AKD Quotidian about — MCB: Newly aggressive stance!

Karachi, February 18, 2014 (PPI-OT): While CY13 results were subdued EPS: PkR2I.62, +3%YoY), there is enough to suggest that the banks outlook is more promising, with management looking to utilize existing capital buffer (CAR: 22.2%) for balance sheet growth (Islamic banking) and diversification (foreign operations).

According to AKD Securities, together with improving asset quality (9%YoY reduction in NPL stock}, further cost efficiency (workforce rightsizing through a VSS} and the highest CASA since CYOS, AKD Securities sees MCB posting a 12% NPAT CAGR across CYI3-CYI8F vs. the previous 5yr NPAT CAGR of Just 7%. As a result, while AKD Securities marginally tweak AKD Securities’ EPS estimates (+1% on avenge across CYI4F-CYI6F), AKD Securities believes MCB is in a position To justify its premium valuation multiples (CYI4F P/B: 218x , P/E: 1i.92x D/Y, 5.3%). AKD Securities’ revised target price of PkR27O/share (up from PkR2S5 /share reviously) implies a Neutral stance.

C’Y13 result review: MCB posted NFAT of PkR218Bbn (EPS: PkR21 62) in CY13, up by a muted 5%YoY. 40CY13 NPAT of PkR426bn (EPS: PkR4.21) was lower by 21%QoQ (ex-VSS: -9%YoY). Key highlights of CY13 results were: I) 7%YoY decline in tighter NIMs, 2) total provisioning reversals of PkR2.84bn vs. provisions of PkR47Omn n CYI2, 3) 20%YoY growth in non-interest income largely due to capital gains and 4) lO% YoY increase in admin expenses. Alongside, the result a PkRS.5ishare final dividend brought the full-year CVI 3 dividend to PkRI4O/share while a 10% bonus was also announced.

LT positives coming through: While CYI3 results were subdued, the bank’s outlook is more promising with management looking to utilize existing capital buffer (CAR: 22.2%) for balance sheet growth and diversification. Over the medium-term this will arise via an aggressive bent towards Islamic banking either through a separate subsidiary or through 55% acquisition of Burj Bank Limited) and potential entry into the GCC/African markets. Expansion in the Islamic space is viable in AKD Securities’ view given its swifter growth Trajectory (+25%VoY in SepI 3), exclusion from minimum dopostt rate directives and the SBP’s strong Support structure.

Earnings drivers: AKD Securities expects MCB to deliver a 5yr NPAT CAGR of 12% Vs . the previous 5yr NPAT CAGR of 7%, driven by I) better efficiency post a VSS for 571 employees at a cost of PkRI .U6bn, 2) reduced credit costs going by the 9%YoY decline in NJPLs/ coverage in excess of 85%, 3) continued increase in CASA which is now at a Byr high of -88% and 4) anticipated double-digit loan growth CAGR across the medium-term.

Investment perspective: MCB has gained 41% over the last 12m to trade Ate CYI4F P/B of2.18x, PIE of 11.92x and DiYof53%. AKD Securities likes the banks newly aggressive bent which should drive a 12% NPAT CAGR across the medium-term while payouts should sustain given MCBs strong capital buffer. That said, AKD Securities believes positives are already priced into premium valuations where AKD Securities’ revised TP of PkR2lOIshare implies a Neutral stance.

MCB: Valuations

Year End Dec 31 CYl2A CYI3A CYI4F CVISF CYIGF

EPS (PkR) 20.64 21.62 23.04 25.53 29.23
EPS Growth 8% 5% 7% 11% 15%
Total BVS (PkR) 104.7 113.6 125.8 137.6 151.5
PIB (Total SHEQ)(x) 2.62 2.41 2.18 2.00 1.81
PER (X) I3.29 12.69 11.92 40.75 9.39
Loan to Deposit (conventional) 44% 39% 38% 39% 40%
NIMs 6.74% 5.49% 5.68% 5.58% 5.62%
Market Cap to Deposits 51% 44% 39% 34% 30%
Cost/Income 36% 40% 37% 37% 36%
ROE (average) 21.2% 19.8% 19.2% 19.4% 20.2%
ROA (average) 2.9% 2.7% 2.7% 2.6% 2.7%
DPS (PkR) 11.8 14.0 14.5 16.0 18.0
Dividend yield 4.3% 5.1% 5.3% 5.8% 6.6%
Payout Ratio 57% 65% 63% 63% 62%

Source: Co, Reports and AKD Research

MC8: Income Statement

Year end Dec 31 CY12A CY13A CY14F CY15F CY16F

Interes( Earned 68,444 65,I86 80,456 90,456 100885
Interest Expense 27,503 27,219 36,559 41,595 45.555
Net Interest Income 40,940 37,967 43,897 48,861 55,330
Total Provisions 478 (2,836) 470 637 899
Post Provisioning Nil 40,462 40.803 43,427 48,224 54,431
total Non-Interest Income 9,541 11.477 11,694 13,070 14,39l
Non Mark-op Interest Expenses 2O,343 19.743 21,717 23,889 25.681
NPBT 32,065 32.932 35,035 38,825 44.507
NPAT 20,885 21.875 23,308 25,834 4 29,SM

Source: Co Reports and AKD Research
MCB: Balance Sheet

Year end Dec 31 CYI2A CYI3A CY14F CYI5F CYI6F

Investments 405,601 453,808 520,445 583,787 645,417
Advances 239,789 248,522 272,287 318,903 366,437
Total Assets 771,458 821,278 924,358 1,049,396 I,171,682
Deposits 544,988 632,309 714,943 821,545 923,321
Total Liabilities 664,983 7O5,816 796,574 909,724 I,017,759
Net Assets 106,475 I15,463 127,785 139,672 153,824
Tier I Equity 91,35O 100,165 113,228 124,412 137,825
Total Tier II Equity 14,623 14,808 14,067 14,771 15,509
Total SHEQ 105,974 114,973 127,295 139,183 153,334
Total SHEQ and Liabilities 770,957 820,789 923,869 1,048,906 I,171,093

Source: Co. Reports and AKD Research