AKD Quotidian about — NBP: Worst may be over

Karachi, March 20, 2014 (PPI-OT): Following NBP’s worst performance in 10yrs (CY13 NPAT: PkR5.4bn, EPS: PkR2.48), AKD Securities cuts AKD Securities’ Dec’14 target price to PkR60/share but retain an Accumulate stance based on an anticipated swift rebound in profitability.

According to AKD Securities, with Bangladesh operations ~60% provided for and domestic impairment headed lower, the main impetus to earnings growth should come from likely lower provisions. At the same time, NBP retains sizeable unrealized capital gains backlog of PkR21.7bn (on local shares/mutual funds) which can potentially result in +ve earnings surprises. Finally, sustained CAR above 16% provides comfort that NBP can maintain a high payout ratio going forward (3yr average: 76%).

Having shed 8%CYTD, NBP trades at a CY14F P/B of 0.7x, P/E of 7.2x and D/Y of 10.4%. While NBP will likely continue to trade at a discount to private sector peers, AKD Securities believes its price performance will recouple with anticipated improvement in sequential results. AKD Securities’ revised target price offers 13% upside (total return: 24%).

Asset quality update: Traditional asset quality concerns came to the fore in CY13 with loan loss provisions jumping to PkR17.5bn, an all-time high. About 50% of these pertained to Bangladesh operations (textile lending) where more than PkR10bn of specific provisions have been created against infection of PkR17bn.

In this regard, NBP management has stated that much of this infection is subjective and is confident that further such provisions are unlikely to materialize with reversals a tangible possibility going forward. With domestic impairment also likely to be lower, AKD Securities sees total provisions halving in CY14F (total coverage is already 80%) which should provide an immediate impetus to earnings growth (CY14F: +3xYoY).

Capital gains backlog: At end-Dec’13, NBP’s equity portfolio (local shares + mutual funds) carried sizeable unrealized capital gains of PkR21.7bn (CY12: PkR8.3bn). Even if provisions tag in higher than expected, AKD Securities believes there is a realistic possibility that NBP will be able to smoothen reported earnings through timely realization of capital gains (2/3 of the portfolio is in 20 stocks with the top 5 holdings being PSO, HUBC, EFOODS, NATF and SNGP). At the same time, unrealized gains of BJAZ stake stand at a hefty PkR18.0bn although AKD Securities marks its disposal as a low probability event over the medium- term.

Future strategy: As per management, the primary strategy is to seek improvement in asset quality with particular emphasis on Bangladesh operations. At the same time, 1) NBP will seek to lift deposit growth (6%YoY in CY13 vs. 14%YoY for the sector) by leveraging unique rural presence, 2) enhance customer service (eyeing to add 700 ATMs in 3yrs + dedicated centers for pension claims) and 3) become aggressive in Islamic banking (targeting a 15x increase in book size to PkR100bn over next 3yrs). AKD Securities believes measures to achieve cost efficiency in addition to the stated medium- term objectives would be key positives.

Investment perspective: NBP trades at a CY14F P/B of 0.7x, P/E of 7.2x and D/Y of 10.4%, an attractive valuation set considering the worst on asset quality is likely over and comfort on a sustained high payout going by 16%+ CAR. While NBP will likely continue to trade at a discount to private sector peers, AKD Securities believes its price performance will recouple with anticipated improvement in sequential results. AKD Securities’ revised target price offers 13% upside (total return: 24%).

NBP: Valuations
Year End Dec 31                 CY12A          CY13A        CY14F         CY15F       CY16F
EPS (PKR)                        7.89           2.48         7.37          8.92       10.49
EPS Growth                        -5%           -69%         197%           21%         18%
PER (x)                          6.70          21.34         7.18          5.93        5.04
Total BVPS (PKR)                68.10          75.52        79.03         83.75       89.11
P/B Total BVS (x)                0.78           0.70         0.67          0.63        0.59
Loan to Deposit Ratio             64%            56%          55%           55%         55%
Yield on earning assets        10.32%          9.42%        9.40%         9.35%       9.33%
Cost of Funds                   5.53%          5.50%        5.53%         5.56%       5.54%
NIMs                            4.78%          3.92%        3.87%         3.79%       3.79%
Market Cap to Deposits            11%            10%           9%            8%          7%
Growth in Loan Book               25%            -6%          10%           14%         14%
Growth in Deposits                12%             6%          13%           14%         13%
Total Equity ROAE               11.3%           3.5%         9.5%         11.0%       12.1%
DPS (PKR)                        6.09           2.00         5.50          6.50        7.00
Dividend Yield                 11.50%          3.78%       10.40%        12.29%      13.23%
Payout Ratio                   77.11%         80.67%       74.60%        72.90%      66.72%
                                                         Source: Co. Reports and AKD Research
NBP: Income Statement
(PKR mn)                             CY12A      CY13A       CY14F        CY15F       CY16F
Interest Earned                     101,126    100,192    109,391       123,764     139,389
Interest Expense                    56,552     60,894     66,508        76,154      86,014
Net Interest Income                  44,573     39,298     42,882        47,610      53,375
Total Provisions                     10,710     19,568      8,980         7,296       5,407
Post Provisioning NII                33,863     19,730     33,902        40,314      47,968
Fee Income                           11,146     12,347     13,273        14,268      15,267
Total Non-Interest Income            24,805     25,952     29,173        31,147      32,383
Total Non-Interest Expenses          36,484     38,653     42,137        45,694      49,328
NPBT                                 22,184      7,029     20,939        25,766      31,024
NPAT                                 15,665      5,307     15,718        19,004      22,357
                                                         Source: Co. Reports and AKD Research
NBP: Balance Sheet
(PKR mn)                      CY12A            CY13A         CY14F         CY15F        CY16F
Investments                  342,965          396,412       495,305       560,673      620,537
Net Advances                 658,654          620,217       682,669       776,727      884,505
Total Assets               1,316,349        1,371,718     1,541,120     1,732,354    1,937,129
Deposits                   1,037,049        1,101,845     1,247,259     1,419,687    1,604,025
Total Liabilities          1,171,468        1,211,054     1,372,974     1,554,173    1,747,549
Net Assets                   144,881          160,664       168,146       178,182      189,580
Total Equity                 144,881          160,664       168,146       178,182      189,580
Total SHEQ and Liabilities 1,316,349        1,371,718     1,541,120     1,732,354    1,937,129

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