Inter Market Perspective

Transcription

1 Inter Market Perspective.. Bank Alfalah Limited It s been a long time coming Initiate with Buy! We initiate coverage on Bank Alfalah Limited (), with a Buy rating, where our Dec 16 TP of PkR35.2/share offers 2.3% upside (total return: 28.9%). Valuation catch-up to the Big-5 (5 discount on P/B ex. ) has been a long posited theme for and can now occur given emergent ROE convergence amidst drag on Big-5 banks. Our liking for is buttressed by an improved capital base (CAR: 14.1%) that can support asset growth in a soft interest rate environment. With the Big-5 still generally timid, s growth plans in SME and Retail can enable outperformance in the new business cycle while Islamic presence should payoff in the medium-term. Our CY16/17F EPS projections are 7%/5% higher than consensus estimates where recent uptick in Coverage/CASA suggests management focus has tilted towards profitability from BS growth earlier. We thus see still-high C/I (63%) as an opportunity. trades at an attractive CY16F P/B of.83x and P/E of 5.74x where full-year CY15F payout (3m D/Y: 8.5%) can catalyze price performance. has arrived Given its position as the sixth largest bank in Pakistan, the long posited theme for has been one of eventual valuation convergence to the Big-5. It s been a long time coming, but we believe has finally arrived at the big stage. CASA is 71% vs. Big-5 avg. of 75%; Coverage is close to 85% and CAR above 14% is sufficient. With ROE also close to 19% (vs. 2 for Big-5 ex-), P/B valuation discount of 5 looks unjustifiably high, particularly as cost efficiencies are likely to arise over the medium term. Plugged into the new business cycle A new business cycle has commenced with greater credit offtake a likely corollary; LT private sector loans growth have already accelerated to 2YoY. With the Big-5 eyeing big-ticket project finance (where will also be involved) but still too timid to aggressively venture into lower strata; has an open field to further entrench its strong positioning in the SME/Commercial and Retail segments. At the same time, medium-term Islamic banking prospects remain exciting, where we flag (i) win-win for Islamic financing of GoP projects (Sukuks), and (ii) potential dedicated Islamic banking subsidiary à-la. The timing is right missed out in the last macro bull cycle (CY3-CY7) due to being in expansion mode and then faced a prolonged period of tough macros. It now enters a higher-growth cycle having completed its newest round of branch expansion (649 branches, 75 of which were added after CY13 and are hitting profitability now). This means s profits should be able to withstand pressures from low interest rates/pib re-pricing where our CY16/17F EPS projections are 7%/5% higher than consensus estimates. Positive earnings surprises can come into play via: (i) one off gains from Warid deal, (ii) capital gains on investments, and (iii) earlier-than-expected materialization of cost efficiencies. Intermarket Perspective trades at a CY16F P/B of.83x and P/E of 5.74x, at a discount of 5 to peers despite similar ROE and potential for faster growth. Our Dec 16 TP of PkR35.2/share offers 2.3% upside (total return: 28.9%) and implies a Buy stance, where upcoming CY15F dividend can catalyze price performance (3m D/Y: 8.5%). Risks emanate from (i) possible capital deficiency, if profits fail to meet projections, (ii) regulatory steps to further clip spreads and (iii) any lasting increase in C/I from current levels. 13 January 216 Abdul Ghani Fatani Investment Analyst abdul.ghani@imsecurities.com.pk Ext 35 Bank Al-Falah Limited Price (PkR/sh) TP (PkR/sh) Stance BUY Upside 2.3% Fwd D/Y 8.5% Total Return 28.9% Bloomberg / Reuters PA /.KA Mkt Cap (US$mn) wk Hil-Low (PkR/sh) m Avg. Daily Vol (' shrs) 1,378 12m Avg. Td Val (US$mn).383 Key Financial Snapshot CY14A CY15F CY16F CY17F EPS (PkR) EPS Growth 2.6% 41.2% 1.7% 4.1% PER (x) BVS (PkR) P/B (x) NIMs 4.16% 4.23% 3.84% 3.88% ROE (average) 14.7% 16.2% 14.8% 14.6% ROE (Tier-I) 17.1% 19.8% 18.1% 17.2% DPS (PkR) Dividend yield 6.8% 8.5% 8.5% 9.4% Payout Ratio 56.3% vs. KSE1 Index Jan-15 Mar-15 Jun-15 Aug-15 Oct-15 KSE1 Index Jan-16 To find our Research on Bloomberg, please type - IMKP <GO>

