AKD Securities Limited – MCB: TP Revision

Karachi, February 17, 2015 (PPI-OT): MCB posted NPAT of PkR24.66bn (EPS: PkR22.15) in CY14, up by 13%YoY which is the highest pace of growth in 3yrs. AKD Securities Limited believes MCB is positioned to post similar growth in CY15F where AKD Securities Limited raises AKD Securities Limited’s earnings estimates across CY15F-CY19F by 4% on average and up AKD Securities Limited’s TP to PkR310/share.

AKD Securities Limited sees the bank posting a double-digit NPAT CAGR across AKD Securities Limited’s forecast horizon driven by strong BS growth, stable NIMs, low credit costs and opportunity to book hefty capital gains particularly on PIB holdings. MCB has shed 1%CYTD to trade at a CY15F P/B of 2.2x, P/E of 12.1x and D/Y of 5.1%.

This remains a strong, well run bank which justifies its valuation premium based on 20%+ CAR, utilization of which (e.g. separate Islamic banking business/anticipated overseas push) can result in +ve earnings surprises. AKD Securities Limited’s revised TP of PkR310/share implies a Neutral stance where AKD Securities Limited advocates building positions on dips.

CY14 result review: MCB posted consolidated NPAT of PkR24.66bn (EPS: PkR22.15) in CY14 vs. NPAT of PkR21.88bn (EPS: PkR19.65) in CY13, 13%YoY growth being the highest in 3yrs. Alongside the result, MCB announced a final dividend of PkR4/share to bring full-year payout to PkR14/share (payout ratio: 63%). Key result highlights included: (i) 15%YoY NII growth, (ii) net LLP reversals of PkR1.1bn, (iii) robust 20%YoY non-interest income growth (+10%YoY ex-tax refunds) and (iv) 10%YoY increase in admin costs (+11%YoY ex-PF reversals and ex-VSS). In 4QCY14 alone, MCB posted NPAT of PkR6.22bn (EPS: PkR5.59), up by 46%YoY on capital gains and absence of a VSS but lower by 6%QoQ on absence of a one-off tax compensation.

Analyst briefing takeaways: Loans grew by 22%YoY in CY14, primarily on working capital exposure, with sectors such as Agriculture, Petrochemicals and Telecoms attracting fresh credit. Management reiterated that the main focus of the bank remains on loan growth where arising opportunities will be availed including in the retail space (mgmt. expects a 50bps DR cut in Mar’15).

In terms of asset quality, at end-CY14 NPL stock stood at PkR21.9bn (-6%YoY), translating into NPL ratio/coverage of 6.8%/86% where management expects the trend of recoveries to continue (even as accrued mark-up is up 2.5x to PkR21.3bn). Among key takeaways (i) MCB’s CAR stands at 20.4% (-175bps on Basel III implementation), (ii) Islamic banking subsidiary is awaiting regulatory approvals and (iii) UAE wholesale branch has received requisite approvals.