Bank Al Falah Limited

Transcription

1 Bank Al Falah Limited Enticing valuations that can t be ignored Friday December 6, 2013 BUY Target Price Dec 14: PKR 32 Current Price: PKR 25 Bloomberg Reuters BAFL.PA BAFL.KA MCAP (USD mn) M ADT ( USD mn.) 0.7 Shares Outstanding 1,349 Valuations 2012A 2013F 2014F EPS DPS F Dividend Yield (%) Capital Gain (%) 28% Total Gain (%) 38% BAFL vs. KSE100 Relative Chart Dec 12 Jan 13 KSE100 Index Mar 13 Feb 13 May 13 Apr 13 Jul 13 Jun 13 Aug 13 Oct 13 Sep 13 BAFL Dec 13 Nov 13 BAFL Profile: Bank Alfalah Limited was incorporated as a public limited company on June 21, 1992 and provides financial solutions to consumers, corporations, institutions and governments through a broad spectrum of products and services, including corporate and investment banking, consumer banking and credit, securities brokerage, commercial, SME, agri finance, Islamic and asset financing. Investment Summary We reinitiate our coverage on Bank Alfalah Limited (BAFL) with Dec14 TP of PKR32/sh. The valuation is based on a blend of DDM and RIVM methods and average of these matrices drove our fair value. At our target price, the script offers exciting upside potential of 28% along with a dividend yield of. Looking at a healthy total return of 38%, we recommend a Buy call on the scrip Successive increase in the policy rate by 50bps in Sep13 and Nov13 has opened a new chapter for banking space as NIMs are anticipated to rebound in near term. We believe, interest rate will remain on the higher side going forward because of persistent inflationary pressures thus BAFL is likely to register higher NIMs of 4.6% in 2014E, up by 90bps YoY We believe, robust branch expansion will ensure BAFL to uphold its prevailing market share (6.9% as of Sep 2013) and deposits are likely to post above industry deposit growth going forward. Furthermore, incremental deposits are likely to be routed to risk free investments i.e. govt. securities for securing stable return. On the other hand, cost of deposits is likely to move northwards because of recent pegging of MDR with repo rate thus we foresee the bank to keep its strong focus on generating low cost deposit and keeping higher current account to deposit ratio (35% as of Sep2013) On the back of growing Islamic banking operations, we believe, BAFL will actively pursue expansion plan in Islamic banking division as well in order to maintain its number 2nd position in Islamic banking business and earn higher earnings in growing business We believe, the bank will remain favorable franchise for fee and commission based business because of its nationwide expansion coupled with its plan to launch various products catering mobile and branchless banking. Going forward, we believe that the segment will continue its stable contribution in overall earnings Monetary tightening phase to unlock earnings growth The monetary easing cycle has bottomed out in Jun13 with successive increase in the policy rate by 50bps in Sep13 and Nov13 on the back of persistent inflationary pressures. This onset monetary tightening phase has opened a new chapter for banking space as industry NIMs are anticipated to rebound in near term. Going forward, we believe, interest rate will remain on the higher side for maintaining +ve real interest rate (one of the IMF guidelines). That said, we foresee asset yields of the bank to increase by 235bps to 11.7% in 2014E. However, this expansion in yields will be partially eroded by rapid increase in cost of funds to 6.6% 2014E (up by 143bps) primarily due to 1) upward revision in DR and 2) pegging of MDR with the repo rate. Inculcating aforementioned reasons, NIMs of the bank is likely to clock in at 4.6% 2014E, posting an increase of 90bps. Higher NIMs coupled with healthy non interest income is likely to ameliorate earnings growth of 15% 5yr CAGR (2013E 2018E). Iqbal Ismail Dinani iqbal.dinani@bmacapital.com Ext: 2059 or sell the securities mentioned. 1

2 ROE Core Equity Growing NIMS amid rising DR 25% 2 15% 16% 19% 18% 19% 22% 23% 16% 14% 12% NIMs RHS ROEA Discount Rate (Avg.) COF % 3. 5% E 2014E 2015E 2016E 6% 4% 2% E 2014E 2015E Rigorous branch expansion plan to unlock deposit growth momentum In order to penetrate within Pakistan banking space, BAFL has envisaged robust branch expansion plan by adding ~150+ new branches by the end of 2015, taking the count to surpass 700 branches nationwide. Despite previous expansion plan held by the bank, its market share kept on decreasing because of highly competitive environment hence we feel that, this expansion will ensure BAFL to uphold its prevailing market share (6.9% in Sep13). We believe that expansion mode will marginally improve its market share to %% by 2015E. Though, we understand that new branches will take time in fetching customer attention thus we are hopeful that bank will post above average industry deposit growth going forward. Inculcating rigorous expansion plans, we anticipate the bank s deposit to surge by 5yr CAGR of ~14% by 2018E. Market Share Industry Deposit Growth Branch Expansion Market Share RHS Industry Deposit Growth BAFL % 7.6% 7.4% 7.2% % 6.6% 6.4% E 6.2% E 2014E 2015E or sell the securities mentioned. 2