2 Investment Thesis Perspective stands out from peers whose stock price is being dragged by assorted reasons including but not limited to (i) GCC exposure including Yemen for, (ii) compliance issues with s New York Branch, (iii) foreign selling in, (iv) asset quality concerns for and (v) lack of liquidity in. is the sixth largest bank in Pakistan; its size (and importantly capital: CAR: 14.1%) now allows it to participate meaningfully in big-ticket syndicate financing while facing limited competition from the Big-5 in the commercial & retail segments. This can enable outperformance in an improving economic setting, particularly as s operations are largely concentrated in Pakistan (93%). Islamic operations account for 13% of s business with Sukuks yielding Kibor or lower. Given pipeline of big-ticket projects and push from SBP, potential higher demand for Sukuks may give rise to better margins on Islamic assets. Unlike several medium-sized banks, has largely completed its branch expansion phase well in advance of the current macroeconomic uptick. With branches in Pakistan typically turning profitable in 1.5yrs, has timed its expansion well. We project 5yr profit CAGR for at 14% with room for positive surprises on (i) one off gains from Warid deal, (ii) capital gains on investments and (iii) earlier-thanexpected materialization of cost efficiencies. trades at a CY16F P/B of.83x, P/E of 5.74x and D/Y of 8.5%. On P/B, trades at a 35% discount to the Big-5 (5 discount ex-) which appears unjustifiably high given limited ROE differential projected 5yr Tier-I ROE for is 18.3% vs. 21.9% on average for the larger private banks. Company Profile Owned by the Abu Dhabi Group, is the sixth largest bank in Pakistan, operating in 222 cities across Pakistan, with a network of 649 branches. In addition, the bank also has small presence in Afghanistan, Bangladesh and Bahrain. was incorporated as a public limited company in 1992 and commenced operations in Pakistan in is a full service bank providing corporate, commercial, SME and retail services. Pattern of shareholding Directors, CEO, etc Associated Companies 4.4 Mutual Funds 4.3 General Public Local 8.2 General Public Foreign 28.9 Foreign Companies 27.1 Others 12.6 Advances Mix Commencement of operations 1997 Head Quarters Karachi Sponsor group Abu Dhabi Group Branches 649 (incl. 158 Islamic branches) Network coverage 222 cities in Pakistan; 7 overseas Deposit Market Share 6.5% (6 th largest) Asset Base (PkRMn) 791,145 Advances (PkRMn) 32,112 Tier-I Capital (PkRMn) 41,284 Advances Concentration 1 5% 21% 11% 5% 58% Corporate Commercial Consumer Islamic Overseas CY9 CY1 CY11 CY12 CY13 CY14 Agribusiness Textile Power Public/Govt Individuals Others 2 P a g e

3 has arrived Perspective Given its position as the sixth largest bank in Pakistan, the long posited theme for has been one of eventual valuation convergence to the Big-5, similar to what has occurred for and vis-à-vis (17% discount now vs. 46% discount in CY7). It has been a long time coming, but we believe has finally arrived. With CASA (9MCY15: 71% vs. 61% in CY1), coverage (9MCY15: 84% vs. 55% in 9MCY1) and ROE (9MCY15: 18.8% vs. Big-5 ex. avg: 2.2%) converging to the top bank levels, and CAR catching up (9MCY15: 14.1%), s valuation discount (5 on P/B to Big-5 ex. ) is not justified. Unlike the other large banks that have been operating for several decades, with less than 2yrs of existence, had to grow at a much quicker rate to catch up to the Big-5. There was, therefore, an understandable compromise on Balance Sheet quality. Now, however, is close to achieving its 7 branches target, which is coinciding with an improvement in Balance Sheet metrics. s NIMs are projected to average 4.1% in CY15-19F vs. 4.3% for the Big-5 Provisioning coverage is 83% vs. 9 for the Big-5. Coverage was 55% in CY1. CASA has improved to 71% vs. 53% in CY9. Big-5 average is 75%. C/I is a high 61% vs. 44% for Big-5 but 9%YoY admin expense growth in 9MCY15 indicates this is now a focus area Tier-I ROE for CY15F-19F to average 18.3% vs. 21.9% for the Big-5 (ex-). While is more leveraged (15.4x vs. 9.6x for Big-5), its CAR is now above 14% vs. 18.4% for Big-5. We flag that s CAR is similar to s CAR. Asset base approaching the PkR1tn mark while capital strength has improved PkRbn PkRbn 2,5 2, 2 25% 2, 1, ,5 1, 5 1, % 1 5% BAHL HMB AKBL MEBL F BAHL HMB F AKBL MEBL Assets Branches (Rhs) Total equity CAR (Rhs) CASA & NIMs converging to top-tier level and Coverage has significantly improved 6% 5% 4% 3% 2% 1% % 1 5% NIMs HMB AKBL CASA (Rhs) F BAHL MEBL NPL Ratio BAHL MEBL AKBL Coverage (Rhs) HMB F 3 P a g e

