AKD Quotidian about — MCB: Loses Luster to better priced peers

Karachi, February 19, 2013 (PPI-OT): Following relatively disappointing results (CY12 EPS: PkR23.OO vs. AKD Security’s estimates of PkR24.30), AKD Security’s reduces AKD Security’s projections for MCB by 2%-6% across AKD Security’s forecasts horizon.

According to AKD Securities, however, due to rollover to CY13F, AKD Security’s blendeds target price increases to PkR200Ishare from PkR1 85/previously. In this regard, while asset quality has improved and sizeable backlog of capital gains exists, AKD Security’s believes the bank will be hard pressed to post growth in CYI3F before a likely strong rebound in CY14F. As such, while MCB remains the best-in-class bank in Pakistan, anticipated soft results over the next 2-3 quarters may now curb the stock’s price performance (after 68% gains in CY12, MCB is up 2.4%CYTD). This is seconded by valuations where MCB now trades at a CYI3F P/B of 1 .lx and PIE of 9.7x, representing an average premium of 51% vs. the AKD Banking Universe. AKD Security’s reiterates that while AKD Security’s remains believers in MCB’s quality, AKD Security’s see relatively better value-for-money plays in Pakistan’s banking space (e.g. UBL and BAFL).

CYI2 Review: On a consolidated basis, MCB posted NPAT of PkR21 .1 5bn (EPS: PkR23.OO) in CY12, up 1O%YoY. Alongside, MCB announced a1 final cash dividend of PkR3/share to bring full-year dividend to PkR13/share as well as a 10% bonus issue. Key highlights included 1) 8%YoY reduction in NIl on tighter NIMs despite 4ppt increase in CASA to 83% , 2) 87%YoY reduction in provisions as NPL stock reduced by 4%YoY, 3)16% growth in non-interest income on higher fees and dividends and 4) 1O%YoY increase in admin expenses (total non-interest expenses were flat). In teriris of asset quality, the NPL ratio is in single-digits again and coverage is close to 90% as loan growth continues to be subdued.

Estimates Revision: AKD Security’s have revised AKD Security’s projections for MCB by 2%- 6% across AKD Security’s forecasts horizon, where 5yr NPAT CAGR is estimated at a muted 9%. Specifically, AKD Security’s see a soft CY13F before a likely strong rebound in CY14F driven by anticipated uptick in interest rates from 2HCY13 onwards. Earnings revision is based on refined interest rate expectations which reduce Nil projections even as AKD Security’s builds in lower credit costs and improving CASA. From a minority shareholder’s perspective, upside may emerge from potentially higher payouts going forward if MCB does not find appropriate avenues to deploy excess capital (CAR: 22.16%).

investment Perspective: MCB has gained 2.3%CYTD to trade at a CY13F P/B of 1.7x and PIE 9.7x (CY14F P/B: 1.6x, PIE: 8.Ox).While AKD Security’s have slightly upped AKD Security’s targets price for MCB, AKD Security’s believes that positives have already been priced in and that while CY14F should see strong earnings uptick, expected soft earnings over the next 2-3 quarters may curb price performance in the interim. AKD Security’s reiterates that while AKD Security’s remains believers in MCB’s quality, AKD Security’s see relatively better value-for-money plays in Pakistan’s banking space (e.g. UBL and BAFL).