 65,973 100% (401) 163 65,735
Provisions Revaluation surplus/ Deficit)
The Pakistan investment portfolio is mainly used to manage liquidity and meet statutory liquidity requirements. On average, 73% of the portfolios are government securities, and principally the Pakistan government. Equity exposure is limited. Therefore, interest rate risk and duration are the key risk factors.
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Exhibit 68
MCB: Key Listed Equities mainly govt linked

Dec 2006, market/ carrying value Rs mn
National Bank of Pakistan

Exhibit 72
NBP: Federal Government Securities

Sui Northern Gas Pipelines Hub Power Fauji Fertiliser United Bank Pakistan Oilfields Pakistan State Oil Co Ltd Millat Tractors EFU General Insurance National Bank of Pakistan
3,126 736 720 390 324 255 186 176 161 6,074
Market treasury bills Pakistan investment bonds Federal investment bonds Government comp. GoP foreign currency bonds
51,288 15,129 940 2,331 10,445 80,133
For liquidity purposes
In Rs; 6% and 9%
Exhibit 69
MCB: Key Corporate Bonds

National Investment Trust is the key equity exposure and is the largest open-end mutual fund in Pakistan. with net assets of Rs100,963 million at 30 June 2007, up 57% YoY. NBP has an R11 billion unrealised gain on this investment, recognized in reserves.
Exhibit 73
Reliance Export (private) Pakistan Mobile Corp Pak Kuwait Investment Corp United Bank Issue No III Jahangir Siddiqui and Co Bank Alfalah
500 500 500 285 280 248 3,550 5,863
KIBOR+2.5% KIBOR+1.6% KIBOR+1.25% KIBOR+1.7% KIBOR+1.75% KIBOR+1.5% Certificates of Investment
NBP: Key Listed Equities mainly NIT units

Exhibit 70
MCB: Revaluation Surplus recognized in reserves

Dec 2006 Rs mn
National Investment Trust (NIT) Fauji Fertiliser Sui Northern Gas Pipelines Unilever (Pakistan) Ltd Hub Power Siemens Pakistan PICIC Growth Fund JS Abamco Ltd
5,667 488 421 279 267 220 217 195 7,754
Market treasury bills Pakistan investment bonds Listed equities Corporate bonds
(40) (1) 1,704 7 1,670
NBP has a large corporate bond exposure to Pakistan International Airlines, which is technically insolvent. NBP claims that the bond exposure is guaranteed by the government.
Exhibit 74
Exhibit 71
MCB: Diminution Provision recognized in investments

Dec 2006 Rs mn
NBP: Key Corporate Bonds large PIA exposure

Listed equities Unlisted equities Corporate bonds
97 66 200 363
Pakistan Int Airlines Javedan Cement Pak Kuwait Investment Reliance Dewan Hatter Cement Nishat Mills Rice Export Corp of Pakistan
3,237 1,400 1,250 1,200 810 599 575 9,073
10%, due 2011 13.15%, due 2011 11.82%, due 2011 13.15%, due 2013 11.55%, due 2013 9.84%, due 2008 15%
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Exhibit 75
Exhibit 79
NBP: Revaluation Surplus recognized in reserves

UBL: Key Corporate Bonds

Federal govt securities Bank Al-Jazira Listed equities Corporate bonds
48 13,493 13,470 60 27,072
- 5.83% stake NIT - Rs11,721mn
Exhibit 76
NBP: Diminution Provision recognized in investments

Dec 2006 Rs mn
Pakistan Agri Storage & Services Corp Pakistan Auto Corp Rice Corp of Pakistan Crecent Textiles Allied Bank Azgard Nine Saindak Metals Askari Commercial Bank Ghee Corp of Pakistan
659 651 512 450 312 300 254 217 211 3,566
weighted avg Tbill rate weighted avg Tbill rate yielding 15%
yielding 15% yielding 15%
Associates Subsidiaries Listed equities Corporate bonds

422 3 125 704 1,256
Exhibit 80
UBL: Revaluation Surplus recognized in reserves

Dec 2006 Rs mn
United Bank Ltd

Exhibit 77
Market treasury bills Pakistan investment bonds Listed equities Unrealised losses
(10) (58) 235 (3) 163
UBL: Federal Government Securities

Exhibit 81
Market treasury bills Pakistan investment bonds Foreign currency bonds GoP US$/ Euro bonds GoP Islamic bonds Federal investment bonds
32,594 7,849 1,383 1,247 694 14 43,781
For liquidity purposes
UBL: Diminution Provision recognized in investments

Dec 2006 Rs mn
Listed equities Unlisted equities Corporate bonds

33 123 244 401
Exhibit 78
UBL: Key Listed Equities

United Money Market Fund - Cat A Pakistan Oilfields Pakistan Petroleum United Money Market Fund - Cat C Pakistan Telecommunications
772 385 274 273 188 1,892
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Forex Exposure
Under SBPs rules on foreign exchange limits, a banks foreign exchange exposure can be no more than 15% of paid-up capital.
Exhibit 82
The banks forex exposure is measured, with on average 81% of assets and liabilities denoted in Pakistan rupees. UBL has higher forex exposure, due to its larger foreign operations, in particular the Middle East. NBP has the greatest exposure to US dollars.
Foreign Currency Exposure (Dec. 2006) quite measured
MCB Pakistan Rupee US$ Pound Sterling Japanese Yen Euro Other
Assets 317,036 23,200 556 24 618 1,745 343,178 92% 7% 0.2% 0.0% 0.2% 1% 100%
Liabilities 284,344 13,638 1,197 121 1,015 677 300,993 94% 5% 0.4% 0.0% 0.3% 0.2% 100%
Off balance sheet 6,087 (7,191) 17 113 (54) 1,028 0
Net 38,779 2,370 (624) 16 (451) 2,095 42,185 92% 6% (1%) 0.0% (1%) 5% 100%
NBP Pakistan Rupee US$ Pound Sterling Japanese Yen Euro Other
Assets 481,116 117,515 3,033 4,068 7,872 24,345 637,949 75% 18% 0.5% 0.6% 1% 4% 100%
Liabilities 430,005 99,540 3,149 3,809 4,558 13,821 554,882 77% 18% 0.6% 0.7% 0.8% 2% 100%
Off balance sheet (17,303) 13,066 2,335 (270) 2,202 (30) (0)
Net 33,807 31,041 2,219 (10) 5,516 10,493 83,067 41% 37% 2.7% (0.0%) 7% 13% 100%
UBL Pakistan Rupee US$ Pound Sterling Japanese Yen Euro Other
Assets 333,688 18,978 13,834 828 263 68,299 435,890 77% 4% 3.2% 0.2% 0.1% 16% 100%
Liabilities 303,558 20,723 13,899 1,811 29 62,692 402,712 75% 5% 3.5% 0.4% 0.0% 16% 100%
Off balance sheet 2,064 (5,746) 2,274 1,102 (257) 563 0
Net 32,193 (7,491) 2,209 119 (23) 6,171 33,177 97% (23%) 6.7% 0.4% (0.1%) 19% 100%
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Interest Rate/ Maturity/ Re-Pricing Risk

Asset re-pricing: MCB Loans 69% re-price in less than one year. Investments 65% re-price in less than one year.
Exhibit 84
Liability Re-pricing Intervals MCB lowest cost

MCB
60%
NBP
UBL
50%
40%
30%
NBP
20%
Loans 82% re-price in less than one year.

