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Banks: Sector Analysis Apr 2010

ABL: analyst briefing key takeaways & reassessment of our investment case
ABL held its analyst briefing yesterday to discuss its CY09 results and its medium term strategy & outlook. In a macroeconomic environment where the growth slump has become the “new normal”, ABL’s strategy is to continue on the path of balance sheet consolidation, especially deposit restructuring, while targeting top-tier blue chip companies with good credit histories and conservatively gaining market share in the high-yielding SME segment. We posit that the bank can maintain “quality” earning growth (EPS CAGR of 10% over FY10-FY13) over the medium term if it manages to build on the successes it has achieved in a tough operating environment where the bank in CY09:
1. raised its Net Interest Margin by 85bpsYoY compared to average NIM expansion of 33bpsYoY for peers
2. achieved bottom-line growth of 71%YoY and an RoE (Tier-I) of 31% in contrast to average profitability growth of 13%YoY and RoE (Tier-I) of 21% by peers
3. limited loan infection to 6.5% of loan book and maintained coverage of 77% as compared to 10.8% infection ratio and 75% coverage for peers
 AKD Research
31 March, 2010

NBP president gets extension
On 10 April, President National Bank of Pakistan (NBP) was granted an extension for one year, commencing 1 July 2010.
Ali Raza was appointed NBP President in 2000. During his tenure, NBP has played a crucial role in stabilizing Pakistan’s fragile economy, particularly in its support of various public sector organisations and the capital market. According to a recently released NBP statement, “Ali Raza’s dynamic leadership guided the bank to a record high profitability for a decade with the assets reaching Rs 1 trillion mark.”  The combined profitability of the National Bank for 2009 surged by 17% to Rs 62 billion.
The statement also applauded NBP’s international expansion spearheaded by Ali Raza, “During his tenure, the bank expanded internationally to the Central Asian Republics, Afghanistan and Bangladesh and is looking forward to commence operations in Saudi Arabia and Russia.”
Over the years, Ali Raza has been awarded several accolades in recognition of his outstanding performance as NBP President.
 11 April,  2010

MCB Bank: flat bottom-line YoY 
MCB Bank posted above expected earnings of PRs5.58/sh in 1Q10 primarily due to decline in provisions. The bank also announced PRs2.5/sh cash dividend.
The result mainly depicts that key earning drivers are in-line with our sector thesis under which we expect decline in operating provisions to drive credit income and earnings in 2010E.
Operating profit in 1Q10 posted a reduction YoY and QoQ, -6% and -8% respectively, as earning asset growth could not compensate for margin decline.
NPLs are nearing their peak in our view while NPL coverage is up to 75%. Loan loss provisions declined on QoQ and YoY basis in 1Q10.
Pension income accounted for ~14% of PBT, PRs0.9bn. Unrealized actuarial gains stand at PRs4bn as per change in net assets of the defined pension plan.
Our conviction on MCB’s growth potential and relatively low tail risk vs peers is intact but we await further clarity on capital mgmt and remain neutral on the stock.
 KASB Securities and Economics Research
22 April, 2010

SBP announces five-day working week for banks 
In accordance with the federal government directive, the State Bank of Pakistan (SBP) announced on 23rd April to observe two weekly holidays to help the government surmount the ongoing energy crisis. “All bank, DFIs and exchange companies will also comply with the central bank’s directive and will observe two holidays in a week,” stated Syed Wasimuddin, chief spokesman, SBP. “As per notification, the State Bank, SBP banking services corporation, all banks and DFIs will be closed on Saturday (today),” he added.
The  BPRD Circular Letter No 08 of 2010, sent to all Presidents/Chief Executives of all Banks/DFIs, stated: “As per decision of the Federal Government, vide Notification No 2/3/2010-Public dated April 23, 2010, the State Bank and all offices of SBP banking services corporation including public debt offices will observe five-day working week. Accordingly, all offices of SBP will remain closed on Saturdays and Sundays.”
The SBP also announced new office timings for all offices including SBP Banking Services Corporation, which will be observed with immediate effect till further orders. The new timings are: Monday to Thursday SBP will work from 9 am to 5.30 pm (with lunch/prayer break from 1.30 pm to 2.15 pm). On Friday, SBP will observe working from 9 am to 6.00 pm (with lunch/prayer break from 1 pm to 2.30 pm).
All offices of SBP Banking Services Corporation will work from 9 am to 1:30 pm from Monday to Thursday and from 9 am to 1 pm on Friday.
— 24 April, 2010

