National Bank of Pakistan

Transcription

1 Company Coverage National Bank of Pakistan PKR 261 (KSE 10,590) Recommendation: LONG Target Price Rs January 2007 KATS Code: NBP Bloomberg: NBP PA Volatilty: HIGH Upside Potential +30.2% NBP STOCK DATA Free Float 20.02% 52 week high week low Exchange Rate (US $) Index Weightage 8.63% Average Turnover (mn) Mkt Cap (Rs) (bn) Issued Shares (mn) Banks Rating AAA/A-1+ No. of Branches 1242 NBP STOCK PERFORMANCE 6.0% 4.0% 2.0% -2.0% -4.0% -6.0% NBP Rel to KSE 100 NBP PRICE PERFORMANCE NBP KSE 100 1M 3M YTD Absolute (%) 2.65% -8.80% 27.41% Absolute (PKR) Rel. Index -0.02% -0.06% 0.12% HIGHLIGHTS NBP remains the largest bank in terms of assets, deposits and advances NBP has branches in 18 of Pakistan s export and import trade partners The bank has also ventured into micro-financing under the President s Rozgar scheme 9.14% of NBP s shareholding is held by foreigners Is likely to see a healthy 12.4% growth in advances this year and 10% in CY08 The divestment of NBP s stake in Al Jazira is likely to bring an inflow of Rs per share NBP s GDR is expected this year increasing its free float and bringing it onto the International radar NIT likely to gain from the sale of PICIC and maintain its high dividend policy translating into Rs.2.88 per share for NBP Low LDR of 0.62 against industry average of 0.71 states growth potential Is likely to see 25.5% growth this year Is currently the cheapest bank in comparison to UBL and MCB Bank Remains one of the cheapest banks in the region with high growth momentum and higher spreads EARNINGS DATA 2004A 2005A 2006F 2007F 2008F Net Profit Before Tax Rs. (bn) Net Profit After Tax Rs. (bn) Earning per Share Rs Earnings Growth % 22.8% 108.4% 25.5% 13.0% 10.3% Book Value per Share Rs P/E P/BV Dividend Rs Dividend yield % 0.42% 0.80% 1.05% 1.34% 1.72% Loan - Deposit Ratio Source: SAAO Research Completed - Distributed on 17 January 2007 Please refer to Important Disclaimer at the end of the report

2 BACKGROUND National Bank of Pakistan maintains its position as Pakistan's premier bank determined to set higher standards of achievements. It is still a Public Sector entity and now remains the only major commercial Bank in the public sector. It acts as a major business partner to the Government of Pakistan with special emphasis on fostering Pakistan's economic growth. Another considerable advantage that NBP boasts is its branch operations in 18 of Pakistan s export and import trade partners. The bank by the end of CY05 had a total of 1,242 branches with an employee count of 13,824. COMPETITION Currently the Bank enjoys the top spot in its league of Commercial banks operating in the country. In terms of total asset size, deposit base and branch network NBP is ahead of its four main competitors namingly MCB Bank Limited, United Bank Limited, Habib Bank Limited and Allied Bank Limited. But in the post privatization scenario where all of the above mentioned four banks have been privatized and have gone through changes in corporate governance and restructuring of their loan portfolios, they tend to pose an eminent threat in shrinking NBP s pie. In the past 6 years the Government has dissolved its ownership in the four large banks leaving NBP as the only bank for the Government allowing it to tap funds at a lower cost in contrast CHALLENGES to its peers. The bank faces a number of challenges in areas such as the development of personnel, technology and internal controls. For the development of human resources NBP has taken it as a policy initiative of recruiting well qualified MBA s and has placed emphasis on improving the merit culture based on performance. On the information technology side the bank has expanded its ATM network to over a 100 branches and has also decided to acquire a core banking software which would further enhance the banks operational efficiency. Although NBP continues to focus on the corporate banking front, a lot can be achieved in the development of products for the consumer segment, this market has grown tremendously in the past five years due to a rising trend in disposable income and cheaper availability of funds. Although NBP has a secured consumer product by the name of Advance Salary which allows Government employees maintaining their salary accounts at NBP to draw up to fifteen times there salary, but more needs to be done to excel in the consumer banking arena to tap into higher spreads on consumer finances which have a floating base rate mechanism like its competitor UBL has been able to and MCB Bank is aggressively targeting at the moment. The introduction of the President s Rozgar Scheme will be a test for NBP in testing its quality against advances to small borrowers with risky or no credit profiles. Although risky but with proper checks and balances in place coupled with a strong interactive role the bank can reap extraordinary benefits from this product range with little or no competition. OWNERSHIP STRUCTURE According to the final accounts of CY05 75% of banks shares are held with the State Bank of Pakistan which represents the governments holding in the bank, although another important factor worth mentioning is the 9.14% holding of foreign institutions in the bank showing keen interest of global fund managers in the bank, this feature is very rare in the case of Pakistani banks. With an estimated free float of 20.02% and a daily average turnover of 11.45mn shares the stock qualifies from large foreign funds perspective which complain of depth and limited free float of equities in Pakistan. Considering the upcoming GDR of NBP this free float is likely to increase. Page No. 2 January ' 07