10%
Investments 76% re-price in less than one year.

0% < 1mth 1 to 3mths 3 to 6mths 6 to 12mths 1 to 2yrs 2 to 3yrs 3 to 5yrs 5 to 10yrs > 10yrs Nil
UBL
Source: Company data, Morgan Stanley Research, Data as of December 2006
Loans 95% re-price in less than one year. Investments 59% re-price in less than one year.
Exhibit 85
Net On & Off Balance Sheet Gap UBL best matched

MCB
200,000
Exhibit 83
NBP
UBL
Asset Re-pricing Intervals UBL shorter duration

MCB
35%
NBP
UBL
150,000
100,000
30%
50,000
25%
(50,000) 20% (100,000) 15% (150,000) 10% (200,000) < 1mth 5% 1 to 3mths 3 to 6mths 6 to 12mths 1 to 2yrs 2 to 3yrs 3 to 5yrs 5 to 10yrs > 10yrs

0% < 1mth 1 to 3mths 3 to 6mths 6 to 12mths 1 to 2yrs 2 to 3yrs 3 to 5yrs 5 to 10yrs > 10yrs Nil
Exhibit 86
Source: Company data, Morgan Stanley Research. Data as of December 2006
Net On & Off Cumulative Balance Sheet Gap

MCB
300,000 250,000 200,000
Liability re-pricing: MCB Deposits 34% of deposits are not interest-bearing, and 54% of deposits re-price in less than one month.
NBP
UBL
150,000 100,000 50,000
NBP Deposits - 28% of deposits are not interest-bearing, and 55% of deposits re-price in less than one month.
0 (50,000) (100,000) (150,000)
UBL Deposits - 29% of deposits are not interest-bearing, and 21% of deposits re-price in less than one month.
(200,000) < 1mth 1 to 3mths 3 to 6mths 6 to 12mths 1 to 2yrs 2 to 3yrs 3 to 5yrs 5 to 10yrs > 10yrs
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Return Decomposition
Exhibit 87
MCB: DuPont
Net interest yield

Net interest margin Ave int earn assets/ ave assets
FY04 2.74%
3.10% 88%
FY05 5.36%
5.90% 91%
FY06 6.62%
7.55% 88%
FY07e 6.71%
7.64% 88%
FY08e 6.66%
7.69% 87%
FY09e 6.29%
7.57% 83%
Cash non-interest yield Operating exp/ assets Loan loss/ assets

Loan loss/ RWA RWA/ assets
1.70% 2.75% 0.11%

0.24% 44%
2.05% 2.35% 0.41%

0.68% 60%
1.54% 2.05% 0.37%

0.58% 64%
1.70% 1.65% 0.44%

0.73% 61%
1.58% 1.64% 0.39%

0.66% 59%
1.50% 1.55% 0.40%

0.68% 60%
Pretax ROA Tax effect (tax/ assets)

Effective tax rate
1.58% 0.62%
39%
4.65% 1.44%
31%
5.74% 1.94%
34%
6.31% 2.04%
32%
6.22% 2.11%
34%
5.82% 1.98%
34%
Associate/ other yield Pref div/ assets ROA Leverage

Common equity to RWAs Bal sheet risk (RWA/ assets)
0.02% 0.00% 0.98% 20.5

11.1% 44%
0.09% 0.00% 3.30% 14.3

11.7% 60%
0.10% 0.00% 3.90% 9.7

16.2% 64%
0.12% 0.00% 4.39% 7.7

21.4% 61%
0.10% 0.00% 4.20% 7.4

22.9% 59%
0.10% 0.00% 3.94% 7.5

22.3% 60%
ROE (cash)
Exhibit 88
20.1%
47.1%
37.8%
33.9%
31.2%
29.6%
UBL: DuPont
Net interest yield

FY04 3.10%
3.35% 92%
FY05 4.54%
4.93% 92%
FY06 5.38%
6.03% 89%
FY07e 5.40%
6.11% 88%
FY08e 5.25%
6.19% 85%
FY09e 5.10%
6.20% 82%

1.86% 2.84% 0.14%

0.25% 55%
1.67% 2.74% 0.45%

0.70% 64%
1.84% 3.00% 0.56%

0.81% 70%
1.84% 2.92% 0.37%

0.54% 70%
1.75% 2.83% 0.38%

0.56% 68%
1.69% 2.83% 0.37%

0.54% 68%

Effective tax rate
1.97% 0.47%
24%
3.03% 1.10%
36%
3.66% 1.22%
33%
3.95% 1.39%
35%
3.79% 1.29%
34%
3.60% 1.22%
34%

0.00% 0.02% 1.49% 15.9

11.3% 55%
0.00% 0.03% 1.90% 15.8

9.8% 64%
0.00% 0.03% 2.40% 14.7

9.7% 70%
0.03% 0.03% 2.56% 13.5

10.6% 70%
0.03% 0.02% 2.50% 12.7

11.6% 68%
0.02% 0.02% 2.38% 12.1

12.1% 68%
ROE (cash)
23.7%
30.0%
35.2%
34.6%
31.8%
28.8%
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MCB Bank Canny

Investment Thesis
We initiate coverage of MCB with an Overweight rating and a 12-month price target of Rs340, which equates to a total potential return of 29%. MCB is trading on 8.9x EPS, 2.5x book, with three-year earnings CAGR of 16%, an RoE of 31%, and a dividend yield of 4.1%, on our FY08 estimates. We believe Pakistan presents a compelling emerging market investment opportunity offering vast growth and high returns. MCB seems well placed to excel in this environment, with strong execution, broad distribution, and a full product suite. We acknowledge the significant sovereign risk and apparent declining risk appetite for true emerging market investments. Our timing may not be ideal, and we recommend investors use the likely near-term volatility as an opportunity to assemble a long-term position in a quality bank name such as MCB in this geography. MCB offers a well-buttressed balance sheet Tier I of 16.6% and gross NPL ratio of 4% with 100% coverage. Return structures are eye-catching. MCB has a net interest margin of 7.55%, driven by a strong deposit franchise with superior mix. The return on RWAs is a bumper 6.14% (the regional average is a mere 2.1%), which equates to very strong organic capital generation enough to sustain 20%+ RWA growth and a dividend payout ratio of at least 50%, in our view. The cream comes from the Mansha influence, canny investments in Adamjee (well below current market value), Sui Pipelines and a large and growing pension fund surplus.
Background
MCB was incorporated in 1947. In 1974, it was nationalized with the entire banking system. Then in 1991, it was the first bank to be re-privatized. Its chairman, Mian Mohammad Mansha has been instrumental in building and steering the bank. He is one of Pakistans most successful industrialists.
Exhibit 89
MCB: Background Data (Dec. 2006)