4 We see high C/I as an opportunity HMB BAHL Cost/Income AKBL MEBL F Staff/Br. (Rhs) Underappreciated deposit franchise ROE justifies a higher P/B multiple (9MCY15) (PBV-x) ROE (%) has significantly improved its CASA over time (71.1% in Sep 15 vs. 61. in CY1), surpassing, and in the process, and thereby narrowing its funding costs. As a result, s NIMs are now comparable to the Big-5. While management aims to increase CASA to 8 in the long run, we conservatively expect it to remain in the 7-71% range over the next 5yrs. This still represents an excellent deposit franchise in our view; which we believe the market is not yet appreciating s market cap/deposits is 7.9% vs. 17.8% for the Big-5. F BAHL MEBL AKBL HMB CASA has significantly improved 76% 72% 68% 64% 6 56% 52% CY1A CY11A CY12A CY13A CY14A CY15F CY16F CY17F CASA & IMS Research KIBOR (RHS) 14% 12% 1 8% 6% 4% 2% Higher coverage to contain credit costs but the market is not yet appreciating the deposit franchise Mkt Cap/Deposit 2 15% 1 5% Medium Small Big-5 Over the last few years, has addressed a sore point of relatively weak asset quality underpinned by low provisioning coverage. In this regard, the NPL ratio has come off to 5.8% vs. 9.1% in 3QCY1 while coverage is now more than 82% vs. 55% in 9MCY1. We attribute this change to (i) focus on corporate business over last few years, (ii) implementation of more stringent lending criteria and (iii) general economic uptick. Going forward, while intends to expand its SME and Retail footprint, adequate coverage together with a supportive macro backdrop suggests incremental credit costs are likely to be limited. 4 P a g e

5 Asset quality has significantly improved PkR mn 3, 25, 2, 15, 1, 5, - 3QCY1 1QCY11 3QCY11 1QCY12 3QCY12 1QCY13 3QCY13 1QCY14 3QCY14 1QCY15 3QCY15 12% 1 8% 6% 4% 2% which will limit medium-term credit costs CY1 CY11 CY12 CY13 CY14 CY15F 1.2% 1..8%.6%.4%.2%. NPL Stock NPL Ratio (Rhs) Coverage Credit cost (Rhs) & IMS Research We see high C/I as an opportunity High administrative costs have historically been a drag for where Cost/Income has averaged almost 65% over last 1yrs. However, there are signs of improvement where (i) 9MCY15 costs are up a contained 9%YoY, and (ii) branch expansion phase is largely over. With the bank primed for scale efficiencies staff/branch is down to 18 vs. 4+ in CY7 we expect C/I to trend lower over the medium to longer term. Potential for positive surprises exist with our 5yr admin expense CAGR at conservative 1. CAR: No longer a major differentiating factor s CAR registered at 14.1% in 3QCY15 (vs. 11.5% in 3QCY14), supported by influx of US$67mn investment by International Finance Corp. (IFC) last year. To recall, IFC acquired a 15% equity stake in in 214 (new shares PkR28/share), with an option (expired in Dec 15 and not exercised) to purchase a further 5% stake. s CAR is now 3.8% higher than the minimum requirement for CY15. While may require further capital to fund long-term Balance Sheet growth, we believe current capital levels are sufficient to sustain both growth and dividends over the next 3-4yrs. CAR sufficient to fund medium-term growth CAR Min CAR CY18F 12.4 CY17F 12.19% CY % CY19F 12.63% % % 11.3% 1.7% 1.3% CY16F 12.58% CY % CY15F 13.35% while also enabling consistent dividends CY15F CY16F CY17F CY18F CY19F DPS Payout Ratio (Rhs) 52% 51% 5 49% 48% 47% 46% ROE converging to Big-5 levels has seen its ROE converge to the Big-5 levels over the last few years. This is a function of (i) ROE normalization for the Big-5 in part due to regulatory steps to curb spreads and (ii) s own turnaround on the back of much-improved asset quality (incl. end to Warid impairment) and CASA uptick. 5 P a g e

