Morning Call about Meezan Bank Limited – Arif Habib Limited

Karachi: All in good faith

Arif Habib Limited initiates Arif Habib Limited’s coverage on Meezan Bank Limited (MEBL) with a Dec-12 Target Price of PKR 35.7/share.

According to Arif Habib Limited’s valuation is based on Justified P/B basis wherein sustainable ROE is estimated at 22.6% and growth at 12.1%. At the last closing of PKR 27.8/share, the scrip provides an upside of 28.5% to Arif Habib Limited’s Target Price. The scrip is current trading at CY12 and CY13 P/B of 1.4x and 1.2x respectively. Arif Habib Limited expects the Bank to post EPS of PKR 4.23 and PKR 4.71 in CY12 and CY13, respectively.

The growth drivers
Arif Habib Limited identifies rising share of Islamic Banks in Pakistan, Meezan Bank’s sheer dominance over the Islamic banks and its ability to mobilise deposits at a low cost, as the key value enhancers which in Arif Habib Limited’s view, will keep the Bank’s earnings stable going forward. In terms of asset quality the Bank over the period has successfully been able to shift its assets from advances to investments, which has resulted in relatively low non-performing loans (NPLs).

Deposit growth – Tapping the niche market
Overall, the Bank’s deposits have seen a faster rate of growth than conventional banks – albeit from a low base – reaching PKR 170bn in CY11 from PKR 55bn in just 5 years. The Bank’s ability to attract this phenomenal growth partially lies in growing share of Islamic banks in the overall banking system and an aggressive phase of branch expansion (275 branches by CY11). Composition-wise, saving deposits constitute almost 37% of the Bank’s deposit base (PKR ~63bn; 5YR CAGR 37%), followed by fixed deposits at 28% (PKR ~48bn; 5YR CAGR 40%), and translating to a low cost CASA of 65%.

Best in terms of earnings growth seems behind us
CY11 turned out to be an exceptional year for the Bank. Improved interest rate scenario along with bank’s ability to keep the cost of deposit at low levels led to MEBL registering a profit after tax (PAT) of PKR 3,392mn (+106%YoY). The net interest margins (NIMs) for the year rose to 7.4% compared to an average of 5.7% during CY06-10 and 3.1% during CY02-04. Improvement in NIMs is linked to high discount rate and increased investments in GoP Sukuk (priced at 6 months T-bill yield). Going forward Arif Habib Limited thinks this growth is likely to take a respite, owing to squeezing NIMs as interest rate have been slashed by 200bps in 2HCY11 and resulted in re-pricing of Ijarah Sukuk.

NPL absorption remains well within comfortable zone
The Bank’s stringent lending policy and its ability to manage credit risk prudently has left it relatively less exposed to Non-Performing Loans (NPLs) as compared to the industry. NPL’s to gross advances ratio remains considerably lower at 7.2%, compared to the industry average of 16.2%. In addition to this, during CY11 the Bank booked higher provisioning against NPL’s, taking the banks coverage ratio to 114%. This Arif Habib Limited believes is due to higher amount of NPLs being categorized as ‘Loss’ (~88%) and the Bank’s cautious approach towards lending. Asset base – Shifting paradigm The Bank’s advances portfolio remained rather subdued, growing by a 6-year CAGR of 17%. While, this is in-line with the overall banking industry – owing to challenging economic circumstances – but in case of Meezan bank; the Advance to- Deposit Ratio (ADR) dropped considerably to 34.8% in CY11 compared to industry average of 59.5%. During CY11, MEBL’s advances grew by ~9%YoY, which is considerably lower than what it had been in the past (23%YoY average growth during CY06-10).

Sukuk’s blessings
Nevertheless, this subpar growth in bank’s advances was partially facilitated through an unprecedented rise in investments, causing a significant shift in the Bank’s asset mix. Bank’s Investment-to-Deposit Ratio (IDR) increased to 58.2% in CY11 owing to increased availability of GoP Ijarah Sukuk. During CY11, the Bank deployed a substantial portion in GoP Ijarah Sukuk, making up almost 77% of its total Investments. Moreover, Meezan being the largest Islamic bank and the prime dealer for SBP Islamic Bond market has actively traded and benefited from its investments in GoP Isaiah Sukuk over the period.

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