3 FUTURE OUTLOOK The list below summarizes the areas which will continue to contribute towards the earnings momentum of the bank: Credit off Take/Interest Rate Scenario The interest rates have seen a roller coaster ride in the past five years where they were reduced from double digits to 3.5% in FY01 as part of the Governments agenda for liberalizing the economy. The lower interest rates prevalent between FY03 to FY05 coupled with a healthy GDP growth created a genuine robust demand for credit off take. An outcome of this sudden demand was the increase in per capita income and consumption which led to a shortage of products and services which was witnessed by expansions in sectors like textile, cements, auto-assemblers, consumer durables and food and dairy etc. All of this spending with a healthy monetary M2 growth led to higher inflation which soared to double digits in the first 4 month of CY05. In order to curb the abundant liquidity situation the SBP initiated its monetary tightening stance which led to a hike in rates by almost 580 bps to curb inflation by the that posted a scenario where most of the advances which were floaters witnessed a hike while the deposit rates throughout the banking sector remained sluggish specially for larger banks, thus creating a highly comfortable position for banks where banks NII (Net Interest Income) experienced an average of % spread that resulted in exceptional profits booked. by banks of which NBP being the largest bank in terms of advances gained a lot. More recently the monetary tightening has come up with effect with inflation tapering off and the economy showing signs of sluggishness. This build up is likely to depict a situation where by the credit off take will be slower than yesteryears. Going forward genuine demand for credit will be witnessed as the economy is likely to remain on the track of growth. Moving forward once inflationary pressures are released on the back of lower oil prices and effective controlling of hoarding activities in food products, the SBP would likely cut rates in the latter half of CY07, so that the economy may not experience a business trough whereby the cost of borrowing will hamper Pakistan s ability to be competitive. From the perspective of NBP it will gain from a healthy 12.4% in advances in CY06 and 10% in CY07 due to a higher base effect and its target market which remains the GoP for its infrastructural projects requirement, the need for working capital on SME, advances to the large cap corporate clientele and new product markets such as Rozgar finance. Bank Al Jazira As part of NBP s policy of expanding internationally, it has recently gained access to the Saudi market which has relaxed its rules for international banks to open its branches in the kingdom. One hurdle that NBP faces in entering the Saudi market is the 5.83% stake it holds in Bank Al Jazira which eventually has to be offloaded. Though the management has shown its unanimous consent towards this divestment it still faces the task of finding a buyer as negotiations continue with financial institutions which was conveyed in a notification to the exchange(s). Although not much has been reported since then but our forecasts suggest that this divestment would be postponed to a later date where a matching buyer(s) is found and the Saudi market regains from its depression. Page No. 3 January ' 07