6 We believe Tier-I ROE in the high teens is the new normal for which compares favorably to last 1yr ROE of 15%-16%. In spite of this, trades at a 5 discount to the Big-5 on P/B (ex-). With capital no longer an imminent concern and several Balance Sheet metrics (e.g. CASA, Coverage) now resembling the Big-5, we believe is strongly placed to witness a valuation catch-up. ROE continues to converge to top-tier levels CY8 CY9 CY1 CY11 CY12 CY13 CY14 CY15F CY16F CY17F CY18F CY19F meanwhile valuation discount is at unjustifiable level PBV (x) Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Big-5 Big-5 Ex. Big-5 - ex 6 P a g e

7 Plugged into the new business cycle A new business cycle has commenced with greater credit offtake a likely corollary; LT private sector loans growth has already accelerated to 2YoY. With the Big-5 eyeing big-ticket project finance (where will also be involved) but still too timid to aggressively venture into lower strata, has an open field to further entrench its strong positioning in the SME/Commercial and Retail segments. At the same time, medium-term Islamic banking prospects remain exciting where we flag: (i) win-win for Islamic financing of GoP projects (Sukuks) and (ii) potential dedicated Islamic banking subsidiary ala. Credit cycle dynamics Pickup in underlying business activity has started to reflect in systemic loan growth; while trade finance/working capital are understandably subdued in conjunction with the commodity bear run, LT fixed investment loans are growing at 2YoY. There is discernible pickup in SME loans (up 6.3%YoY) as well as Retail loans (especially auto financing: up 35.1%YoY). As a result, once the commodity markets stabilize, the headline loan growth number is expected to enter double-digits and accelerate thereon. In this regard, our channel checks indicate systemic loan growth expectations of 12%YoY in CY16F followed up by 15%-17%YoY in CY17-18F. SME/Commercial financing: right place, right time SME/Commercial exposure for is not new with this broader segment already accounting for more than 2 of the bank s loan book. Reducing credit costs over the last 7-8yrs (from 15bps to 5bps) for indicates risks within this segment can be managed even as, from a historical viewpoint, this has been a difficult sector (systemic NPL ratio for SME: 31.6%). With larger banks still generally focused on the corporate segment, s aspirations in the high-yielding SME/Commercial segment (plans to increase loan book share to 27% in the medium-term) can help shore up NIMs if the interest rate environment remains subdued. Superior exposure in SME/comm paves way for further uptick SME financing has potential to surprise PkR Mn 3, 25, 2, 15, 1, 5, - 9.6% 9.2% 8.8% 8.4% % Source: SBP Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan'14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan'15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 SME (Lhs) SME/Total Pvt. Credit As per our talks with management, the bank intends to leverage its existing corporate relationships by targeting smaller businesses associated with the vertical supply chain of major companies. This would allow the bank to capitalize on the untapped and growing demand for advances from smaller businesses, as the benefits of the macroeconomic uptick (e.g. CPEC) trickle down. 7 P a g e

8 SME/Commercial segment snapshot SMEDA defines SMEs as having (i) up to 25 employees, (ii) paid-up capital of PkR25mn, (iii) annual sales up to PkR25mn. Within individual banks, the SME/Commercial segments are often overlapping with no clear demarcation. SME sector in Pakistan has a 3 contribution to GDP and accounts for almost 8 of the non-agriculture labor force. However, its share in private sector credit is less than 1, the gap plugged in by the informal sector, often at exorbitant interest rates. SME NPLs account for almost 14% of systemic NPLs while the inflection ratio within this segment is more than 3. Poor asset quality, together with information asymmetry which adds to costs for screening, processing etc. leads to banks generally ignoring the SME/Commercial segment. SMEs are dominated by Trading and Manufacturing concerns, with the bulk of borrowers availing working capital finance up to PkR3mn. With Pakistan requiring 7% GDP growth to absorb 1.7mn people entering the workforce each year, small businesses are likely to mushroom, particularly as we expect urban sector growth to outpace rural growth over the next few years. Retail is exciting too! Growth in consumer finance has bottomed out, punctuated by a significant spike in auto financing (up 35%YoY). However, systemic consumer finance accounts for just 8.5% of total loans, still some way short of their 17% share in CY7; while household debt/gdp is a paltry 2.7. Considering a soft interest rate environment is expected to persist, banks should devote increasing attention to high-yielding and underpenetrated segment where; after auto finance, unsecured products (personal loans/credit cards) have immense growth potential. Presence of a centralized Credit Information Bureau (CIB) this time around implies an implosion on the consumer side ala 28 is unlikely, going forward, in our view. In s case, the consumer segment accounts for 5% of its loan book vs. estimated 2 of loans back in CY7 when was known as a consumer bank. Given management is interested in SMEs, which has a higher inflection rate than Consumer (1.4%), we see the bank increasing its retail exposure in a bid to shore up NIMs. Banking sector s credit to Consumers has bottomed out where auto financing is leading the way PkR mn 12, 1, 8, 8. 6, 4. 4,. Jul-6 Mar-7 Nov-7 Jul-8 Mar-9 Nov-9 Jul-1 Mar-11 Nov-11 July-12 Mar-13 Consumer loan/private sector loan Nov-13 July-14 Mar-15 Nov-15 2, Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 July-12 Jan-13 July-13 Jan-14 July-14 Jan-15 July-15 Car Financing 8 P a g e

