JS Securities Limited – Morning Briefing

Karachi, February 23, 2018 (PPI-OT): ABL: Earnings revised on higher costs from borrowings, ‘Buy’ remain intact

 

We update our investment case on Allied Bank Ltd. (ABL) following the release of 2017 detailed accounts and analyst conference call.

 

We revise down our 2017E-2019F earnings estimates by 7-15% due to higher-than-expected cost of funds; however, our Target Price for ABL has increased to Rs122 from Rs119 owing to revaluation of fixed assets during 2017.

 

Our ‘Buy’ rating remains intact, as our Target Price reflects an upside of 31%, while ABL also trades at an attractive 2018E P/B of 0.96x (17% discount to banks with similar ROEs).

 

The bank witnessed 9% YoY higher Interest Expense, because of 3x YoY growth in Repo Borrowings during 2017, which were ~25% of the bank’s interest bearing liabilities.

 

The bank’s Fee Income declined by 2% YoY in 2017, while dropping by 14%/12% YoY/QoQ during the 4Q2017 and registering its lowest level during the past nine quarters.

 

Advances increased by 13% YoY (ADR: 42%), with lending further increasing towards the Energy sector.

 

Estimates lower on higher cost of funds, ‘Buy’ intact

 

We update our investment case on Allied Bank Limited (ABL) following the release of 2017 detailed accounts and analyst conference call. We revise down our 2017E- 2019F earnings estimates by 7-15% due to higher-than-expected cost of funds; however, our Target Price for ABL has increased to Rs122 from Rs119 owing to revaluation of fixed assets during 2017. Hence, our “Buy” rating remains intact, as our Target Price reflects an upside of 31%, while ABL also trades at an attractive 2018E P/B of 0.96x (17% discount to banks with similar ROEs). Key risks to our investment case are (1) delays in increase in interest rates and (2) lower-than- expected growth in asset base. On the pension case, the bank awaits for detailed judgment from the Supreme Court to disclose any financial impact from the same.

 

Higher borrowings offsetting benefits of C/A expansion

 

The bank’s zero-cost deposits recorded an impressive growth of 25% YoY in 2017, where total deposits increased by 10% YoY only. However, higher share of zero- cost deposits did little to control the bank’s cost of funds as the bank witnessed 9% YoY higher Interest Expense, because of 3x YoY growth in Repo Borrowings, which were ~25% of the bank’s interest bearing liabilities. As a result, average cost of funds remained unchanged YoY during 2017, taking NIMs down by 60bps YoY.

 

Fee Income drops in 4Q2017, banks expects recovery

 

The bank’s Fee Income declined by 2% YoY in 2017, while dropping by 14%/12% YoY/QoQ during the 4Q2017 and registering its lowest level during the past nine quarters. As per our conversation with the bank’s management, the decline pertained to fee income from trade business and remittances, where the latter is likely to be an impact of late receipts. The bank expects Fee Income generation to recover from the re-launch of existing products and launch of new products finalized during 2017. Currently, few of the major contributors to the bank’s Fee Income are debit cards, fee from corporate investment banking and commodity operations.

 

Lending exposure to Energy sector increases further

 

The bank’s IDR jumped to 79% (+6ppt YoY) during 2017 as fresh investments were largely parked in MTBs (56% of investment book). The bank’s equity investments remained broadly unchanged, providing a dividend yield of 10.6% on cost. Advances increased by 13% YoY (ADR: 42%), with lending further increasing towards the Energy sector. To recall, ABL had the highest exposure to the Power sector amongst JS Banking Universe as at 2016. The bank’s top three sectors, Energy (31%), Agri (16%) and Textiles (13%), currently account for 60% of the lending portfolio. Moreover, asset quality during 2017 improved to 4.6% (-1.2bps YoY) as overall NPL stock declined by Rs2bn, while Coverage Ratio also increased to 93%.