JS Global Capital Limited – Morning Briefing

Karachi, September 01, 2016 (PPI-OT): BAFL: ‘Hold’ intact with a revised TP of Rs30

JS Global Capital Limited reiterates JS Global Capital Limited’s ‘Hold’ call on Bank Alfalah Limited (BAFL) with a revised Target Price of Rs30 (Rs25 earlier).

JS Global Capital Limited revises up JS Global Capital Limited’s 2016E-18F earnings estimates for BAFL by 11%-18% on (1) ~30% lower-than-anticipated PIBs maturity in 3Q2016 and (2) impressive 12% QoQ jump in zero-cost deposits during 2Q2016.

BAFL trades at 2016E P/B of 0.78x, though offers a relatively low 2016E dividend yield of 3% as JS Global Capital Limited expects the bank to continue to support its Tier II CAR with a low payout ratio.

BAFL posted strong 1H2016 PAT of Rs4.35bn (EPS: Rs2.73), up 17% YoY on the back of (1) 13% YoY lower Interest Expense and (2) 66% YoY lower provisioning expenses.

BAFL’s 2Q2016 financials reflect a strategy of increasing lower or zero cost deposits over increase in deposit base. During 2Q2016, the bank’s cost of deposits declined by 163bps/24bps YoY/QoQ due to impressive 12% QoQ growth in zero cost deposits.

BAFL’s investments in long-term government papers (PIBs) further increased to Rs250bn, where investments in PIBs now stand at 5.5x BAFL’s total equity. However, share of T-bills declined to 14% in overall investments, taking IDR down to 66% (-353bps QoQ).

‘Hold’ with a revised TP of Rs30

JS Global Capital Limited reiterates JS Global Capital Limited’s ‘Hold’ call on Bank Alfalah Limited (BAFL) with a revised Target Price of Rs30 (Rs25 earlier). JS Global Capital Limited revises up JS Global Capital Limited’s 2016E-18F earnings estimates for BAFL by 11%-18% on (1) ~30% lower-than-anticipated PIBs maturity in 3Q2016 and (2) impressive 12% QoQ jump in zero-cost deposits during 2Q2016. BAFL trades at 2016E P/B of 0.78x, though offers a relatively low 2016E dividend yield of 3% as JS Global Capital Limited expects the bank to continue to support its Tier II CAR with a low payout ratio. The bank’s Tier II CAR stands at 13.8% as of Jun-16.

1H2016 profits up 17% YoY on zero-cost deposits

BAFL posted strong 1H2016 PAT of Rs4.35bn (EPS: Rs2.73), up 17% YoY on the back of (1) 13% YoY lower Interest Expense and (2) 66% YoY lower provisioning expenses. In 2Q2016 alone, earnings clocked in 10% YoY higher at Rs1.89bn (EPS: Rs1.18), however declined by 24% QoQ because of 4% Super Tax. BAFL’s 2Q2016 financials reflect a strategy of increasing lower or zero cost deposits over increase in deposit base. During 2Q2016, the bank’s cost of deposits declined by 163bps/24bps YoY/QoQ due to impressive 12% QoQ growth in zero cost deposits. On the other hand, deposits grew by 3% QoQ only.

Higher current account deposits resultantly took the bank’s CASA to an all-time high of 81%. In addition to a decent core income, bank’s (1) provisions and write offs also declined by 67%/30% YoY/QoQ and (2) Non-Interest Income improved by 12% QoQ. Higher Non-Interest Income was due to 43% QoQ higher Fee Income recorded in 2Q2016. That said, higher Admin expenses (up 10% YoY and 15% QoQ) somewhat curtailed bottom-line growth.

Advances growth remain sluggish

BAFL’s investments in long-term government papers (PIBs) further increased to Rs250bn, where investments in PIBs now stand at 5.5x BAFL’s total equity. However, share of T-bills declined to 14% in overall investments, taking IDR down to 66% (-353bps QoQ). Advances also picked up slower than the industry as the management explained it keeps preference for superior quality and high yielding assets and would remain selective in loan disbursement in the future as well. Moreover, focus on SME and consumer sector remains intact.

Pakistan inks agreements worth US$650mn with WB

Pakistan signed four agreements with World Bank (WB) amounting to US$650mn related to projects in education, health, water and other sectors. The agreements include (1) Balochistan Integrated Water Resources Management and Development Project worth US$200mn, (2) Third Punjab Education Sector Project worth US$300mn, (3) Sindh Resilience Project, worth US$100mn and (4) National Immunization Support Project worth US$50mn.