4 Issuance of NBP s GDR After the successful launch of OGDCL s GDR (Global Depository Receipts) the Government has unveiled its plans to launch further GDR s of other government entities to attract portfolio investment to finance fiscal imbalances coupled with increased global investor awareness for domestic equities. The GDR s would be issued for one IPP (Independent Power Producer) company KAPCO and three banks namingly Habib Bank, United Bank and NBP which we foresee will all be completed by end of CY07. NBP s GDR would project the bank on the radar of global fund managers and unlike MCB would have no dilution effect on the earnings of the bank as the government is most likely to divest its stake in the bank rather than issuing fresh capital which will also increase the free float of the scrip. National Investment Trust (NIT) In line with the Government view of privatizing state owned entities, the Government had previously set a deadline of 30 June 2005 for the sale which has now been extended. The present situation is such that 19 SOQ (Statement of Qualification) have been received for its sale. The Governments agenda is to divest NIT into six parts, of which three will go to the largest unit holders namingly National Bank of Pakistan with mn units, Faysal Bank Limited with 167 mn units and Bank of Punjab with mn units while rest of the fund will be divided into three equal chunks and sold off. Although the privatization of NIT will have to be channeled through the income statement it is likely to be categorized as an one time capital gain. With respect to the latest ongoing M&A activity in the banking sector the news of NIB Banks acquisition of PICIC instigates the capital gains for NIT which will eventually be able to continue its high dividend stream for this year generating a healthy Rs.2.88 per share for NBP. Low Loans Deposits Ratio To foresee the future potential of the bank an important measure is the Loans Deposits ratio which in contrast to the banking sector is among the lowest. As reflected by the results in Sep 06 where the bank shows an LDR of 0.62 which shows tremendous potential for growing advances in the future. The banking sector as a whole has a LDR as of Sep 06 is at Although looking at NBP s historical LDR it is evident that the bank is on the conservative side and is not venturing into high risk areas like other mid sized banks and remains focused towards corporate banking, Small and Medium Enterprises (SME) and low risk consumer products, but we foresee that in light with a healthy credit off take and the venturing into the Rozgar Scheme the banks LDR might reach 0.65 in the years to come and stay within the band. Asset Quality To comment on the Banks asset profiling emphasis should be laid upon the two main components in its Total Assets base, its Advances and its Investments. On the Advances front as of CY05 the bank has a well diversified loan book comprising of 53% to the corporate sector, 4.97% to the agriculture sector. Within the corporate sector the banks exposure to Textiles and allied industry is at 18.87% against the industry average of peer comparative banks at 23% which shows the banks prudence in keeping a riske weighted diversified loan book. Onto the Investments front the bulk of NBP s investment portfolio which is equivalent to Rs bn or 58% is held in local and foreign Government instruments with little or no risk, of the rest 19% depicts its 5.83% stake held in the Saudi Bank Al Jazira and 10.5% comprises of NIT units. Page No. 4 January ' 07

5 VALUATION In evaluating a bank the generally acceptable valuation technique applied is the Price/Book Value methodology but due to the increased dependence and awareness of the KSE market participants on the Price/Earnings ratio we have also discussed this multiple. The application of any technique applied in isolation yields very little unless it is comparatively analyzed with other firms of its league, therefore, we have also used domestic valuations of NBP s peers and also highlighted on the regional valuations of other banks in the emerging markets of Asia as increased foreign participation in the Pakistani bourses is likely to shrink the gap between valuations in different markets. P/BV (x) Using this measure NBP currently trades at 2.2x P/BV06 and at 1.92 P/BV07 which is relatively lower against comparative banks like UBL currently trading at 3.3x P/BV06 and 2.4x P/BV07 and MCB Bank trading at 3.5x P/BV06 and 2.7 P/BV07 From a regional perspective Pakistani banks are the cheapest considering Pakistan s economic growth story, rising disposable incomes and lowest credit penetration coupled with the highest banking spreads in emerging Asian economies. Within the Sub-continent, Indian banks like HDFC (5.4x P/BV06 and 4.5x P/BV07) and ICICI (3.0x P/BV06 and 2.7x P/BV07) are trading at relatively higher multiples. Below is an illustration and table showing banks from Indonesia, Malaysia, India, Phillipines and China P/E (x) MCB UBL Price to Book (x) 06 NBP HDFC UTI ICICI BOCom BPI MayB BRI Price to Book (x) 07 HDFC UTI BOCom MCB ICICI BPI UBL NBP MayB BRI NBP vs Pakistani Banks P/BV06 P/BV07 P/E06 P/E07 MCB Bank Limited United Bank Limited National Bank of Pakistan NBP vs Banks in Emerging Asia HDFC Bank (India) ICICI Bank (India) UTI Bank (India) Bank Of Communication (China) Bank of Philipine Islands (Phillipines) Maybank (Malaysia) Bank Rakyat (Indonesia) Page No. 5 January ' 07

