NBP to reach nearly Rs150 by December 2026

June 17, 2025 (MLN): National Bank of Pakistan (PSX: NBP) is poised to reach a price target of Rs149.7 per share by December 2026, offering an upside of 39% from the current market price of Rs108 per share, along with a CY25 dividend yield of 14%.

NBP’s management can now focus on enforcing KPIs and refreshing internal guidance on key metrics, according to a report by KTrade.

The bank has moved past legacy pension litigation in 2024 after a drawn-out legal process since 2015, building strong capital buffers (CAR 28.19%) over the period.

This should allow NBP to undertake an overhaul strategy by recalibrating the deposit mix gradually in line with peers while optimizing the loan book and increasing efficiency with KPI enforcement across the bank’s segments.

The bank’s ROE averages over ~13% across our forecast range, where a significant CAR buffer (~over 1,500bps against D-SIB CAR requirement of 13%) should support a gradual move towards payout levels pre-pension litigation, giving NBP the highest payout yield in the domestic banking space.

This should allow NBP to align its performance going forward with its peer group.

KTrade expects the bank to recalibrate the deposit mix going forward by benchmarking incentives across its 1,500-plus branch network while rationalizing rates on PSE deposits to market levels.

The house also expects deposit costs to narrow by 1,256bps over the forecast range, outpacing our coverage sector average.

Additionally, NBP’s core earnings are supported by a captive inter-government transaction fee base, which supports the outlook for non-funded income.

The bank’s pension litigation originating through a 1977 conversion of employee retirement plans was finalized in Jun’24 after the Supreme Court dismissed an appeal petition.

This led to a current portion charge against the bank’s original pension fund scheme of Rs49bn (Rs12/share - 49% of full year Dec’24 earnings) and Rs8.5bn in recurring charges from 2024 onwards.

Going forward, NBP is expected to face elevated compensation expenses with an absolute annual impact of Rs8bn-Rs8.5bn, generating an additional 500bps to the overall cost/income forecast.

NBP suspended payouts since 2017 (a nominal payout of 7.5% or Rs1 per share was announced in 2021) and only recently resumed payouts at a conservative 65% in Dec’24.

Prior to suspension, NBP posted a consistent payout of 80% between 2011-2016.

Net Interest Income CAGR of 21% over the last three years, with IDR increasing to 119% by Dec’24, has led to a CAR buffer of ~28%+.

ROE is expected to average 13% across the forecast range and should lead NBP to gradually move towards its historic payout level, giving the bank the highest dividend yield within banking sector peers.

The bank has outperformed the market by 117% over a trailing 12-month period, driven by the closure of its pension litigation, leading to the first payout since 2021.

Trading at 0.5x on P/BV, NBP trades at the lower end of our sector coverage valuation range, and KTrade believes this discount will narrow going forward as the bank delivers a sustainable ROE trajectory and increases payouts going forward.

NBP’s management can now focus on KPI enforcement and refresh internal guidance on key metrics. This should allow NBP to align its performance going forward with its peer group.

KTrade expects the bank to recalibrate the deposit mix going forward by benchmarking incentives across its 1,500-plus branch network while rationalizing rates on PSE deposits to market levels.

The house expects deposit costs to narrow by 1,256bps over the forecast range, outpacing our coverage sector average.

Additionally, NBP’s core earnings are supported by a captive intergovernmental transaction fee base, which supports the outlook for nonfunded income.

KTrade expects NBP to undertake a two-pronged strategy for recalibrating the deposit base. The bank’s cost of deposits at 17.6% for Dec’24 is significantly higher relative to the comparable peer group.

NBP should look to rationalize PSE deposits by aligning rates with the broader market.

GoP and PSE deposits make up 48% of the total deposit mix and should be subject to renegotiation and or shedding.

The management, in our view, is unlikely to continue allowing bureaucratic intervention and enforce guidance on the cost of deposits as a key KPI going forward.

Historically, these deposits would carry elevated cost in the range of 100bps-150bps versus market rates.

Retail Banking Reset: 1,500+ branches give NBP the largest branch network, second only to HBL.

On a relative basis, deposit per branch growth has exceeded the peer group by 9% over the last 2 years.

The brokerage house expects this to improve further as the bank begins to incentivize low-cost deposit mobilization through retail banking in line with peers and disincentivize savings and fixed-term deposits.

The bank’s marketing spend supports a repositioning of its retail banking, up 52% YoY in Dec’24 and expected to remain near current levels over the near to medium term.

Management guidance targets CA% improving to 33% by the end of the year from 26% currently.

KTrade believes this may be optimistic and conservatively expects an improvement to 28% by year-end end reaching 35% of the deposit mix at the end of our forecast range.

The house expects NIMs to expand by 80bps in CY25 as interest-bearing deposits reprice in line with policy rate revisions and average 3.5% over our forecast range.

They see limited branch network additions going forward; however, they expect accelerated conversions to Islamic Banking Branches.

NBP has 203 Islamic branches out of a total branch network of 1,503 branches.

NBP is expected to convert between 40-50 branches this year and accelerate the pace each year, supporting the bank’s efforts to reduce deposit costs.

The bank is recalibrating the Loan Book post Dec’24.

Ahead of ADR Taxation, NBP accelerated loan growth by 9.2% sequentially in 4Q2024 at potentially lower spreads, taking full year loan growth to 0.5% YoY.

The ADR tax was subsequently removed, and by Mar’25, NBP contracted the loan book by 8.5%, reducing ADR to 33% for the quarter from 36% in Dec’24.