9 CPEC can catalyze credit demand where LT loans are already growing at more than 2YoY GoP demand for Sukuks can see higher yields on the same CPEC can drive corporate demand As stated earlier, LT fixed investment loans are currently one of the fastest loan growth categories. This is a function of increasing industries entering an expansion phase: Officially announced cement sector expansions total 7.7mn tons which accounts for 17% of current installed cement capacity. This dovetails with pickup in construction activities especially in the entertainment segment (e.g. malls). Consequent to the Auto Policy being formally announced, incumbents may opt for expansion while new foreign OEMs may also enter. Allied industries e.g. batteries/tires are already seeing expansions and new entrants. Sectors experiencing a slowdown e.g. Fertilizers are pursuing diversification especially in the broader Food sector. Some of the above are cognizant of CPEC-generated demand going forward. As energy/infrastructure projects directly under the CPEC umbrella achieve financial close (bulk likely to be financed by Chinese credit), ancillary credit demand should still result in a trickle-down impact for local banks. and Islamic financing can be a good fit has one of the largest Islamic banking networks in the country, with 157 local Islamic banking branches and an asset base of PkR116bn (7.7% market share; 14.7% share in s book). Islamic contribution to s total assets has reduced from 2 in CY12 on (i) maturing high-cost term deposits and (ii) lack of asset-side products particularly GoP-driven Sukuks. However, there are signs of change where: Islamic is participating in major projects such as the Sindh Engro Coal Mining (SECMC) while some major projects like the Diamer Bhasha dam and Karachi- Sukkur motorway will involve Islamic financing. The GoP has recently elongated its domestic borrowing duration with PIBs (conventional banks) preferred over Sukuks due to lack of viable underlying assets. With CPEC coming into play, this can change and be a win-win with new Sukuks likely to yield less than PIBs (positive for GoP) but more than current pricing for current Sukuks (KIBOR or lower; positive for Islamic banks). Other than the corporate side, the SBP believes that small businesses are more inclined towards Islamic banking products due to religious factors. is one of the few banks that has the potential to tie-in its SME and Islamic propositions. SBP push on Islamic banking is evident; the central bank has eased initial MCR for Islamic banks to PkR6bn (vs. PkR1bn previously). Major banks such as have already set up a separate Islamic entity and can potentially follow suit (separation of conventional/islamic businesses at is at least a decade-old aspiration). Sukuks have the potential to catchup with PIBs touching saturation point 36% 3 24% 18% Contribution to GoP domestic debt 12% 6% Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13R Sukuk contribution Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14R Aug-14 PIBs contribution Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 9 P a g e

10 The timing is right Perspective missed out in the last macro bull cycle (CY3-CY7) due to being in expansion mode and then faced a prolonged period of tough macros subsequently. It now enters a higher-growth cycle having completed its newest round of branch expansion (649 branches; 75 of which were added after CY13 and are hitting profitability now). This means s profits should be able to withstand pressures from low interest rates/pib re-pricing where our CY16F/17F EPS projections are 7%/5% higher than consensus estimates. positive earnings surprises can come into play via (i) one off gains from Warid deal, (ii) capital gains on investments, and (iii) earlier than expected materialization of cost efficiencies. : per branch profits are accelerating while others lag behind % 2 15% PBT Ex. CG/Br. (PkRmn) % CY8 CY9 CY1 CY11 CY12 CY13 CY14 Growth in br. (Rhs) PBT Ex. CG/branch9MCY15. CY11 CY12 CY13 CY14 9MCY15 MEBL F BAHL Room to realize scale efficiencies as staff/branch comes off MEBL BAHL AKBL Admin Cost/Branch (PkRmn) HMB F Ahead of the curve s total branches were last reported at 649 (up 7%YoY), in line with the bank s plan to take the network to 7 branches by 217. In this regard, the branch network has doubled from CY9 levels (321 branches) with 65 added in CY12, 13 in CY13 and 74 in CY14. We note the following: Bulk of s branch additions took place in CY13/14, and the bank is not planning to embark on another expansion phase. Considering branches typically take about 1.5yrs to become profitable, the impact is becoming visible now with normalized pre-tax profit per branch at a 1yr high (PkR17.8mn/branch). AKBL MEBL Staff/Branch BAHL HMB F 1 P a g e