6 P/E Multiple Historically banks have traded at a discount in contrast to other leading blue chips at the KSE 100 benchmark index primarily because of a decade of high NPL s coupled with low profitability and a meager rise in credit off take, but the last five years have seen exponential growth in profitability pretested with lower NPL s having a ripple effect on the growth of the market capitalization which has increased the weightage of banks and reduced the discount at which banks were traded in the past. Currently, a lot of smaller and mid-sized banks are trading at higher multiples due to the M&A (Mergers & Acquisitions) activity going on with keen foreign interest developing in local banks with Standard Chartered taking over Union Bank at almost 5x P/BV, SAMBA s injection of $100mn in Crescent Commercial Bank, ABN Amro interest in Prime Commercial Bank and the announcement of NIB Bank in acquiring PICIC & PICIC Commercial Bank. Domestically, NBP which is the largest bank in the country is one of the few banks which is trading at a single-digit multiple at 9.88x P/E 06 and 8.58x P/E 07 whilst MCB Bank is trading at 12.67x P/E 06 and 10x P/E 07 and UBL is trading at 11x P/E 06 and 9x P/E 07, clearly stating that NBP is being offered at a discount. On the regional front once again local banks are the cheapest as banks in India are trading at an average multiple of 20.5x P/E 06 and 17.8x P/E 07 along with Chinese banks trading at a 20x P/E 06 and 18x P/E 07, banks in the Far Eastern Region trading at 16x P/E 06 and P/E 07. Price to Earnings (x) 06 Price to Earnings (x) MCB UBL NBP HDFC ICICI UTI BOCom BPI MayB BRI MCB UBL NBP HDFC BOCom ICICI UTI BPI MayB BRI Fair Value In determining a fair value for NBP we have used 2.5x P/BV on expected book value 07 as a possible indicator of its price at Rs Looking at the 3 years historical trend of local banks and the inability of buyers and lack of depth in the market to sustain at higher multiples we have chosen 2.5x book as a benchmark in determining the fair value. Although a number of banks are currently trading at higher P/BV multiples with lower growth projections. Below is a list of NBP s expected book value and price. Valuations CY06 CY07 CY08 Expected Book Value at the end of year x P/BV x P/BV x P/BV x P/BV x P/BV Page No. 6 January ' 07

7 Market Shares of Corporate & SME Loans NBP vs other Scheduled Banks Union, 2% Others, 52% MCB, 9% Market Shares of Assets UBL, 10% Alfalah, 7% Allied, 5% Askari, 4% Others, 36% NBP, 13% Faysal, 3% BOP, 3% Askari, 4% Alfalah, 4% MCB, 8% United, 10% Market Share of Consumer Banking Habib, 14% National, 16% MCB, 5% Askari, 3% BOP, 1% SCB, 6% Others, 16% Faysal, 6% National, 16% United, 9% Commercial Banks Deposit Break Up Union, 11% Alfalah, 11% Habib, 15% Alfalah, 8% Allied, 6% Askari, 4% Banks, 33% Remaining 28 MCB, 8% United, 10% Habib, 15% National, 16% Branch Network HBL NBL UBL MCB ABL BOP BAFL PICIC BAHL ACBL UNBL Page No. 7 January ' 07