FRANCHISE Headcount Branches - Pakistan - Overseas ATMs - Pakistan 9,210 988 6 SHARE STATS Shares o/s (m) Market cap (bns) Est float Ave daily volume (No m) - est t/o to mkt cap Key shareholders General Public Public Sector Corporations Foreign Companies DEPOSITS - by type Savings Current Fixed Margin 628 Rs178 76% 3.7 153% 27% 19% 18%
265
LOANS - by customer Commercial Housing Personal - by industry Agriculture Mining & quarrying Textile Chemical & pharmaceuticals Cement Sugar Footwear & leather garments Automobile & transport equip. Electronics & electrical equip. Construction Oil, gas, petroleum & energy Wholesale traders Transport, storage & comm. Financial Insurance Services Individuals Others
100% 91% 1% 8% 100% 1% 0% 14% 2% 3% 3% 1% 0% 1% 0% 2% 10% 8% 7% 0% 2% 10% 34%
100% 54% 32% 13% 1%
- by customer Public/ Government Private
100% 3% 97%
REVENUE - by type Banking - retail - commercial Sales & Trading Others
100% 72% 41% 31% 28% 0%
Investment Negatives Execution risk managing vast growth requires robust systems and quality human capital. Reliance on low funding costs around 70% of MCB's net interest income is a function of very wide deposit spreads. Macro environment continued economic growth momentum is premised on political stability, security and policy continuation.
On 16 May 2007, Atif Aslam Bajwa was appointed president of MCB. A career banker of 25 years, Atif has diverse national and international experience in corporate and consumer banking at Citibank and ABN Amro. At Citibank he was the regional head for Central and Eastern Europe. His role covered both corporate and consumer banking. In early 2005, he moved to Dubai with Mashreqbank to manage the Retail and Small Business Group. MCB is the No. 4 player in the Pakistan bank sector, with around 8% market share of assets and deposits. It is predominantly an SME and corporate bank and has aspirations to grow aggressively in the consumer space. MCB has a 29.13% stake in Adamjee Insurance (book value Rs2,269 million, current market value Rs9,113 million), the largest general insurer in Pakistan, with gross premiums of Rs7,912 million and an equity base of Rs4,165 million.
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Valuation
Our price target of Rs340 for MCB is based on our residual income valuation model (RIVM). The RIVM measures shareholder value by summing the current common book equity and the present value of future residual income. Residual income is defined as the spread between the cash return on equity and the cost of equity multiplied by common equity. We use a cost of equity of 17.75% derived using the CAPM (risk-free rate of 10%, a beta of 1.0, and an equity risk premium of 7.75%) Our forecasting methodology also incorporates a recession five years out from the current year, whereby loan growth is zero and loan loss is 2.0 times normalized levels. Key risks to our price target are as follows. Upside Risks 1. Better-than-expected loan and deposit growth. 2. 3. Better-than-expected net interest margin management. Political stability and human development improvements.
Downside Risks 1. Stumbles/cost overruns with internal restructure. 2. A faltering economy, suppressing loan growth, causing asset quality to deteriorate, and destroying investor confidence. Sustained political instability, and increased law and order issues.
3.
Our key earnings assumptions are as follows:Exhibit 90
Earnings / Scenario Assumptions

3-year CAGR Bear Base Bull
Loans Deposits Net interest income Non interest income Opex NPAT Loan loss/ RWAs
5% 10% 8% 8% 10% 4% 1.00%
18% 20% 18% 19% 10% 21% 0.69%
25% 27% 26% 25% 10% 30% 0.40%
Source: Morgan Stanley Research estimates
Exhibit 91
MCB: Residual Income Valuation Model

Share Information Expected 12 Month Dividend Current Stock Price Issued Shares (million) Reported Book Value Per Share Cost of Capital 10-yr. Govt. Bond Yield (%) Beta Market Risk Premium (%) Cost of Common Equity (%) Development pay out ratio Maturity Phase Number of Years Target Capital Ratio End of Phase RWA Growth Rate Mature pay out ratio Decline Phase Number of years Target Capital Ratio End of Phase RWA Growth Rate Decline pay out ratio
Present value of residual income (Rs m) Rs10.00 Rs267 628 Rs77.22

10000 8000 6000 4000 2000 0 1 5 9 13
Years
Key valuation measures Stock Price Est. Current Fair Value 12 Month Target Price 12 Month Total Return (%) Price to book value Current ROE 12 mth TP implied multiple 12 CP implied multiple 12 mth TP implied BV multiple
Rs267 Rs297 Rs340 31% 3.1 33.9% 11.3 8.9 3.2
10.00 1.0 7.75 17.75 60%
17
21
25
Valuation drivers 5 10% 4% 60%
Years
CAGR Cash earnings 15.8% 13.1% 6.1%
End of phase ROEE 27.8% 27.8% 17.8%
% of fair value Phase Cumulative 23 23 33 55 19 75 25 100
Book value at start Development Maturity Decline
10 5 50
50 10% 3% 70%
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Risk-Reward Snapshot: MCB (MCB.KA, Rs267, OW, PT Rs340)

Risk-Reward View: High leverage to Economic Development
450 400 350 300 250 200 150 100 50 210 (-21%) 390 (+46%)
Investment Thesis
MCB offers a high-quality play on Pakistans emerging financial system. Returns are high and growth is vast. A strong, broad deposit franchise affords MCB funding benefits and customer opportunity. Branding, distribution, and execution capability position MCB well to take advantage of inherent growth opportunities in this market. Ample balance sheet (Tier I 16.6%) and limited asset quality issues buttress the bank.
340 (+27%) 267.00
Key Value Drivers

Aug 05 Dec 05 Price Target Apr 06 Aug 06 Dec 06 Apr 07 Aug 07 Dec 07 Apr 08 Aug 08 Historical Stock Performance Current Stock Price
Source: FactSet, Morgan Stanley Research
Price target Rs340 Bull Case Rs390 13x Bull Case 08e EPS
Derived from base-case RIVM. New government, same policies and accelerating economic growth: Restoration of confidence and proactive policy making accelerate economic momentum. Foreign and domestic investment drives infrastructure development and private consumption. Banks fully tap penetration opportunities in assets and liabilities. Asset quality remains benign and returns structurally expand with improving mix and effective execution. Sustained macro trends and stable returns: Opportunities in retail and corporate banking are executed. Loan growth is sustained at 20%+. Deposit reach broadens with minor spread compression. Continued franchise investment improves product suites, distribution, and risk management.
Macro: Continued economic development supported by foreign and domestic investment. Execution: MCB leverages its funding advantage and high profile branding and distribution to win business in a rapidly growing setting.
Potential Catalysts
Political resolution: Removal of uncertainty surrounding leadership/ government and security. Recovering risk appetite: Recent investment market turmoil has curtailed appetite for true emerging market investments.
Base Case Rs340
11x Base Case 08e EPS
Risks to Our Thesis

Sovereign/political risk: Pakistan may plunge into a state of disarray should institutions break down and leadership change be adverse. Aggressive and poorly considered lending Skilled human capital shortage Continued risk aversion Increased competitive intensity Risks are obvious and currently discounted in the share price. We assess a high probability to a positive outcome in the longer term.
Bear Case Rs210
7x Bear Case Country risks manifest and confidence collapses: Pakistan 08e plunges into a state of disarray with a breakdown in law & order and EPS leadership. Collapsing confidence depresses loan and deposit growth. Defaults emerge and returns crumble.
Key Sensitivities:
1% of loan growth equates to 1.5% of earnings. 10bps of net interest margin equates to 2% of earnings. 1% of fee growth equates to 0.5% of earnings. 1% of opex growth equates to 0.5% of earnings. 10bps of loan loss charge equates to 1.5% of earnings. 1% change to the ERP equates to a 10% change in the price target.
30
MORGAN
STANLEY
RESEARCH
Exhibit 92
MCB: Financial Summary (31 December, Rs mn)