11 Positive earnings surprises can occur on (i) Mobilink-Warid merger, (ii) capital gain realization, and (iii) earlier than expected cost efficiencies Several medium-sized banks are still in the midst of network expansion, while is consolidating. Current staff/branch for at 18 is broadly at par with medium-sized peers but is expected to continue converging towards the Big-5 average (1) going forward. We believe now has the necessary platform via its branch network and balance sheet size to start realizing scale economies. Per branch profitability is significantly up and is headed for all-time highs (PkR2mn+). With medium-sized peers still growing infrastructure and some larger banks held back by deceleration in international operations, has the potential to outperform over our investment horizon. Earnings estimates posted record-high NPAT of PkR2.31bn (EPS: PkR1.45) in 3QCY15 vs. NPAT of PkR1.46bn (fully-diluted EPS: PkR.92) in 3QCY14, up by 58%YoY, with the bank not yet touching its unrealized capital gains backlog. As a result, s 9MCY15 NPAT clocked in at PkR5.98bn (EPS: PkR3.76), up an impressive 5YoY (pre-tax: up 67%YoY). Going forward, we forecast EPS of PkR5.2/5.1/5.31 for CY15/16/17F where our estimates are 5%-7% higher than consensus. Positive earnings surprises can occur on: Mobilink-Warid merger has an 8.76% stake (319mn) shares in Warid Telecom costing PkR4.3bn but written down to zero following periodic impairment. We now understand that Vimpelcom/GTH (sponsors of Mobilink Telecom) will acquire 1 of Warid in exchange for a 15% stake in Mobilink. Details indicate a Mobilink-Warid merger will be sought in 6months, with Dhabi Group to have a 15% stake in the merged entity. Assuming will be left with a 1.3% stake (8.76% * 15%) in Mobilink post-merger, we value this stake in the PkR.5- PkR1./share range (pre-tax) based on (i) last reported BVPS of Warid and (ii) EV/EBITDA method. It is unclear if gains (if any) are routed through P&L (impairment reversal) or directly added to equity. Capital gains PIBs & equities realized capital gains of PkR1.4bn in 9MCY15, more than double that realized in 9MCY14 (PkR63mn). Even so, s remaining pre-tax unrealized capital gains backlog on AFS securities still stands at PkR1.6bn (13.4% of assets; 2.6% of equity). Our capital gains projections for full-year CY15F/16F/17F stand at PkR2.7bn/PkR1.86/PkR1.77bn, where higher than expected gains will result in positive earnings surprises. Further upside from capital gains remains a possibility PkR bn 12, Warid stake partly sold 1, 8, 6, 4, 2, - 16% 14% 12% 1 8% 6% 4% 2% CY7A CY8A CY9A CY1A CY11A CY12A CY13A CY14A CY15F CY16F CY17F CY18F CY19F NPAT CG/PPI (RHS) 11 P a g e