8 Advances Growth Deposit Growth 25.0% 6.0% 2 5.0% 15.0% 4.0% 3.0% 1 2.0% 5.0% 1.0% 2005A 2006E 2007E 2008E -1.0% 2005A 2006E 2007E 2008E Spread Asset Growth 8.0% 8.0% 6.0% 7.0% 6.0% 4.0% 5.0% 4.0% 3.0% 2.0% 2.0% 1.0% 2005A 2006E 2007E 2008E Net Profit Growth Profit After Taxation A 2006E 2007E 2008E 0.0 Page No. 8 January ' 07

9 Return on Equity Dividend Yield 25.0% % 1 5.0% 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% Dividend Per Share Earning Per Share Total Assets Return on Assets % % 3.00% % 2.00% % % 0.50% % Page No. 9 January ' 07

10 Income Statement 2004A Rs. (bn) 2005A 2006E 2007E 2008E Rs. (bn) Rs. (bn) Rs. (bn) Rs. (bn) Interest Income Interest Expensed Net Interest Income Fee Income Other Income Non-Interest Income Total Operating Income Operating Expenses Profit Before Provisions Provisioning Profit Before Taxation Taxation Profit After Taxation Balance Sheet Paid up Capital Reserves & Surplus on Revaluation Total Equity Deposits Borrowing from financial institutions Other Liabilities Total Liabilities Advances Investments Other Yielding Assets Other Assets Total Assets Ratio Analysis 17 Jan Earning Per Share Dividend Per Share Book Value Per Share Price to Earnings Ratio Dividend Yield 0.4% 0.8% 1.1% 1.3% 1.7% Price to Book Value Return on Equity 13.2% 17.1% 22.1% 20.5% 21.3% Return on Assets 1.10% 2.20% 3.01% 3.21% 3.42% Average Yield on Lending 4.6% 8.5% 11.1% 11.25% 10.8% Average Return on Deposits 1.5% 2.9% 3.6% 4.20% 4.4% Interest Rate Spread 3.1% 5.6% 7.5% 7.1% 6.4% Interest Expensed/Interest Income 31.1% 30.7% 30.9% 31.4% 31.3% Loans-Deposit Ratio Page No. 10 January ' 07

11 SAAO CAPITAL PRIVATE LIMITED Equity Sales Desk Mohammad Ali Saeed Mohammad Omer Saeed Navaid Kamani Muhammad Shahid Research Desk Mohammad Ali Saeed Muhammad Hasan Ext. 112 Adeel Durrani Ext. 110 Suboor Rizvi Ext. 111 SAAO CAPITAL PRIVATE LIMITED Address: Business & Finance Center I.I. Chundrigar Road Karachi Pakistan Telephone: , Fax: Web: DISCLAIMER IMPORTANT: This report and the information and opinions provided or expressed herein have been prepared by SAAO Capital Private Limited for the information of its or their respective clients only. The information obtained has been compiled with reasonable care using data, information, or sources believed to be true, reliable, and accurate at the time of publication. No representation or warranty whatsoever, whether express or implied, is made to the accuracy or completeness or otherwise of this report or any of the contents thereof. SAAO Capital Private Limited, does not accept any responsibility or liability whatsoever for any direct or consequential loss or damage of whatsoever nature arising from or as a result of the use, publication, or distribution in whole or in part of this report or any of its contents. The information and opinions contained in this report are or may be subject to change or revision without any notice. SAAO Capital Private Limited, its directors, officers, associates, representatives, or employees may have positions or otherwise be directly or indirectly interested in the securities mentioned in this report or may buy, sell, or deal or offer to buy, sell, or deal in or with such securities from time to time, whether as principal for its or their own account or as an agent or in any other capacity for or on behalf of another person. This report is not, and is not intended to be, nor constitutes any offer or solicitation for the purchase or sale or other dealing in the securities mentioned herein. Reproduction or distribution of this report is prohibited. Page No. 11 January ' 07