PROFIT & LOSS STATEMENT Net interest income Non interest income Total income Opertaing expenses Underlying profit Loan loss Goodwill Associates/ Other Net profit pre tax Income tax Net profit post tax OEI Reported profit Preference divs NPAT attributable Adj (cash) earnings Reported EPS - growth Adj (cash) EPS - growth Ordinary DPS Ordinary pay out ratio Special DPS RATIOS Net interest yield
FY04
7,291 4,512
FY05
14,976 5,723
FY06
21,276 4,948
FY07e
25,098 6,339
FY08e
30,042 7,132
FY09e
35,084 8,348
11,803
7,316
20,699
6,563
26,223
6,584
31,437
6,181
37,175
7,396
43,433
8,676
4,487
280 0 51
14,136
1,144 0 349
19,640
1,183 0 474
25,256
1,655 0 637
29,778
1,750 0 700
34,757
2,256 0 805
4,258
1,673
13,341
4,126
18,931
6,390
24,238
7,840
28,728
9,768
33,307
11,324
2,585
0
9,214
0
12,541
0
16,398
0
18,961
0
21,982
0
2,585
0
9,214
0
12,541
0
16,398
0
18,961
0
21,982
0
2,585
2,072 Rs6.37 (18.1%)
9,214
8,874 Rs18.00 182.8%
12,541
12,496 Rs24.17 34.2%
16,398
16,398 Rs27.92 15.5%
18,961
18,961 Rs30.18 8.1%
21,982
21,982 Rs34.99 15.9%
Rs5.10
(34.4%)
Rs17.34
239.9%
Rs24.08
38.9%
Rs27.92
15.9%
Rs30.18
8.1%
Rs34.99
15.9%
Rs2.50 49%
Rs0.00
Rs4.25 25%
Rs0.00
Rs7.50 31%
Rs0.00
Rs10.00 36%
Rs0.00
Rs11.00 36%
Rs0.00
Rs12.00 34%
Rs0.00
FY04 2.74%
3.10% 88%
FY05 5.36%
5.90% 91%
FY06 6.62%
7.55% 88%
FY07e 6.71%
7.64% 88%
FY08e 6.66%
7.69% 87%
FY09e 6.29%
7.57% 83%
BALANCE SHEET Cash Securities/ investments Due from banks Gross loans/ bills Provisions Net loans and bills Foreclosed asset (net of prov) Intangibles Other Total assets Deposits Debt Other Total liabilities Net Assets Common equity Hybrid/ pref Retained earnings Reserves Equity attributable OEI Total equity Ord share outstanding Fully diluted weighted ave Book value per share NTA per share Ave int earn assets - growth Ave int bearing liabs - growth RWAs - growth Equity tier 1 Tier 1 Total CAR Equity/ assets RWA/ assets Loans/ assets Loans/ deposits Securities/ assets NPLs NPLs/ loans NPLs/ equity Provision cover Provisons/ loans VALUATION Price/ adj earnings Price/ book Price/ NTA Dividend yield Free cash flow yield INTERIMS Net interest income Non interest income Total income Opertaing expenses Underlying profit Loan loss Goodwill Associates/ other Profit pre tax Reported NPAT NPAT attributable Adj (cash) earnings Adj (cash) EPS DPS
FY04
23,833 67,242 5,760 154,975 6,693 148,283 0 0 14,266
FY05
23,666 70,357 1,522 198,139 7,817 190,321 0 249 13,592
FY06
32,466 64,451 6,650 227,927 8,609 219,318 0 372 19,921
FY07e
36,582 118,273 5,875 236,053 9,897 226,156 0 372 17,130
FY08e
36,582 122,917 5,993 300,424 11,647 288,777 0 372 42,895
FY09e
36,582 127,749 6,113 371,220 13,903 357,317 0 372 90,613
259,385
219,470 10,293 14,769
299,707
227,299 28,976 19,186
343,178
254,003 25,541 21,448
404,386
315,590 16,878 17,283
497,535
363,691 17,217 49,785
618,746
441,723 17,563 78,018
244,532 14,853
3,372 0 417 11,065
275,461 24,247
4,265 0 560 19,422
300,993 42,185
5,463 0 6,279 30,443
349,752 54,635
6,283 0 10,764 37,588
430,693 66,842
6,283 0 22,971 37,588
537,304 81,442
6,283 0 37,571 37,588
14,853
0
24,247
0
42,185
0
54,635
0
66,842
0
81,442
0
14,853 337 406 Rs44.05 Rs44.05

235,096 55.8% 238,903 5.7% 143,161 56.3%
24,247 427 512 Rs56.85 Rs56.26

253,732 7.9% 252,422 5.7% 191,056 33.5%
42,185 546 519 Rs77.22 Rs76.53

281,746 11.0% 270,366 7.1% 219,321 14.8%
54,635 628 587 Rs86.96 Rs86.37

328,310 16.5% 313,654 16.0% 233,754 6.6%
66,842 628 628 Rs106.39 Rs105.80

390,773 19.0% 359,891 14.7% 297,490 27.3%
81,442 628 628 Rs129.63 Rs129.03

463,211 18.5% 423,437 17.7% 367,582 23.6%

1.70% 2.75% 0.11%

0.24% 44%
2.05% 2.35% 0.41%

0.68% 60%
1.54% 2.05% 0.37%

0.58% 64%
1.70% 1.65% 0.44%

0.73% 61%
1.58% 1.64% 0.39%

0.66% 59%
1.50% 1.55% 0.40%

0.68% 60%

Effective tax rate
1.58% 0.62%
39%
4.65% 1.44%
31%
5.74% 1.94%
34%
6.31% 2.04%
32%
6.22% 2.11%
34%
5.82% 1.98%
34%