3 but it will also augment cost of funds Since pegging of MDR with the repo rate and expected uptick in discount rate is likely to increase cost of deposits as well, resultantly BAFL s cost of deposits is expected to clock in at 6.6% in 2014E, up by 143bps. In order to counter rising cost of funds, bank will keep its focus on generating low cost deposits (CASA: 74% and CA to deposits: 35% as of Sep2013) by increasing its exposure in rural areas and Islamic banking side, we believe. Deposit Composition CA to Deposits Savings to Deposits CASA 54% 47% 44% 37% 41% 36% 29% 26% 35% 33% 3 35% HBL NBP MCB UBL ABL BAFL and admin cost Admin expenses over the past years have witnessed a significant 3yr CAGR of 12% ( ) primarily due to the launch of 150 new branches. And we believe that, admin cost will remain on the higher side during because of planned opening of another 150 branches and higher inflationary pressures. We have reckoned admin cost to record a 3yr CAGR of 17% during E. As of 9M2013, the bank s admin cost to income ratio hovered around 72% which is highest among top tier banks (except NBP due to its massive provision which dented total income) and posts a serious concern for the management. In order to arrest rapid growth in admin cost, the bank has formulized various initiatives such as relocating its existing staff to new branches, launching smart branches (limited area and people) and automation of operational activities. We believe, these measures will effectively reduce admin cost to income ratio to ~65% by 2018E but still it would be on the higher side when compared with top tier average. or sell the securities mentioned. 3

4 Admin. Cost to Income Admin cost to Income Average % 72% 49% 49% 48% 32% HBL NBP MCB UBL ABL BAFL Growing Islamic banking operations to support earnings growth With rising interest in Shariah compliant products and enticing growth of 28%YoY in deposits (11% market share) as of Jun 2013, Islamic banking business offers huge potential to excel. Currently, the bank enjoys leading position (after Meezan Bank) in terms of deposits and branches and offers wide range of shariah compliant products. In order to increase its exposure, BAFL is likely to add ~25 Islamic branches (38% total expansion plan) in As per latest accounts, the bank s CASA for Islamic banking division hovers around 76% during 9M2013 which is likely to underpin spreads in the rising interest rate environment, we believe. ROE of Islamic Banking Islamic Deposit Composition 3 25% 2 15% 5% 26% 23% 24% 22% 19% CA Savings Term CASA RHS M % 76% 74% 72% 7 68% 66% 64% 62% or sell the securities mentioned. 4

5 Non core income to supplement earnings growth The bank s non funded income underscored a robust growth of 36% YoY in 2012; contributing 34% to overall bank s operating income (2nd highest in top tier banks). Healthy contribution of non interest income is a function of higher fee, commission income generated on the back of higher trade related activities, escalating inward remittances and partnership with the government in Government to Person (G2P) program. According to our discussion with the management, the bank is intending to launch couple of products catering mobile and branchless banking in order to reap up maximum benefits from the growing segment. Non core income to total income NBP BAFL UBL ABL MCB HBL Improving asset quality ratios Following industry s declining trend in NPLs, BAFL s NPLs shrunk by 4% during 9M2013 however; coverage ratio of the same is remained on the lower side as compared to top tier banks. We believe that the bank will gradually inch up its coverage ratio to ~77% by 2018E in order to replicate industry practice. Furthermore, we believe that the bank will opt vigilant credit policy frame which will ensure lending to highly credit worthy corporates and relatively less risky investments. We have also assumed that the incremental deposits will be routed to risk free government securities in order to keep asset quality in check. Valuation The valuation is based on a blend of DDM and RIVM methods and average of these matrices drove our fair value, thus Dec14 TP is at PKR32/sh. At this level, the scrip offers an exciting upside potential of 28% along with a dividend yield of. Looking at healthy total return of 38%, we recommend a Buy call on the script. As of yesterday close, the scrip is trading at forward PBV and PER multiple of 1.1x and 6.1x respectively. Furthermore, the bank is also prone to one time gain from Warid proceeds as the bank has already provided PKR4bn as a provision under diminution in the value of investment. According to recent news flows on Warid, BAFL is likely to earn an after tax capital gain of PKR 2.2/sh inculcating estimated transaction price of USD500mn. or sell the securities mentioned. 5