12 Less susceptible to foreign sell-off While the big-5 ex- are facing the heat with consistent foreign sell off, has managed to hold ground. Price performance suggests that has outperformed the larger banks (FYTD: up 15.6% vs. Big-5 ex- 12.5% down) on account of relatively less foreign shareholders exposure (~6% ex. associate companies and sponsors). We believe that lower susceptibility to foreign sell-off could allow to outperform peers considering the prevalence of persistent negative foreign investors sentiment; the banking sector (likely concentrated in the larger banks). has outperformed peers FYTD backed by less exposure of foreign investors (1) (2) (3) (3.84) (9.98) (15.47) (15.28) (25.55) Valuation currently trades at a CY16F P/B of.83x and P/E of 5.74x, where our Dec 16 TP of PkR35.2/share offers an upside of 2.3% (Total return: 28.9%) from its last closing price of PkR29.3/share. We have valued using a blend of justified P/B (5), DDDM (25%), DDM (15%), and justified P/E (1). Given (i) asset mix shift in favor of advances from zero weighted investment in government securities, and (ii) increase in CAR requirement (from 1.25% in CY15F to 12.5% in CY19F), we highlight the growing importance of CAR in the valuation equation by employing the Distributable Dividend Discount Model (DDDM). DDDM is a measure of the dividend paying potential of a bank to its shareholders (with a condition of not more than 1 payout) as it calculates the present value of the distributable dividends based on minimum capital adequacy requirement set forth by the SBP. The terminal value is calculated using the justified P/B at terminal year and sustainable growth rate. DDDM Model CY15F CY16F CY17F CY18F CY19F NPAT (PkRMn) 7,963 8,98 8,43 9,695 11,17 Projected Dividends 3,969 3,969 4,365 4,762 5,556 Unappropriated profit required 14 6,581 13,618 18,751 24,842 Add: Beginning unappropriated profit 9,613 12,833 15,367 18,167 21,582 Statutory reserve 1,593 1,62 1,686 1,939 2,23 Distributable Dividend 7,963 8,98 8,43 7,172 5,554 Payout ratio % 5 PV of distributable dividend 8,98 7,25 5,239 3,468 Terminal justified P/B 1.19 Terminal year equity value (PkR mn) 67,741.7 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 DEC-15 Jan-16 & IMS Research FIPI Flows in Banks (US$mn) Est. Sustainable Growth Rate 9.3% Est. Cost of Equity 17. PV of terminal value 42,295 NPV of equity using DDDM 66,35 Number of shares (mn) 1,587 Fair value per share (PkR) P a g e

13 Method (Dec'16) TP (PkR) Weight Weighted Avg TP (PkR P/B (CY16F) P/E (CY16F) DDM % 5.7 DDDM % 1.44 Blended TP Target Price sensitivity to changes in base case PIB yields Downsides Base.5% -se 1% -se Pessi mistic Upsides % +se 1% +se Optimistic 13 P a g e

14 Risks Economic risk Though Pakistan seems to be on track to achieve a GDP growth above 5% over the medium term, it still continues to face economic risks, including: (i) structural inefficiencies, (ii) delays in addressing energy deficiency, (iii) bleak export performance, and (iv) stressed fiscal deficit on account of low tax-to-gdp. Failure to address these issues might have a detrimental impact on economic indicators and therefore on the banking system. Regulatory risk We believe that the regulatory risks have been played out, with no further cut in DR and move from SBP to trim spreads likely in the medium term. However, in the long run, we flag possibility of an increase in MCR, which might lead to further consolidation in the sector. Moreover, we believe that the medium and the smaller banks will be under pressure to ensure CAR levels above the rising requirement under BASEL-III (12.5% by CY19F vs. 1.25% in CY15). If misses our earnings estimates, it may have to cut dividends and/or raise additional capital over the medium to long term. Political risk Political uncertainty has significantly eased off ever since PTI/TUQ sit-ins took place in 214. However, concerns still prevail over sustainability of law and order situation in Karachi, impact on foreign policy following US elections, and geopolitical development in the region. Therefore, economic prospects in the medium term rely majorly on the successful completion of current PML-N government s term. Reinvestment risk, though with the second lowest IDR, has the second highest exposure in PIBs, thus making its earnings more susceptible to reinvestment risk. That said, we believe sufficient capital gains backlog can mitigate this risk to some extent in the medium term. - 2nd highest PIBs exposure despite 2nd lowest IDR IDR PIBs/Investment 14 P a g e