0.02% 0.00% 0.98% 20.5

11.1% 44%
0.09% 0.00% 3.30% 14.3

11.7% 60%
0.10% 0.00% 3.90% 9.7

16.2% 64%
0.12% 0.00% 4.39% 7.7

21.4% 61%
0.10% 0.00% 4.20% 7.4

22.9% 59%
0.10% 0.00% 3.94% 7.5

22.3% 60%
6.4% 6.4% 9.7% 5.7% 55% 60% 71% 25%

8,538
9.5% 9.5% 12.8% 8.1% 64% 66% 87% 23%

8,344
16.6% 16.6% 19.1% 12.3% 64% 66% 90% 18%

8,483
17.9% 17.9% 20.9% 13.5% 58% 58% 75% 28%

10,386
18.2% 18.2% 21.2% 13.4% 60% 60% 83% 24%

13,219
18.7% 18.7% 21.7% 13.2% 59% 60% 84% 20%

14,849
ROE (cash) Underlying profit'ty (assets) Underlying profit'ty (equity) Underlying profit'ty (RWAs) Adj (cash) earnings Capital strain Free cash flow Free cash flow/ assets Free cash flow/ RWAs Interest spread pre NAL Earning rate post NAL Funding rate post NAL Cost to int margin from NAL Interest spread post NAL Yield from free funds Net int margin post NAL Interest exp/ int inc Non int inc/ total inc Ave headcount Personnel cost/ headcount Profit/ headcount Cost/ Income Effective tax rate Statutory tax rate
20.1% 1.7% 34.6% 3.8% 2,072 (5,160) (3,088) (0.97%) (2.19%) 3.28% 3.98% 0.86% 0.16% 3.12% -0.01% 3.10% 22.0% 38.2% 10,027 0.404 0.258 62.0% 39.3% 41.0%
47.1% 5.1% 72.3% 8.5% 8,874 (4,789) 4,084 1.58% 2.65% 6.13% 7.00% 1.10% 0.23% 5.90% 0.01% 5.90% 15.7% 27.6% 9,633 0.479 0.957 31.7% 30.9% 38.0%
37.8% 6.1% 59.1% 9.6% 12,496 (2,827) 9,670 3.02% 4.73% 7.76% 9.15% 1.67% 0.27% 7.48% 0.07% 7.55% 17.5% 18.9% 9,194 0.507 1.364 25.1% 33.8% 35.0%
33.9% 6.8% 52.2% 11.1% 16,398 (1,443) 14,954 4.00% 6.60% 7.83% 9.64% 2.09% 0.28% 7.55% 0.09% 7.64% 20.7% 20.2% 9,192 0.573 1.784 19.7% 32.3% 35.0%
31.2% 6.6% 49.0% 11.2% 18,961 (6,374) 12,587 2.79% 4.74% 7.83% 9.36% 1.82% 0.28% 7.54% 0.14% 7.69% 17.9% 19.2% 9,563 0.326 1.983 19.9% 34.0% 35.0%
29.6% 6.2% 46.9% 10.5% 21,982 (7,009) 14,973 2.68% 4.50% 7.69% 9.38% 1.97% 0.28% 7.40% 0.17% 7.57% 19.2% 19.2% 9,950 0.404 2.209 20.0% 34.0% 35.0%
6% 57% 78% 4.3% FY04 52.4 6.1 6.1 0.9% -3.8% H204
3,818 2,152
4% 34% 94% 3.9% FY05 15.4 4.7 4.8 1.6% 5.0% H105
6,046 2,284
4% 20% 101% 3.8% FY06 11.1 3.5 3.5 2.8% 11.8% H205
8,930 3,438
4% 19% 95% 4.2% FY07e 9.6 3.1 3.1 3.7% 18.3% H106
10,112 2,371
4% 20% 88% 3.9% FY08e 8.9 2.5 2.5 4.1% 15.4% H206
11,164 2,576
4% 18% 94% 3.7% FY09e 7.6 2.1 2.1 4.5% 18.3% H107
11,851 3,132
5,970
3,597
8,331
3,668
12,368
2,895
12,483
3,632
13,740
2,952
14,983
2,768
2,373
367 0 39
4,663
433 0 157
9,473
712 0 192
8,851
163 0 326
10,788
1,020 0 148
12,215
1,162 0 354
2,044
1,288 1,288 1,288
4,388
3,167 3,167 3,167
8,953
6,048 6,048 5,707
9,015
6,019 6,019 5,975
9,916
6,522 6,522 6,522
11,406
7,929 7,929 7,929
Rs2.63 Rs1.50
Rs6.90 Rs1.75
Rs10.11 Rs2.50
Rs11.59 Rs4.00
Rs12.48 Rs3.50
Rs13.50 Rs5.00
31
MORGAN
STANLEY
RESEARCH
United Bank Ltd Retailer

Investment Thesis
We initiate coverage of UBL with an Overweight rating and a 12-month price target of Rs193, which equates to a total potential return of 16%. UBL is trading on 9.0x EPS, 2.5x book, with three year earnings CAGR of 10%, an RoE of 32%, and a dividend yield of 4.1%, on our FY08 estimates. Pakistan presents a compelling emerging market investment opportunity offering vast growth and high returns, in our view. UBL seems well placed to excel in this environment, with strong execution, broad distribution, and a full product suite. We acknowledge the significant sovereign risk and apparent declining risk appetite for true emerging market investments. Our timing may not be ideal, and we recommend investors use the likely near-term volatility as an opportunity to assemble a long-term position in a quality bank name such as UBL in this geography. UBL launched its retail banking proposition in 2004 and now occupies the No. 1 position in that space, in particular auto lending. UBL continues to be aggressive and innovative in this space. Return structures are eye-catching. UBL has a net interest margin of 6.03%, driven by a strong deposit franchise with a favourable mix. UBL has the most developed international strategy, with an emphasis in the Middle East. Oil-driven economic development, investment, and capital market activity are strong and growing in this part of the world. UBL is currently undertaking a comprehensive project to transform the internal business processes, replace IT platforms, and revitalize distribution. The core banking system is currently being replaced with Genesis. This project is expected to take two to three years to complete.
Background
UBL was founded in 1959. In 1974, it was nationalized with the entire banking system. In October 2002, UBL was reprivatized when 51% of equity along with management control was sold to a consortium comprising Abu Dhabi Group of the United Arab Emirates and Bestway Group of the United Kingdom. In June 2007, the SBP sold a 24% stake in UBL, bringing its ownership down to 20%. The president and CEO is Atif R. Bokhari, who was appointed in May 2004. A career banker of 20 years, Atif has diverse national and international experience in corporate banking at Bank of America and Habib Bank. UBL is the No. 3 player in the Pakistan bank sector, with around 10% market share of assets and deposits. It is predominantly an SME and corporate bank, but has led the charge into consumer banking with the largest number of auto loans and customers. It is a major investment bank and leading player in project finance. UBL has a 30% stake in UBL Insurers Ltd (book value Rs91 million). Abu Dhabi Group and Bestway Group own the remaining shares of UBL Insurers. With paid-up capital of Rs300 million, it is the fourth-largest general insurer in Pakistan.
Exhibit 93
UBL: Background Data (Dec. 2006)

FRANCHISE Headcount Branches - Pakistan - Overseas ATMs - Pakistan 9,860 1,062 16 SHARE STATS Shares o/s (m) Market cap (bns) Est float Ave daily volume (No m) - est t/o to mkt cap Key shareholders State Bank of Pakistan Bestway Group Abu Dhabi Investment Autho General Public DEPOSITS - by type Savings Current Fixed Margin Other - by customer Public/ Government Private REVENUE - by type Banking - retail - commercial Sales & Trading Corporate Finance Others 809 Rs136 30% 1.2 39% 20% 31% 31% 18%
302
LOANS - by customer Commercial Housing Personal - by industry Chemical & pharmaceuticals Agriculture Textile Cement Sugar Shoes & leather garments Automobile & transport equip. Financial Construction Electronics Food industries Metal products Oil, gas, petroleum & energy Services Wholesale traders Individuals Others
100% 82% 2% 16% 100% 4% 5% 29% 0% 0% 1% 1% 1% 3% 1% 5% 2% 1% 2% 3% 19% 24%
100% 36% 27% 34% 1% 1% 100% 16% 84%
Investment Negatives Execution risk the internal transformation project and growth requires robust systems and quality human capital. Reliance on low funding costs around 60% of UBLs net interest income is a function of very wide deposit spreads. Macro environment continued economic growth momentum is premised on political stability, security and policy continuation.
100% 55% 26% 29% 10% 34% 1%
32
MORGAN
STANLEY
RESEARCH
Valuation
Our price target of Rs193 for UBL is based on our residual income valuation model (RIVM). The RIVM measures shareholder value by summing the current common book equity and the present value of future residual income. Residual income is defined as the spread between the cash return on equity and the cost of equity multiplied by common equity. We use a cost of equity of 17.75% derived using the CAPM (a risk-free rate of 10%, a beta of 1.0, and an equity risk premium of 7.75%). Our forecasting methodology also incorporates a recession five years out from the current year, whereby loan growth is zero and loan loss is 2.0 times normalized levels. Key risks to our price target are as follows. Upside Risks 1. Better-than-expected loan and deposit growth. 2. 3. Better-than-expected net interest margin management. Political stability and human development improvements.
Downside Risks 1. Stumbles/cost overruns with internal restructure. 2. A faltering economy, suppressing loan growth, causing asset quality to deteriorate, and destroying investor confidence. Sustained political instability, and increased law and order issues.
3.
Our key earnings assumptions are as follows:Exhibit 94
Earnings / Scenario Assumptions