Going forward, management guidance targets an ADR of 40% by the end of 2025 which should be in line with the bank’s recent history 2019-2022 however KTrade expect better internal controls across lending practices which should prevent a deterioration in credit quality reducing surprises in the form of higher provision charges and non-performing loans.

NBP has historically maintained a high loan concentration to the Government and Public Sector Enterprises (PSE), averaging 34.3% over the last five years, considerably higher than peer group banks, which should rationalize gradually.

While the brokerage houses are cognizant of limitations with NBP to reduce exposure to this segment, we do expect better internal controls and restructuring of PSEs under Structural Benchmarks (SB) and Quantitative Performance Criteria (QPC) with the IMF to contain NPL formation from this exposure.

The government is targeting to reduce interventions across commodity operations, which can decrease concentration across the loan book, leading NBP to increase exposure to higher-yielding segments.

Going forward, KTrade expects credit growth for the bank to average at a conservative 7% across our forecast range, with an ADR averaging between 36%-38%.

A gradual recovery in large-scale manufacturing as the interest rate setting becomes supportive can provide NBP the opportunity to push ADR to target levels over the medium term.

The house forecast NBP’s near-term spread to expand by 0.6% bps to 3.1% and average 3.2% across our forecast range 2026-2029.

Between 2019-2024, NBP trailed sector advances in growth.

NBP recorded a 4% growth versus the sector growth of 14%.

KTrade further expects NBP to continue trailing across 2025-2029, but at a narrower pace with 7% versus 10% for sector loan growth.

The house expects NBP to continue targeting spreads across investment yields at a lower risk as the bank focuses on improving internal controls to prevent asset deterioration over the same period.

NBP has historically faced asset quality concerns, with provisioning charges totaling Rs95.8bn (28% of sector provisions) between 2018–2023.

Coverage ratio declined from 107% (2018) to 92% (2023) due to exposures in downstream oil & gas and private commodity financing.

A large commodity borrower default in Dec’24 further reduced coverage to 84% (from 99% in Sep’24), with infection rising from 16.9% to 19.1%.

However, by Mar’25, IFRS-9 Stage 3 adjusted coverage recovered to 106%, 900bps above sector average.

19% of NPL stock as of end-2024 is public sector-related.

While exposure to this segment remains, IMF-driven reforms are expected to contain future asset quality risks.

NPL formation is forecast at 21% with coverage in the 92–98% range.

Public sector reforms, ceilings on guarantees, and scaled-back commodity operations may improve asset quality.

Stronger internal controls could mitigate risks in volatile sectors (e.g., textiles, sugar at 11.4% of the loan book).

A 200bps policy rate cut by FY26 may aid restructurings. Provisioning reversals are not modeled, but upside risk to earnings exists.

NBP’s core earnings are supported by inter-government transaction fees, with fee income comprising over 50% of normalized NFI.

Debit card fees have grown at a 3-year CAGR of 41%. Capital gains drove 22% NFI growth over 3 years, with Rs28bn realized in 2024 (PkR6.76/share post-tax).

Unrealized gains total Rs67bn, second only to UBL. The equity book (Rs43bn at cost) generated Rs5.8bn in dividends in 2024.

NFI is projected to grow at a 4% forward 4-year CAGR.

NBP’s pension litigation, originating from the 1977 retirement plan conversion, concluded in Jun’24 after the Supreme Court dismissed appeal petitions.

This resulted in a one-time charge of Rs49bn (Rs12/share, 49% of full-year Dec’24 earnings) and recurring annual charges of Rs8.5bn from 2024 onward, raising compensation costs by ~500bps.

In Mar’24, the Supreme Court dismissed all civil petitions filed by NBP, upholding the Sept’17 decision.

NBP was ordered to pay arrears of government pension increases only to parties involved in the original case.

New litigation by non-party petitioners followed, though interim relief has suspended further payments.

NBP has accounted for potential unfavorable outcomes.

A 1997 amendment to the Bank Nationalization Act allowed the BoD of nationalized banks to revise employee benefits.

NBP’s 1999 revision increased basic pay by 110–140% as the pension base.

Retired employees filed petitions in 2010–11 seeking reinstatement of 1977 benefits and government-notified pension increases.

NBP's investment since 2003 stands at Rs49bn as of Mar’25, offering future value despite low near-term liquidity prospects.

The bank maintained an 80% payout until 2016 and declared a full-year DPS of Rs8/share (65% payout) in 2024 despite pension charges.

A conservative 50% payout is assumed going forward, placing NBP ahead of peers in forward yield. Any policy changes require a Constitutional Amendment to the Banks (Nationalization Act) of 1974.

Risk

A pending Supreme Court case related to a different class of pensioners claiming increased payments from NBP remains unresolved.

While the Lahore High Court had ruled in favor of the pensioners, the Supreme Court has provided interim relief to NBP.

The bank has taken a cautious approach by incorporating the financial impact in its 2024 statements.

Under IMF guidance, the government is pursuing PSE reforms to limit fiscal slippage through structural changes like independent boards and IFRS-9-based audits.

Delays in implementation may increase NPL risks.

Recent geopolitical tensions, including the Pakistan–India conflict and the Israel–Iran situation, have driven commodity prices higher, potentially worsening Pakistan’s external position and slowing economic recovery.

Rising commodity prices may also trigger inflation, prompting a shift in SBP’s policy stance and altering sector dynamics.

Despite a solid coverage ratio, the bank faces asset quality concerns due to significant exposure to struggling sectors like OMCs and steel.

Finally, while management is working to redefine the bank’s strategy, overcoming entrenched bureaucratic challenges will be crucial for future progress.