15 Financial Snapshot CY14A CY15F CY16F CY17F CY18F Mark-up earned 55,378 6,574 63,425 71,566 81,527 Mark-up expensed 33,55 32,22 34,47 39,643 44,712 Net Mark-up 21,873 28,372 29,378 31,923 36,815 Total Provisions 1,534 1,518 1,734 2,221 3,62 Net mark-up after provision 2,34 26,854 27,644 29,72 33,754 Fee, comm. and brokerage income 3,12 4,43 4,984 5,67 6,252 Dividend income Income from dealing in FX 2,43 1,655 1,82 1,957 2,14 Capital gains 1,218 2,71 1,864 1,771 1,55 Other income 2, Total non mark-up income 9,36 9,446 1,68 1,855 11,495 Total Income 29,376 36,299 37,712 4,557 45,248 Administrative expenses 2,261 22,65 24,248 26,516 29,188 NPBT 8,514 13,512 12,715 13,264 15,254 NPAT 5,641 7,963 8,98 8,43 9,695 Key Ratios CY14A CY15F CY16F CY17F CY18F EPS (PkR) P/B Tier I (x) BVS (PkR) P/B (x) PER (x) Tier I to Assets 5.1% 4.9% 4.9% Loan to Deposit % % 49.9% NIMs 4.2% 4.2% 3.8% 3.9% 4.1% Loan growth 11.4% % 14.3% Deposit growth 15.3% % 12.7% Cost/Income 67.5% 6.3% 63.4% 63.8% 62.1% ROE (Tier-I) 17.1% 19.8% 18.1% 17.2% 18. DPS (PkR) Dividend yield 6.8% 8.5% 8.5% 9.4% 1.2% Payout Ratio 56.3% CY14A CY15F CY16F CY17F CY18F Cash and balances 5,516 54,36 62,248 7,392 8,974 Balances with other banks 12,332 1,459 12,342 13,797 15,964 Lending to fin. institutions 18,313 37,48 31,329 26,62 2,526 Investments 324,319 4, , ,25 487,486 Advances 29, , ,16 417,88 476,523 Other Assets 31,311 32,686 31,83 32,194 34,78 Fixed Assets 15,74 16,997 18,38 18,396 19,385 Total Assets 743, ,53 948,16 1,19,954 1,135,638 Bills payable 11,758 12,699 13,651 14,675 15,776 Borrowings from fin. institutions 55, ,274 15,633 73,943 7,246 Deposits and Other Accounts 65, , , , ,877 Sub-ordinated loans 9,987 1, 8,333 5, 1, Other Liabilities 14,515 15,966 17,164 18,451 19,835 Deferred Liabilities 853 1,92 1,44 1,8 81 Total Liabilities 698,39 819,51 892,1 96,384 1,71,543 Net Assets 44,819 53,478 56,6 59,57 64,95 Share Capital 15,872 15,872 15,872 15,872 15,872 Reserves 12,338 13,931 15,55 17,236 19,175 Unappropriated Profits 9,613 12,833 15,367 18,167 21,582 Sub Total 37,824 42,636 46,79 51,276 56,63 Non Controlling Interest 37,824 42,636 46,79 51,276 56,63 Surplus on Revaluation of assets 6,995 1,843 9,216 8,295 7,465 Total Equity 44,819 53,478 56,6 59,57 64,95 Forward P/E Band (x) (PkR) Jan-7 Oct-8 P/B Band (x) (PkR) Jan-7 Oct-8 Aug-1 Aug-1 May-12 May-12 Mar-14 Mar-14 Jan-16 Jan-16 (x) (x) P a g e

16 I, Abdul Ghani Fatani, certify that the views expressed in the report reflect my personal views about the subject securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations made in this report. I further certify that I do not have any beneficial holding of the specific securities that I have recommendations on in this report. Ratings Guide Buy Upside more than 2 Accumulate Upside more than 1 but less than or equal to 2 Neutral Upside from to 1; Downside from to -1 Reduce Downside more than 1 but less than or equal to 2 Sell Downside more than 2 Disclaimer: Intermarket Securities Limited has produced this report for private circulation only. The information, opinions and estimates herein are not direct at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject Intermarket Securities Limited to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable where such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness and correctness. This report makes use of forward looking statements that are based on assumptions made and information currently available to us and those are subject to certain risks and uncertainties that could cause the actual results to differ materially. No part of the compensation of the author(s) of this report is related to the specific recommendations or views contained in this report. This report is not a solicitation or any offer to buy or sell any of the securities mentioned herein. It is meant for information purposes only and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this report, you should consider whether it is suitable for your particular circumstances and, if appropriate, see professional advice. Neither Intermarket Securities Limited nor any of its affiliates or any other person associated with the company directly or indirectly accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. Subject to any applicable law and regulations, Intermarket Securities Limited, its affiliates or group companies or individuals connected with Intermarket Securities Limited directly or indirectly may have used the information contained herein before publication and may have positions in, or may from time to time purchase or sell or have a material interest in any of the securities mentioned or may currently or in future have or have had a relationship with, or may provide investment banking, capital markets and/or other services to, the entities mentioned herein, their advisors and/or any other connected parties. This document is being distributed in the United States solely to major institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934, and may not be furnished to any other person in the United States. Each US person that receives this report by its acceptance thereof represents and agrees that it: is a major institutional investor as so defined, and understands the whole document. Investors should contact their Intermarket Securities representative if they have questions concerning this report. 16 P a g e