3-year CAGR Bear Base Bull
Loans Deposits Net interest income Non interest income Opex NPAT Loan loss/ RWAs
Source: Morgan Stanley research
6% 10% 8% 8% 20% 4% 1.00%
19% 20% 20% 19% 20% 21% 0.55%
25% 27% 26% 25% 20% 35% 0.35%
Exhibit 95
UBL: Residual Income Valuation Model

Share Information Expected 12 Month Dividend Current Stock Price Issued Shares (million) Reported Book Value Per Share Cost of Capital 10-yr. Govt. Bond Yield (%) Beta Market Risk Premium (%) Cost of Common Equity (%) Development pay out ratio Maturity Phase Number of Years Target Capital Ratio End of Phase RWA Growth Rate Mature pay out ratio Decline Phase Number of years Target Capital Ratio End of Phase RWA Growth Rate Decline pay out ratio
Present value of residual income (Rs m) Rs5.00 Rs171 809 Rs48.50

7000 6000 5000 4000 3000 2000 1000 0 1 5 9 13
Years
Key valuation measures Stock Price Est. Current Fair Value 12 Month Target Price 12 Month Total Return (%) Price to book value Current ROE 12 mth TP implied multiple 12 CP implied multiple 12 mth TP implied BV multiple
Rs171 Rs168 Rs193 16% 3.3 34.6% 10.2 9.1 2.9
10.00 1.0 7.75 17.75 50%
17
21
25
Valuation drivers 5 10% 4% 60%
Years
CAGR Cash earnings 17.0% 13.1% 6.5%
End of phase ROEE 25.0% 25.0% 17.8%
% of fair value Phase Cumulative 24 24 32 57 18 75 25 100
Book value at start Development Maturity Decline
10 5 50
50 10% 3% 70%
33
MORGAN
STANLEY
RESEARCH
Risk-Reward Snapshot: UBL (UBL.KA, Rs171, OW, PT Rs193)

Risk-Reward View: More Upside than Downside Execution Critical
300 260 (+52%) 250
Investment Thesis
UBL offers a high-quality play on Pakistans emerging financial system. Returns are high and growth is vast. A strong broad deposit franchise affords UBL funding benefits and customer opportunity. It has a first mover advantage in the retail lending space, in particular auto lending, with 20% market share. Branding, distribution, and execution capability position UBL well to take advantage of inherent growth opportunities in this market.
200
171.00
193 (+13%)
150
100 130 (-24%) 50
Key Value Drivers

Aug 05 Dec 05 Price Target Apr 06 Aug 06 Dec 06 Apr 07 Aug 07 Dec 07 Apr 08 Aug 08 Historical Stock Performance Current Stock Price
Source: FactSet,, Morgan Stanley Research
Price target Rs193 Bull Case Rs260 14x Bull Case 08e EPS
Derived from base-case RIVM. New government, same policies and accelerating economic growth: Restoration of confidence and proactive policy making accelerate economic momentum. Foreign and domestic investment drives infrastructure development and private consumption. UBL fully taps penetration opportunities in assets and liabilities. Asset quality remains benign and returns structurally expand with improving mix and effective execution. International growth options crystallise. Sustained macro trends and stable returns: Opportunities in retail, corporate, and investment banking are executed. Loan growth is sustained at 20%+. Deposit reach broadens with minor spread compression. Franchise investment improves product suites, distribution, and risk management.
Macro: Continued economic development supported by foreign and domestic investment. Execution: UBL leverages its funding advantage and high-profile branding and distribution to win business in a rapidly growing environment.
Potential Catalysts
Political resolution: Removal of uncertainty surrounding leadership/ government and security. Recovering risk appetite: Recent investment market turmoil has curtailed appetite for true emerging market investments.
Base Case Rs193
10x Base Case 08e EPS
Risks to Our Thesis

Sovereign/political risk: Pakistan may plunge into a state of disarray should institutions break down and leadership change be adverse. Aggressive lending Sustained textile doldrums Skilled human capital shortage Continued risk aversion Increased competitive intensity Risks are obvious and currently discounted in the share price. We assess a high probability to a positive outcome in the longer term.
Bear Case Rs130
7x Bear Case Country risks manifest and confidence collapses: Pakistan 08e plunges into a state of disarray with a breakdown in law & order and EPS leadership. Collapsing confidence depresses loan and deposit growth. Defaults emerge and returns crumble.
Key Sensitivities:
1% of loan growth equates to 1.5% of earnings. 10bps of net interest margin equates to 2% of earnings. 1% of fee growth equates to 0.5% of earnings. 1% of opex growth equates to 1% of earnings. 10bps of loan loss charge equates to 2% of earnings. 1% change to the ERP equates to a 10% change in the price target.
34
MORGAN
STANLEY
RESEARCH
Exhibit 96
UBL: Financial Summary (31 December, Rs mn)

