Morning Call about Bank Al-Falah – Arif Habib Limited

Karachi, January 16, 2014 (PPI-OT): Strong fundamentals, not yet priced-in

With result season excitement gaining pace particularly for the banking sector, Arif Habib Limited’s best call stands out for Bank Al-Falah (BAFL).

According to Arif Habib Limited, the Bank is currently trading at forward CY14E P/BV of 0.9x, and a PER of 6.2x. Based on forward estimates, Arif Habib Limited’s target price for Dec-14 comes at PKR 35/share offering a decent 27% upside potential from current levels.

For the CY13, Arif Habib Limited estimates bank to post in full-year earnings of PKR 3.5/share up by 6% YoY from PKR 3.3/share last year. This is despite the sectors shirking net interest margins and higher provision charge.

PKRmn               4QCY13E   9MCY13   9MCY12   YoY    CY13E     CY12A   YoY
Mark-up Income        4,818   12,519   13,879   -10%   17,337   18,580    7%
Non Mark-up Income    2,042   5,958     5,047    18%    8,000    7,281   -9%
Total Income          6,860   18,476   18,926    -2%   25,337   25,861    2%
Operating Expense     4,578   12,614   11,776     7%   17,192   15,519  -10%
PPOP                  2,283   5,862     7,151   -18%    8,145   10,342   27%
Provisions              251   1,077     1,932   -44%    1,328    3,559  168%
Pre-tax Profits       2,032   4,785     5,219    -8%    6,817    6,783    0%
Tax                     679   1,467     1,820   -19%    2,146    2,397   12%
Post-tax profits      1,352   3,318     3,399    -2%    4,670    4,386   -6%
EPS (PKR)              1.00   2.46      2.52             3.46     3.25     -
DPS (PKR)              2.00   -         -          -     2.00     2.00     -
Source: Company Financials and AHL Research

Expecting a base-case EPS of PKR 1.0 in 4QCY13
The bank so far during the period 9MCY13 has booked in a net profitability of PKR 3.3bn, compared to PKR 3.8bn last year same period (-2.4% YoY), bringing a cumulative earnings per share of PKR 2.46 in 9MCY13, versus PKR 2.52 last year same period. For 4QCY13, Arif Habib Limited estimates BAFL to post in an EPS of 1.0 without incorporating the additional one-off positive impact of PKR 0.12/share expected from Wateen Telecom Limited (WTL) deal. Arif Habib Limited sees a strong probability of WTL impact materialising by Dec-13 ending quarter. This should bring CY13 EPS to PKR 3.58 (PER 7.7x) from base case of PKR 3.46 (PER 7.9x).

Interest rate spread to remain rather flattish
Quarterly, bank’s interest spreads are likely stay unchanged at 4.3% translating into a 3% QoQ growth in interest income, owing to static growth in bank’s low cost deposit (CASA 71% and 35% share of no-remunerative deposits by 9MCY13 ). Moreover, Arif Habib Limited estimates some consolidation in non-funded income of BAFL following: 1) stable growth in fee income, dividend income, and, 2) lower realisation of capital gains.

Higher branch-related expenditure, provision coverage to alter profits
BAFL’s operating expenditure is estimated to show a 2% QoQ with cost-income ratio at 67% in 4QCY13, compared to 54% last year same period, owing to bank’s aggressive branch expansion plans. As a result, bank’s pre-provisioning profit (PPOP) estimated to improve by 2%QoQ at PKR 2.3bn (or PKR 1.69/share) in 4QCY13 versus PKR 2.2bn (or PKR 1.66/share) previous quarter. Overall provisioning for the quarter is estimated at PKR 251mn, slightly higher than previous quarter, owing to bank’s increased coverage ratio 68% by Sep-13, from 65% by Dec-12.

Outlook: Buy
BAFL’s high asset quality and improving sector fundamentals – NIMs to improve following a 50bps hike expected in policy rate during 2014 – support a higher multiple re-rate. For Dec-14, Arif Habib Limited’s target price for BAFL is PKR 35/share, offering a 27% upside; hence Arif Habib Limited maintains a ‘Buy’ call on BAFL. In addition, Arif Habib Limited expects BAFL to maintain a healthy payout of 58%, translating into a cash dividend of PKR 2.0/share with the results, offering one of the highest dividend yield of 8% in the banking sector at current levels.