Result Preview – Elixir Securities Limited

Karachi, March 16, 2015 (PPI-OT): BAFL: Strong net interest income (NII) despite compromise over cost mix

Earnings outperform expectations, Dividend in line

Bank AlFalah Limited (BAFL) announced its CY14 financial results on February 26, 2015, in which the company reported PAT of PKR5.6bn, translating into EPS of PKR3.55, up 21% YoY. 4QCY14 EPS clocked in at PKR1.02, up 20% YoY. BAFL also announced a cash payout of PKR2.0/sh along with annual results.
Strong core income primarily resulted in higher revenues

Net interest income of BAFL grew by 29% YoY in CY14 (4QCY14: ↑46% YoY) and clocked in at PKR21.9bn. This was largely driven by strong deposit mobilization, asset re-pricing in the 1HCY14 and increased investment in high yield PIBs.

Deposits of the bank grew by 15.3% during the year while BAFL increased its exposure to PIBs by almost 4.75x YoY during CY14. However, deposit mix was compromised during the year as BAFL increased fixed deposits by 2pp to 25% of the total deposits while savings and current remunerative accounts fell by 1pp YoY to 32% and 6% respectively. Current – non remunerative deposits remained flat during the year.

Net Interest Margin (NIM) of the bank also improved by 20bps to 3.8% in CY14 against 3.6% in CY13. Non-interest income (NII) also posted decent growth of 9% YoY to PKR9.0bn during the year, largely supported by substantial growth in FX income.

Asset quality has somewhat improved

BAFL’s Non Performing Loans (NPLs) stock grew by ~8% YoY to PKR19.4bn during CY14. However, key asset quality ratios display an optimistic picture showing improvement. Infection ratio fell by 20bps to 6.4% in CY14 against 6.6% in CY13 while coverage ratio improved to 73.4% against 72.7% in CY13. BAFL however, has deferred provision amounting to PKR108mn against Agritech Limited (AGL) till Dec-15 which can have an EPS impact of PKR0.06 (2% of EPS) in CY15.

Branch addition resulted in opex growth at a faster pace

BAFL’s opex grew by 21% YoY to PKR20.8bn during CY14. This was largely driven by aggressive expansion carried out in the bank’s branch network. Management of the bank added 73 branches to its network during the year. Cost to income ratio of the bank clocked in at 67% during the year against 69% in CY13, falling by 2pp YoY. The bank is now developing infrastructure to introduce priority banking which might push its opex up during CY15.

Conference call takeaways

BAFL, in its conference call, stated that there would be muted growth in credit off-take while the bank would be capitalizing on increasing lending to higher return generating areas such as SMEs and consumer loans in order to counter falling interest rates. Branch addition and deposit mobilization is expected to slow down as the bank would primarily be focusing on improving deposit mix and cost rationalization.

Management also mentioned that BAFL is the market leader in consumer loans with a portfolio of PKR21bn. The bank managed to capture a market share of 5% via its branchless banking product ‘Mobile Paisa’ and currently operates a network of 12K agents.

Maintain HOLD

Elixir Securities Limited believes that the stock is fairly priced at current levels and offers a dividend yield of 10.0% on Elixir Securities Limited’s Dec-15 PT of PKR30/sh. The stock is currently trading at CY15E PBV of 0.99x and PER of 7.5x.

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