PROFIT & LOSS STATEMENT Net interest income Non interest income Total income Opertaing expenses Underlying profit Loan loss Goodwill Associates/ Other Net profit pre tax Income tax Net profit post tax OEI Reported profit Preference divs NPAT attributable Adj (cash) earnings Reported EPS - growth Adj (cash) EPS - growth Ordinary DPS Ordinary pay out ratio Special DPS RATIOS Net interest yield
FY04
7,860 4,727
FY05
14,531 5,359
FY06
21,367 7,286
FY07e
26,897 9,186
FY08e
31,971 10,634
FY09e
36,688 12,137
12,587
7,220
19,890
8,760
28,653
11,890
36,083
14,567
42,605
17,222
48,825
20,316
5,367
357 0 0
11,130
1,434 0 13
16,763
2,240 0 (23)
21,516
1,857 0 234
25,383
2,312 0 234
28,510
2,660 0 234
5,010
1,189
9,709
3,540
14,500
4,833
19,893
7,016
23,305
7,924
26,084
8,869
3,821
44
6,168
91
9,667
137
12,877
137
15,381
137
17,216
137
3,777
0
6,078
0
9,529
0
12,740
0
15,244
0
17,078
0
3,777
3,777 Rs7.29 35.1%
6,078
6,078 Rs11.73 60.9%
9,529
9,529 Rs16.35 39.4%
12,740
12,740 Rs17.49 6.9%
15,244
15,244 Rs18.83 7.7%
17,078
17,078 Rs21.10 12.0%
Rs7.29
35.1%
Rs11.73
60.9%
Rs16.35
39.4%
Rs17.49
6.9%
Rs18.83
7.7%
Rs21.10
12.0%
Rs1.50 21%
Rs0.00
Rs2.50 21%
Rs0.00
Rs3.00 18%
Rs0.00
Rs5.00 29%
Rs0.00
Rs7.00 37%
Rs0.00
Rs9.00 43%
Rs0.00
FY04 3.10%
3.35% 92%
FY05 4.54%
4.93% 92%
FY06 5.38%
6.03% 89%
FY07e 5.40%
6.11% 88%
FY08e 5.25%
6.19% 85%
FY09e 5.10%
6.20% 82%
BALANCE SHEET Cash Securities/ investments Due from banks Gross loans/ bills Provisions Net loans and bills Foreclosed asset (net of prov) Intangibles Other Total assets Deposits Debt Other Total liabilities Net Assets Common equity Hybrid/ pref Retained earnings Reserves Equity attributable OEI Total equity Ord share outstanding Fully diluted weighted ave Book value per share NTA per share Ave int earn assets - growth Ave int bearing liabs - growth RWAs - growth Equity tier 1 Tier 1 Total CAR Equity/ assets RWA/ assets Loans/ assets Loans/ deposits Securities/ assets NPLs NPLs/ loans NPLs/ equity Provision cover Provisons/ loans VALUATION Price/ adj earnings Price/ book Price/ NTA Dividend yield Free cash flow yield INTERIMS Net interest income Non interest income Total income Opertaing expenses Underlying profit Loan loss Goodwill Associates/ other Profit pre tax Reported NPAT NPAT attributable Adj (cash) earnings Adj (cash) EPS DPS
FY04
23,945 52,708 24,174 182,751 16,166 166,586 0 0 14,836
FY05
34,143 61,559 18,689 242,751 14,730 228,020 0 114 15,532
FY06
49,024 65,735 19,418 298,069 13,826 284,243 0 179 17,291
FY07e
47,556 106,129 22,002 354,865 15,074 339,791 0 0 45,225
FY08e
47,556 108,242 22,445 423,083 17,001 406,082 0 0 73,240
FY09e
47,556 110,398 22,896 501,312 19,107 482,205 0 0 117,120
282,248
236,925 16,140 9,804
358,056
296,190 26,750 10,842
435,890
343,031 44,678 15,003
560,703
440,087 46,004 30,388
657,565
501,285 46,929 53,930
780,174
594,083 47,872 71,385
262,869 19,379
5,180 0 3,585 8,981
333,783 24,274
5,180 0 7,790 9,742
402,712 33,177
6,475 0 12,930 12,000
516,479 44,224
8,094 0 21,030 13,200
602,144 55,421
8,094 0 32,226 13,200
713,341 66,834
8,094 0 43,639 13,200
17,746
1,633
22,713
1,561
31,405
1,772
42,324
1,901
53,521
1,901
64,933
1,901
19,379 518 518 Rs34.26 Rs34.26

234,328 20.1% 225,680 21.9% 171,536 55.8%
24,274 518 518 Rs43.85 Rs43.63

294,958 25.9% 290,220 28.6% 239,225 39.5%
33,177 648 583 Rs48.50 Rs48.23

354,176 20.1% 357,909 23.3% 316,288 32.2%
44,224 809 728 Rs52.29 Rs52.29

440,368 24.3% 449,148 25.5% 376,555 19.1%
55,421 809 809 Rs66.13 Rs66.13

516,442 17.3% 519,258 15.6% 448,909 19.2%
66,834 809 809 Rs80.23 Rs80.23

592,054 14.6% 596,548 14.9% 531,855 18.5%

1.86% 2.84% 0.14%

0.25% 55%
1.67% 2.74% 0.45%

0.70% 64%
1.84% 3.00% 0.56%

0.81% 70%
1.84% 2.92% 0.37%

0.54% 70%
1.75% 2.83% 0.38%

0.56% 68%
1.69% 2.83% 0.37%

0.54% 68%

Effective tax rate
1.97% 0.47%
24%
3.03% 1.10%
36%
3.66% 1.22%
33%
3.95% 1.39%
35%
3.79% 1.29%
34%
3.60% 1.22%
34%

0.00% 0.02% 1.49% 15.9

11.3% 55%
0.00% 0.03% 1.90% 15.8

9.8% 64%
0.00% 0.03% 2.40% 14.7

9.7% 70%
0.03% 0.03% 2.56% 13.5

10.6% 70%
0.03% 0.02% 2.50% 12.7

11.6% 68%
0.02% 0.02% 2.38% 12.1

12.1% 68%
7.9% 7.9% 12.2% 6.9% 61% 65% 77% 19%

19,056
7.7% 7.7% 10.7% 6.8% 67% 68% 82% 17%

17,104
8.9% 8.9% 12.2% 7.6% 73% 68% 87% 15%

16,382
9.2% 9.2% 13.2% 7.9% 67% 63% 81% 19%

19,518
10.2% 10.2% 14.2% 8.4% 68% 64% 84% 16%

21,154
10.7% 10.7% 14.7% 8.6% 68% 64% 84% 14%

20,052
ROE (cash) Underlying profit'ty (assets) Underlying profit'ty (equity) Underlying profit'ty (RWAs) Adj (cash) earnings Capital strain Free cash flow Free cash flow/ assets Free cash flow/ RWAs Interest spread pre NAL Earning rate post NAL Funding rate post NAL Cost to int margin from NAL Interest spread post NAL Yield from free funds Net int margin post NAL Interest exp/ int inc Non int inc/ total inc Ave headcount Personnel cost/ headcount Profit/ headcount Cost/ Income Effective tax rate Statutory tax rate
23.7% 2.1% 33.6% 3.8% 3,777 (6,144) (2,367) (0.93%) (1.68%) 3.66% 4.12% 0.80% 0.33% 3.32% 0.03% 3.35% 18.6% 37.6% 9,271 0.486 0.407 57.4% 23.7% 41.0%
30.0% 3.5% 55.0% 5.4% 6,078 (6,769) (691) (0.22%) (0.34%) 5.32% 7.01% 2.12% 0.43% 4.89% 0.03% 4.93% 29.8% 26.9% 9,348 0.475 0.650 44.0% 36.5% 38.0%
35.2% 4.2% 61.9% 6.0% 9,529 (7,706) 1,823 0.46% 0.66% 6.52% 9.49% 3.43% 0.45% 6.07% -0.04% 6.03% 36.5% 25.4% 9,643 0.629 0.988 41.5% 33.3% 35.0%
34.6% 4.3% 58.4% 6.2% 12,740 (6,027) 6,713 1.35% 1.94% 6.59% 9.96% 3.78% 0.41% 6.18% -0.08% 6.11% 38.7% 25.5% 10,134 0.778 1.257 40.4% 35.3% 35.0%
31.8% 4.2% 53.0% 6.1% 15,244 (7,235) 8,008 1.31% 1.94% 6.61% 10.01% 3.80% 0.39% 6.21% -0.02% 6.19% 38.2% 25.0% 10,987 0.852 1.387 40.4% 34.0% 35.0%
28.8% 4.0% 48.1% 5.8% 17,078 (8,295) 8,784 1.22% 1.79% 6.58% 10.08% 3.85% 0.35% 6.23% -0.03% 6.20% 38.5% 24.9% 11,883 0.938 1.437 41.6% 34.0% 35.0%
10% 107% 85% 8.8% FY04 23.5 5.0 5.0 0.9% -2.7% H204
4,709 2,138
7% 75% 86% 6.1% FY05 14.6 3.9 3.9 1.5% -0.8% H105
6,300 2,105
5% 52% 84% 4.6% FY06 10.5 3.5 3.5 1.8% 2.1% H205
8,232 3,254
6% 46% 77% 4.2% FY07e 9.8 3.3 3.3 2.9% 7.6% H106
9,888 3,325
5% 40% 80% 4.0% FY08e 9.1 2.6 2.6 4.1% 9.0% H206
11,480 3,961
4% 31% 95% 3.8% FY09e 8.1 2.1 2.1 5.3% 9.9% H107
12,219 4,347
6,847
3,740
8,404
4,082
11,486
4,678
13,212
5,215
15,441
6,676
16,566
6,810
3,107
109 0 0
4,322
590 0 0
6,808
845 0 13
7,998
920 0 24
8,765
1,319 0 (47)
9,756
738 0 117
2,998
2,713 2,713 2,713
3,732
2,154 2,154 2,154
5,976
3,924 3,924 3,924
7,101
4,668 4,668 4,668
7,398
4,861 4,861 4,861
9,135
5,698 5,698 5,698
Rs5.24 Rs1.50
Rs4.16 Rs0.00
Rs7.58 Rs2.50
Rs8.01 Rs0.00
Rs8.34 Rs3.00
Rs7.82 Rs0.00
35
MORGAN
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Forecasts and Assumptions

