AKD Quotidian about — BAFL: Will Baffle; but on the Upside this time!

Karachi: With CY11 NPAT surpassing aggregate CY08-CY10 profits and fast-track growth anticipated to continue, AKD Securities raises AKD Securities’ end-Dec’12 target price for BAFL to PkR21.50/share.

According to AKD Securities sees 14% NPAT CAGR across the next 5yrs driven by sustained 5%+ NIMs, declining credit costs (consumer portfolio has halved since peak) and limited Wand impairment. While the Cost/Income ratio remains high at 60%, sub-inflation admin expense growth in CY11 indicates renewed focus on cost control. Higher income coupled with improving operating efficiency should allow BAFL to consistently post ROE in the high teens while a strong capital base implies likelihood of annual cash payouts even after accounting for tighter Basel lll standards. Despite a solid return of 26.5%CYTD, BAFL still trades at attractive valuations (CY12F P/B: 0.65x, P/E: 3.73x, D/Y: 14.1%) where AKD Securities’ blended TP of PkR21.50/share offers upside of 51%. AKD Securities conservatively does not attach any value to investment in Wand where potential divestment of the same may unlock further upside.

The New BAFL: Unconsolidated CY11 NPAT of PkR3.51bn (consolidated NPAT: PkR433bn) has surpassed aggregate CY08-CY10 profits of PkR337bn. Very strong CY11 performance has arisen from 1) -95bps expansion in NIMs to 57%, 2) flattish credit costs and 3) single-digit admin expense growth. For consolidated accounts, associates made a positive contribution in CY11 vs. a hefty loss in CY10 as Wand and Wateen were reclassified under `AFS’ from `associates’ previously.

AKD Securities sees a 5yr NPAT CAGR of 14% driven by:
5%+ NIMs – AKD Securities sees NIMs averaging 5.25% across the next 5yrs. CASA has risen from 53% in CY09 to 66% in CY11 and should further rise to 70%-f by CY15F as the bank has lower need for expensive term deposits. BAFL’s Islamic balance sheet size is the 2nd largest in Pakistan, a franchise which is underappreciated by the market, in AKD Securities’ view.

Lower credit costs – AKD Securities sees credit costs averaging a low 0.6% across the next Syrs as NFL accretion tapers off. This is despite gradual expiration of FSV benefit with management confident enough to allow run-off. AKD Securities does not expect Wand impairment to extend beyond CY14F.

Improving cost efficiency – While the Cost/Income is still a high 60%, relatively contained 9.7%YoY admin expense growth in CY11 indicates emergent focus on cost control. Further improvement is needed however, with the employee/branch ratio at a relatively high 25 vs. an average of 11 for the Big-5 Banks.

More consistent payouts: While BAFL has historically paid out biennial cash dividends, a stronger capital base implies space for annual cash payouts (TFC rollovers may still be required). AKD Securities sees CAR sustaining above 12% vs. the base-case 105% required under Basel III by 2019. Higher cash payouts in turn should enable 19%+ ROE going forward, at par with the larger private banks. At the same time, tighter paid-up capital requirements under Basel lll entail resumption of stock payouts from CY13F onwards.

Valuations and Investment Perspective: Despite a solid return of 265%CYTD, BAFL still trades at attractive valuations (CY12F P/B: 065x, P/E: 3.73x, D/Y: 14.1%). Robust CY11 profits have made up for a disappointing run across CY08-CY10 and the bank appears well placed to post ROE in the high teens coupled with more consistent payouts which should drive valuation rerating. AKD Securities’ blended TP of PkR21.50/share (discounting factor: 19.1%) offers upside of 51%.

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