Bright prospects for branchless banking
Branchless banking has great potential for growth in Pakistan as was evident from the galloping increase in electronic payments which crossed Rs4.1 trillion in the last quarter of 2009, stated State Bank Governor Salim Raza. He said these volumes were expected to grow substantially as Pakistan has currently 95 million mobile phone users against 26 million bank account holders.
The SBP governor made these remarks at the inauguration of Pakistan Branchless Banking conference recently in Karachi. In his keynote address on the “Need for Alternative Delivery Channels in Promoting Access to Finance”, Mr. Raza said that Pakistan was the first country in South Asia to have issued Branchless Banking regulations, providing commercial and microfinance Banks a supportive regulatory environment for developing partnerships and innovative delivery channels to promote financial inclusion in Pakistan.
There are almost 4 billion non-banked people in the world, he said, with the existing outreach in Pakistan being 12 per cent. “Hence, it is in our best interest to develop an inclusive financial system, which also provides low-income and marginalised communities with increased access to quality financial services.
Referring to three models of branchless banking operating in the country, Mr. Raza said that under the first model known as ‘microfinance banks’ kiosks at retailers’ premises, more than 40,000 borrowers have been reached through 68 offices of Pakistan Post. Under the second model of “Retailers acting as MFB’s agents”, which was launched in October 2009, the Tameer Microfinance Bank has opened over 25,000 branchless banking customers’ accounts and the cumulative volume of transactions of branchless banking services till the end of March 2010 was over Rs 4 billion with over 1.3 million transactions.
Under the third model, which is led by commercial banks, SBP governor said, MCB Bank has registered over 60,000 customers and transacted over Rs 1 billion with over 175,000 cases.

ABL 1QCY10 result review: cost accretion dims earning momentum
A On a consolidated basis, ABL has posted NPAT of PKR1.80bn (EPS-PkR2.3) in 1QCY10 as compared to PkR1.44bn (EPS-PkR1.85) in 1QCY09, a growth of 24%YoY. The result is below our expected NPAT of PkR1.98bn (EPS PkR2.54). A sharp anomalous 24.8%YoY increase in non-interest income explains the results deviation from our expectations. The bank booked total provisions of PkR1.26bn, broadly inline with consensus expectations.
Despite the sharp sequential slippage in cost to income ratio to 53% in 1QCY10 compared to 41% in 4QCY09, it is encouraging to note that the bank posted healthy growth of 24.4% in Net Interest Income (NII). This in our view highlights that the bank’s strategy of achieving greater loan book diversification and deposit restructuring is paying dividends in the shape of improved NIMs. Concurrently, ABL’s Non-Core Income is also gaining momentum, where earning growth rose to 32.7%YoY in 1QCY10. In non-interest income, Fee, Commission & Brokerage Income exhibited brisk 33.68%YoY rate of growth in 1QCY10.
Based on ABL’s attractive risk return dynamics, we have an accumulate stance on the stock. Our fair value of PkR78 per share implies an upside of 18.2% at current price level.
— AKD Research
26 April, 2010

UBL — 1QCY10 result review (inline)
On a consolidated basis, UBL has posted NPAT of PkR2.74bn (EPS: PkR2.46) in 1QCY10 against NPAT of PkR2.76bn (EPS: PkR2.48) in 1QCY09, a marginal decline of 1%YoY. The result was inline with our forecasted NPAT of PkR2.67bn (EPS: PkR2.40).
Among the key P&L items, Net Interest Income (NII) is up 1%YoY, total provisions (including impairment) are down 4%YoY, non-interest income is flat and admin expenses are up just 5%YoY.
Post result announcement, the stock is up ~2%. UBL trades at a CY10F Total Equity P/B of 0.97x and PER of 6.7x. The scrip offers an upside of 13.3% to our target price of PkR68/share. Accumulate!
— AKD Research
27 April, 2010