Loan Growth sustaining 20%

MCB
50%
Loan/ Deposit Ratio must increase deposit bases

UBL
100%
NBP
MCB
NBP
UBL
90%
40%
80%
30%
70%
20%
60%
10%
50%
0% FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e
40% FY02 FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e
Exhibit 98
Exhibit 101
Net Interest Margins only gradual compression

MCB
8%
Opex Growth sustained investment

MCB
50%
NBP
UBL
NBP
UBL
7%
40%
30% 6% 20% 5% 10% 4% 0%
3%
-10%
2%
FY02 FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e
-20% FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e
Exhibit 99
Exhibit 102
Non-interest Income Growth 15% to 20% growth

MCB
75% 65%
Cost: Avg. Assets operating leverage

MCB
4.0%
NBP
UBL
NBP
UBL
3.5% 55% 45% 3.0% 35% 25% 15% 2.0% 5% -5% 1.5% -15% -25% FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e 1.0% FY02 FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e 2.5%
36
MORGAN
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Exhibit 103
Exhibit 106
Core Profitability
MCB
7.0%
Earnings Growth balanced growth

NBP UBL
45% 40% 35%
MCB
UBL
6.0%
5.0% 30% 4.0% 25% 20% 15% 2.0% 10% 1.0% 5% 0.0% FY01 FY02 FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e 0% FY06 FY07e FY08e FY09e FY10e FY11e
3.0%
Exhibit 104
Exhibit 107
Loan Loss/ RWAs solid credit origination

MCB
1.60%
Return on RWAs gradual deposit spread declines

MCB
8%
NBP
UBL
NBP
UBL
1.40%
7%
1.20%
6%
1.00%
5%
0.80%
4%
0.60%
3%
0.40%
2%
0.20%
1%
0.00% FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e
0% FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e
Exhibit 105
Exhibit 108
Return on Equity sustained high returns

MCB
50% 45% 40%
Tier I rich organic capital generation

MCB
20%
NBP
UBL
NBP
UBL
16% 35% 30% 25% 20% 15% 8% 10% 5% 0% FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e 4% FY03 FY04 FY05 FY06 FY07e FY08e FY09e FY10e FY11e 12%
37
MORGAN
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38
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The information and opinions in this report were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley").
Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Matthew Wilson. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
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Important US Regulatory Disclosures on Subject Companies

As of July 31, 2007, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: MCB Bank Ltd. The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
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(as of July 31, 2007)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Underweight to hold and sell recommendations, respectively.
39
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Coverage Universe Stock Rating Category
Investment Banking Clients (IBC) % of Total % of Rating IBC Category Count % of Total Count
Overweight/Buy Equal-weight/Hold Underweight/Sell Total
908 1021 358 2,287
40% 45% 16%
332 327 90 749
44% 44% 12%
37% 32% 25%
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.
Analyst Stock Ratings

Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months. More volatile (V) - We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner. Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months.
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40
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41
MORGAN
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Industry Coverage:Pakistan Banks

Company (Ticker) Matthew S Wilson, CFA MCB Bank Ltd (MCB.KA) United Bank Limited (UBL.KA) Rating (as of) Price (08/27/2007)
O (08/28/2007) O (08/28/2007)
PKR267.25 PKR171.00
Stock Ratings are subject to change. Please see latest research for each company.
2007 Morgan Stanley

Morgan Stanley Pak Bank Initiation

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MORGAN

Morgan Stanley Asia (Singapore) Pte.+

Matthew S Wilson, CFA

August 28, 2007

Industry View Attractive

Price Target Summary

Return on RWAs (latest reported)

Source: Company data, Morgan Stanley Research

August 28, 2007 Pakistan Banks

High Risk but Huge Opportunity

August 28, 2007 Pakistan Banks

Population 6th largest and 70% < 30yo

Foreign Investment open economy key to growth

Source: US Census Bureau, Morgan Stanley Research, Data as at Dec 2006

Source: CEIC, Morgan Stanley Research

Low Total Credit Penetration and retail is only 4%

Net Interest Margins wide and sustainable

Hong Kong Australia Taiwan

Singapore Malaysia Thailand Korea

Vietnam Philippines Pakistan Indo

GDP per capita (US$)

Source: Company data, Morgan Stanley Research, Data as at Dec 2006

GNP per Capita and Growth growing wealth

RoRWAs large generator of organic capital

YoY growth (rhs)

3.0% 2.5% 2.0%

1.0% 0.5% 0.0%

Source: CEIC, Morgan Stanley Research.

Source: Company data, Morgan Stanley Research. Data as at Dec 2006

August 28, 2007 Pakistan Banks

August 28, 2007 Pakistan Banks

Price Target Summary

UBL: Overweight, PT Rs193

August 28, 2007 Pakistan Banks

GDP Growth four years of strength

Real GDP growth

Source: CEIC, Morgan Stanley Research.

GDP by Sector underpinned by growth in services

8,000,000 7,000,000 6,000,000 5,000,000

Source: CEIC, Morgan Stanley Research.

GNP per Capita and Growth growing wealth

YoY growth (rhs)

Source: CEIC, Morgan Stanley Research.

August 28, 2007 Pakistan Banks

Contribution to GDP private consumption critical

SBP Policy Rate measured increases to 10.0%

Source: CEIC, Morgan Stanley Research.

Source: CEIC, Morgan Stanley Research.

Contribution to GDP large investment phase

Reserve Requirements measured increases

Statutory Liquidity Requirement (SLR)

Cash Reserve Requirement (CRR) Time

Source: CEIC, Morgan Stanley Research.

Source: CEIC, Morgan Stanley Research

Inflation still above SBPs target of 6.5%

Money Supply and Growth tightening stance

CPI - annual ave chg

YoY growth 3MMA (rhs)

Source: CEIC, Morgan Stanley Research.

Source: CEIC, Morgan Stanley Research

August 28, 2007 Pakistan Banks

Fiscal Deficit as a % of GDP greater discipline

Export Mix huge textile concentration (cotton)

Petroleum & Coal