AKD Securities Limited Equity Research – Daily Report

Karachi, February 25, 2016 (PPI-OT): MCB: TP revision on earnings slowdown

Following below average CY15 financial results, AKD Securities Limited revisits AKD Securities Limited’s investment case for MCB where AKD Securities Limited now eyes earnings growth of a nominal 3% in CY16F, reflecting a challenging year ahead. In this regard, NIMs are likely to come off on account of: 1) PIB maturity of ~PkR100bn in 2HCY16 to reduce yield on investments and 2) full impact of TR introduction and MDR tightening.

That said, MCB’s keen focus on: 1) attracting low cost deposits particularly efforts to scale up C/A (up 10%YoY in CY15), 2) building its high margin consumer book (25%YoY growth) and 3) superior asset quality are factors that will allow MCB to sail through. Losing 42% since its CY15 peak of PkR338/sh, MCB is currently available at heavily discounted valuations with CY16F P/B and P/E of 1.5x and 8.2x respectively against its 3yr avg. historical P/B and P/E of 2.42x and 12.8x respectively where AKD Securities Limited’s revised TP (blended P/B,P/E and DDM) of PkR239.5/sh offers 23% upside.

CY15 result review: MCB posted consolidated NPAT of PkR25.03bn (EPS: PkR22.38) in CY15 vs. NPAT of PkR24.3bn (EPS: PkR22.15) in CY14, up 2.9%YoY. Alongside the result, MCB announced a final interim dividend of PkR4.0/share taking total CY15 payout to PkR16.0/share (payout ratio: 70%). Key CY15 result highlights included: (i) NII up 13%YoY on balance sheet growth, (ii) provisions worth PkR543mn as compared to reversals of PkR1.4bn in CY14, (iii) impressive 33%YoY non-interest income growth led by capital gains (+2.0x YoY) and dividend income (+74%YoY), and (iv) 11%YoY increase in expenses. The sequential downtrend in profitability (-19%QoQ) was primarily on account of higher provisions worth PkR1.6bn in 4QCY15 against reversals of PkR1.1bn in 9MCY15.

Earnings growth to slow down further in CY16F:MCB CY15 earnings depicted the slowest pace of growth in the last 5yrs. CY16F is expected to be the same, if not tougher with tighter NIMs considering upcoming maturity of high yielding PIBs in 2HCY16, lowering yield on investments. That said, support in this regard is likely to come from MCB’s excellent deposit franchise with increasing contribution from current accounts (36% of total deposits in CY15), partially mitigating the impact of MDR on cost of funds.

Breaking traditions in a good way: Moving away from its conservative approach, MCB is now keenly building upon its consumer financing business (25% YoY growth in CY15)- a segment that it has largely been ignored considering associated asset quality concerns. That said, the management looks all set to tap this segment considering the prevalent low interest rate scenario targeting 30%-35% growth going forward. AKD Securities Limited believes MCB should be able to leverage its size and widespread network to benefit from any increase in consumer financing (up 11.6% YoY in Dec’15).

Investment Perspective: Losing 42% since its CY15 peak of PkR338/sh, MCB is currently available at heavily discounted valuations with CY16F P/B and P/E of 1.5x and 8.6x respectively against its 3yr avg. historical P/B and P/E of 2.42x and 12.8x respectively. While earnings outlook remains weak, MCB’s ROE still averages at a healthy 19.2% across the medium term. AKD Securities Limited’s revised TP of PkR239.5/sh offers 23% upside.