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MCB: Still a growth stock?
Following lower than expected NPAT of PkR15.5bn (EPS: PkR18.57) in 9MCY11, we trim our earnings estimates for MCB by 3% on average and cut our Dec12 target price to PkR180/share from PkR205/share. Steeper decline in TP is due to assigned weight to DDM (25%) to partly reflect low earnings growth visibility in what is shaping up to be a volatile interest rate environment. While MCB should post 25%YoY growth in CY11F (projected sequential improvement in 4QCY11F), unless asset quality improves, we believe the bank will be hard pressed to post double-digit profit growth across the next 2-3 years particularly if interest rates continue to swiftly decline (we anticipate a further 50bps in the DR by month end). As a result, while MCB should record average Tier-I ROE of ~25% across the medium-term, valuations may sustainably depart from the growth multiples traditionally associated with the bank. MCB trades at a CY12F P/B of 1.29x, PER of 6.01x and D/Y of 8.8%. Our revised TP of PkR180/share offers upside of 13% and implies an Accumulate stance.
KSE100 - Index
Current Previous Chg. 11,992.77 11,994.01 -0.01%
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0 9,000 Nov-10 Feb-11 May-11 Aug-11 Volume (LHS) KSE-100 Index (RHS)
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Summarized P&L
(In PkRbn) 9MCY11 YoY 3QCY11 Int Inc 49.7 23% 16.8 Int Exp 16.7 26% 6.1 NII 33.0 22% 10.7 Total Provs 2.7 35% 0.3 Post Prov NII 30.2 21% 10.4 Fee Inc 3.6 20% 1.2 FX Inc 0.7 54% 0.2 Cap Gains 0.7 96% 0.1 Non Int Inc 6.2 31% 2.0 Total Inc 36.4 23% 12.4 Non Int Exp 12.3 19% 4.4 Sh of AICL 0.1 -16% (0.1) NPBT 24.3 24% 8.0 NPAT 15.5 24% 4.9 EPS (PkR) 18.57 5.86 QoQ -1% 9% -5% -76% 3% -6% -11% -69% -7% 2% 10% n.m. -4% -4%
9MCY11 could have been better: MCB posted NPAT of PkR15.5bn (EPS: PkR18.57) in 9MCY11, up 24%YoY. 3QCY11 NPAT clocked in at PkR4.9bn (EPS: PkR5.86), +9%YoY/-11%QoQ. Lower sequential profitability was largely due to unexpectedly lower interest income (we understand that PkR700mn markup was suspended in connection with circular debt exposure) and a spike in admin costs (lower PF writebacks). Regarding the former, suspended markup should find its way onto the P&L in 4QCY11F, . thereby enabling MCB to post a strong end to the year. Asset quality in for improvement: NPL stock reached PkR26.6bn (NPL ratio: 10.0%, coverage: 83%) on Sep 3011, up 11%YoY/4%QoQ. In our view, asset quality metrics have troughed out where we see marked improvement ahead in a more dovish interest rate environment. We build in average credit costs of 0.75% across the next 5yrs (vs. avg. of 1.32% across previous 5yrs) where we believe MCBs asset quality has the potential to surprise on the upside (90% of NPLs already in fully-provisioned Loss category). Outlook: With its business model facing margin pressure, MCB may look to leverage its strong capital base (CY10 CAR: 22.04%) to expand the asset book. This could also be overseas and management has hinted as much. That said, unless asset quality depicts swift improvement, we believe MCBs valuation may sustainably depart from the growth multiples of yesteryears. Our revised target price of PkR180/share (75% weight to Justified P/B, 25% weight to DDM) offers upside of 13% from current levels.
raza.jafri@akdsecurities.net
www.akdsecurities.net
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Valuation Statistics
Year End Dec 31 CY09A EPS (PkR) 18.73 EPS Growth 2% P/B Tier I (x) 2.11 Total BVS (PkR) 86.5 P/B (Total SHEQ) (x) 1.85 PER (x) 8.52 Loan to Deposit (conventional)69% Yield on earning assets 12.90% Cost of Funds 4.04% NIMs 8.86% Cost/Income 27% Normalized Cost/Income 34% ROE (average) 23.7% DPS (PkR) 9.1 Dividend yield 5.69% CY10A 20.18 8% 1.87 98.1 1.63 7.91 59% 12.08% 4.06% 8.01% 31% 36% 21.9% 10.5 7% CY11F 25.12 25% 1.68 108.7 1.47 6.35 49% 12.41% 4.40% 8.01% 32% 35% 24.3% 12.5 7.8% CY12F 26.57 6% 1.46 123.4 1.29 6.01 49% 10.72% 3.77% 6.95% 34% 37% 22.9% 14.0 8.8% CY13F 29.09 9% 1.28 137.1 1.16 5.49 48% 11.36% 4.03% 7.33% 36% 36% 22.3% 15.0 9.4%
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I, Raza Jafri, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is/or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I further certify that I do not have any beneficial . holding of the specific securities that I have recommendations on in this report.
Rating Definitions
Buy Accumulate Neutral Reduce Sell > 20% upside potential > 5% to < 20% upside potential < 5% to > -5% potential < -5% to > -20% downside potential < -20% downside potential
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