6 Cost of Equity RFR 13. Beta MRP 6. COE 19.4% DDM (PKRmn) CY14 CY15 CY16 CY17 CY18 Key Assumptions The cost of equity is derived from capital asset pricing model where RFR is assumed at 13% (latest 10yr PIB auction) along with market risk premium of 6% and 3yr adjusted beta of We have assumed higher discount rate in and 11.5% as a long term discount rate. We foresee that will further tighten risk management policies and bring coverage ratio to around 75% by 2018E. Banks deposit mobilization strategy will be skewed towards investment side and ~6 of incremental deposits will be placed in investments mostly in government securities. We do not see significant change in private sector credit off take primarily due to prevailing energy and law and order situation. We believe, bank s average IDR will remain close to ~5 in E with major investment exposure coming in government securities. Key risk to our assumptions Macro Risk Terminal Value Total Dividend 3,376 4,326 5,082 5,211 6,051 63,702 PV of Dividend 3,376 3,624 3,567 3,063 2,980 26,281 Sum of PV 42,891 DDM/Sh (PKR) 32 RIVM (PKRmn) CY14 CY15 CY16 CY17 CY18 PAT 5,626 7,210 8,471 8,685 10,085 Return on Equity 5,626 7,210 8,471 8,685 10,085 Equity Charge Residual Income (RI) 5,931 6,679 7,488 8,192 (304) 9, PV of RI (304) Sum of PV 1,584 Terminal Value 15,016 Current Equity 27,866 RIVM/Sh (PKR) 33 Average (PKR) 32 Regulatory changes: The banking sector in Pakistan is highly regulated by SBP and recent pegging of MDR with repo rate is one such incident that has dented bank s earnings despite expected increasing interest rate cycle. Furthermore, any delay in interest rate hike will impact company s valuation accordingly. Weak economic growth: The newly enrolled program with IMF envisaged the goal of fiscal or sell the securities mentioned. 6

7 consolidation which will obviously curtail GDP growth in next two to three years. Any delays in fiscal reformation coupled with insistent energy crisis will limit economic activity and thus adversely affect the overall banking system. Low growth GDP will also augment NPLs accumulation, we believe. Risk Specific to BAFL Financial Summary Higher operating costs on the back of higher inflationary expectation: Due to fiscal consolidation measures, inflations is likely to be on higher side in following 2 3 years which may push operating cost northwest. PKRmn E 2014E 2015E Markup earned 44,298 46,080 44,796 65,126 78,269 Markup paid 25,687 27,500 26,905 39,544 47,242 Net Interest Income 18,611 18,580 17,891 25,582 31,027 Provisions 4,330 3,559 1,525 6,410 7,025 Net Interest Income after provisions 14,281 15,021 16,366 19,172 24,002 Non Interest Income 5,368 7,281 8,297 10,282 11,583 Total Income 19,649 22,303 24,663 29,454 35,585 Non Interest Expenses 14,215 15,519 17,591 21,032 24,834 PBT 5,434 6,783 7,072 8,422 10,751 PAT 3,503 4,556 4,845 5,626 7,210 EPS PKR Balance Sheet Cash & Bank 50,883 58,044 45,480 56,171 66,479 Balance with Other banks 17,424 26,721 31,420 30,219 34,837 Lending to Financial Institutions 7, ,237 6,044 6,967 Investments 166, , , , ,375 Advances 198, , , , ,853 Operating Fixed Assets 13,389 13,748 17,519 19,008 20,057 Total Assets 468, , , , ,301 Bills Payable 5,403 8,431 12,203 16,138 18,605 Borrowing 18,169 21,228 18,280 24,175 27,869 Deposit and other accounts 401, , , , ,736 Subordinated Loans 7,149 5,875 11,081 12,789 14,743 Total Liabilities 442, , , , ,264 Net Assets 25,777 30,247 32,423 35,173 39,037 Share Capital 13,492 13,492 13,492 13,492 13,492 Reserves 4,100 5,637 6,605 7,731 9,173 Unappropriated Profit 5,248 6,562 7,769 9,393 11,815 Core Equity 22,840 25,690 27,866 30,615 34,479 Surplus On Reval of Assets 2,937 4,558 4,558 4,558 4,558 Total Equity 25,777 30,247 32,423 35,173 39,037 BVPS Core or sell the securities mentioned. 7