NIB: 1QCY10 result review
On an unconsolidated basis, NIB has posted NPAT of PkR23mn (EPS: PkR0.01) in 1QCY10 against NPAT of PkR400mn (EPS: PkR0.10) in 1QCY09. This was significantly lower than our expected 1QCY10 NPAT of PkR491mn (EPS: PkR0.12). On a consolidated basis, NIB has posted NPAT of PkR127mn (EPS: PkR0.03) in 1QCY10, down 84%YoY.
As expected, Net Interest Income has contracted, by 12%YoY. Loan provisions of PkR277mn have been booked in 1QCY10 against net reversals of PkR472mn in 1QCY09. On a positive note, non-interest income is up a healthy 87%YoY, driven by 15%YoY growth in fee income and 3x higher capital gains (largely NAFA divestment). Contrary to expectations however, total non-interest expenses have spiked by 20%YoY in 1QCY10, led by a 14%YoY increase in admin expenses.
Not surprisingly, NIB stock price is down 3% post result announcement. NIB trades at a CY10F Total Equity P/B of 0.95x and PER of 9.42x. Our target price of PkR4.95/share implies 5% upside.
— AKD Research
28 April, 2010

HBL: earnings up on lower provisions
HBL posted upbeat consolidated earnings of PRs3.74/sh in 1Q10, up 26% YoY, but primarily due to forced sale value (FSV) benefit of collateral against loan provisions.
Inline with sector trend and our thesis, net interest income growth is slowing due to decline in margins, however lower operating provisions are keeping credit income growth buoyant.
Non-interest income, +45% YoY and +10% QoQ, was the key contributor to jump in operating profitability which was up 11% YoY and 4% QoQ in 1Q10.
The bank availed FSV benefit against loan loss provisions, down 38% YoY and 44% QoQ, of PRs1bn in 1Q10. This is in addition to PRs0.8bn taken in 4Q09.
NPLs inched up to PRs51.6bn, +PRs2.2bn QoQ, but we believe are nearing peak. CASA improved to 72%, crest of the last 2 years, and further improvement is not likely.
We maintain our Underperform rating on the stock where we believe the stock price; trading at 2010E P/B of 1.2x, is already integrating potential rebound in earning growth (+19%) and ROE (18%) of the bank.
 KASB Securities and Economics Research
27 April, 2010

Bank Alfalah — 1QCY10 result review
On an unconsolidated basis, Bank Alfalah Ltd (BAFL) has posted NPAT of PkR586mn (EPS: PkR0.43) in 1QCY10 against NPAT of PkR448mn (EPS: PkR0.33) in 1QCY09, growth of 31%YoY. Reported NPAT is higher than our forecasted 1QCY10 NPAT of PkR488mn (EPS: PkR0.36).
Net Interest Income (NII) is up 8%YoY led by a decline in interest expense, as per expectations. Total provisions have tagged in significantly lower at PkR312mn in 1QCY10, lower by 46%YoY. We believe this is likely due to the bank availing further FSV benefit. Non-interest income is lower by 16%YoY, largely due to 32%YoY decline in fee income. Cost control efforts have continued with total non-interest expense up just 4%YoY.
BAFL trades at a CY10F Total Equity P/B of 0.7x and PER of 9.2x. Our target price of PkR14/share for BAFL implies upside of 22%. Buy!
— AKD Research
29 April, 2010

UBL: asset consolidation continues in 1Q10
UBL posted flat YoY earnings of PRs2.25/sh in 1Q10 as direction of key earnings drivers was a mixed bag i.e. asset contraction offsetting margin expansion.
Balance sheet consolidation continued in 1Q10 with asset book down 6% YoY and asset gearing declining to 9x from 12x in 1Q09.
We believe margins have peaked, 6.8% in 1Q10, & we expect net int. income growth to remain flat with decline in provisions to drive credit income & net profit in 2010E.
NPLs inched up to PRs42bn while CASA remained healthy at 67%, up 700bp YoY. We believe NPLs are nearing peak. On CASA, we do not expect further upside.
We eye UBL as a relatively attractive momentum change play on recovery in domestic economic activity, trading at 1.0x 2010E P/B — lowest among private sector large cap banks.
 — KASB Securities and Economics Research
29 April, 2010

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