Pearl Securities Limited – Banks in focus

Karachi, February 06, 2015 (PPI-OT): Synopsis

Allied Bank Limited (ABL) will be unveiling full year CY14 accounts next week, the 10th of Feb’15. Bottom-line is not expected to show strong performance experienced during the year as greater provisions for taxation are likely to trim earnings. NPAT for the year is expected at PKR 15.3bn (EPS: PKR 13.38), showing moderate growth of 5% YoY against net earnings of PKR 14.6bn (EPS: PKR 12.79) achieved in the previous year.

Solid core operations are expected to derive strong NII growth of 23% YoY while non- mark-up income is expected to increase notably by 35% YoY. However, the main reason for constrained earnings will likely be high tax rate of 32% against negligible 0.8% (YoY). Final cash dividend expected at PKR 1.5/share will take CY14 payout to PKR 6/share.

Tax provisions to deny strong fundamental earnings

The primary factor behind constrained earnings this year is expected to be elevated tax rate in comparison to the previous year. In the previous year, the bank received substantial tax reversal of PKR 3.3bn in the final quarter whereas this year tax provision of PKR 1.54bn is expected in 4Q CY14. Due to significant tax reversal, overall provisions for taxation for CY13 were negligible at PKR 118mn while provisions for CY14 are expected to be around PKR 7.2bn. However, despite such a strong difference in taxes, improved fundamentals is expected to allow net income growth of 5% YoY for CY14.

4 Q C Y 13   4 Q C Y 14 *   Change        CY 13          CY 14 *        Change

( PRS in Million)           %                   ( PRS in Million)       %

Mark – up / return / interest earned        14,13 4       16,237         15%        54,222          64,576           19%

M ark-up / return / interest expensed         8,823        9,427          7%        32,552          37,942           17%

Net Mark – up / interest income              5,3 11        6,810         28%        21,670          26,634           23%

Pro visio ns against NP Ls and investmetns      254          130        -49%           565              86          -85%

NII afterprovisions                           5,056        6,680         32%        21,105          26,549           26%

Non mark-up / interest income                 2,349        2,931         25%         9,603          12,991           35%

Total non mark-up / interest expenses         4,363        4,311         -1%        15,947          17,003            7%

Profit before taxation                        3,042        5,300         74%        14,761          22,537           53%

Taxatio n                                    (3,258)       1,541       -147%           118           7,221         6019%

Profit after taxation                         6,300        3,759        -40%        14,643          15,316            5%

EPS                                            5.50        3.2 8        -40%         12.79           13.38            5%

Improved earning assets to raise core earnings

The Bank’s core income has improved significantly during the year on account of a refined investment portfolio and growing advances. By the end of Sep’14, investments are seen growing by 5% YoY while also restructured to lean towards government issued PIBs. T-Bill investments were reduced, while PIBs make up 49% of all investments against previous 8% at the start of CY14.

Additionally, the banks advances have grown by 6% while lending to financial institutions have increased by 95%. Core income for CY14 is expected to be around PKR 64.6bn, significantly greater by 19% YoY against mark-up income of PKR 54.2bn in the previous year. NII for the year is expected to clock in around PKR 26.6bn, up by 23% YoY.

Reduced NPL provisioning to compliment NII

Strong reduction in provisioning for non-performing loans and advances are expected to supplement operations in CY14. Provisions against NPLs are expected to decline by 77% YoY, estimated to be around PKR 153mn against provisioning of PKR 651mn in the same term last year. NII after provisions are expected to grow by 26% YoY to reach around PKR 26.5bn.

Strong support from non-mark-up income

Bottom-line is expected to receive strong support from non-mark-up operations where strong gains from sale of securities will expand total non-mark-up income significantly by 35% YoY. Fee income is expected to grow by just 2% YoY while dividend income is expected to increase by 13% YoY. However, the main factor behind expected rise in non-mark-up income will stand to be substantial gains from sale of securities which are expected to be enhanced by 245% YoY.

About the Bank

Allied Bank is among the most prominent scheduled banks in Pakistan having a large network of 975 branches nationwide with an ATM network exceeding 700 units. The Bank is listed on all stock exchanges in the country and engaged commercial banking and related services. ABL offers various technology based products and services to clientele. The registered office is located in Lahore, Pakistan.

Bank Outlook

Some stress to core earnings is apparent from recent DR reduction by SBP; however, ABL will be able to control negative impact as it is heavily invested in government paper. Moving forward, the bank is expected to increase financial lending with less chance of default at lower interest rate margin. Currently, the scrip is trading 13% discount to its target price of PKR128 with the level of (CY14E) P/BV(x) at 1.58(x) and (CY15F) P/BV(x) at 1.45x respectively.