AKD Securities Limited – BAFL: The bank with a plan

Karachi, January 29, 2015 (PPI-OT): AKD Securities Limited tweaks earnings estimates for BAFL to reflect a more palatable macro environment where IFC capital injection (PkR6.67bn) can allow (i) swifter than industry BS growth and (ii) continuation of annual dividends. By this time next year, BAFL will have 700+ branches which should translate into consistent cost efficiency over the medium-term. The combination of BS size and strong capital base will enable BAFL to post a 14% NPAT CAGR across the next 5yrs, the highest in the AKD Banks Universe with room for +ve surprises if SBP focus on Islamic banking reaches fruition. As a result, BAFL depicts the greatest uptick in Tier-I ROE in AKD Securities Limited’s coverage cluster- from an average of 12.6% over the last 5yrs to 18.7% by CY18F.

Together with the macro rebound, this should translate into swift valuation rerating where BAFL trades at an average 22% discount to private sector peers that may struggle to expand ROE. Having shed 3.8%CYTD, BAFL trades at an attractive valuation set (CY15F P/B: 1.18x, P/E: 7.8x, D/Y: 6.7%) where AKD Securities Limited’s revised TP of PkR38/sh (on new no. of shares) offers a 1-yr total return of 19%. Note, that AKD Securities Limited’s TP would rise to PkR40.5/share upon inclusion of Warid in valuations. Accumulate!

The bank with a plan: Scale pays off in the Pakistan banking sector; to this end, BAFL has increased its branch network from less than 50 in CY02 to more than 600 at present to emerge as the 6th largest bank in the country. This is not easy to replicate, as peers have had to rely on oft-risky M and A activity to grow. While this rapid expansion has resulted in periods of high earnings volatility for BAFL, AKD Securities Limited believes the bank is now positioned to reap scale benefits; across the medium-term, C/I is projected to drop below 65%, CASA should cross 70% and L/D could expand to above 55%. This should drive a 14% NPAT CAGR across the next 5yrs, with room for +ve surprises (18% NPAT CAGR if C/I drops to 60%).

Stronger capital base: AKD Securities Limited ventures that swift BS growth will be a natural consequence of a stronger capital base where IFC capital injection of PkR6.67bn alone (238.1mn shares issued) will bump up BAFL’s CAR by an estimated 180bps (CY13 CAR: 12.1%). AKD Securities Limited sees BAFL’s assets growing at a 12%+ CAGR across the medium-term, with room to support higher risk weights leading to a projected loan growth CAGR of 15%. At the same time, BAFL will likely be able to continue with annual dividends at a ~50% payout ratio. Besides impetus to core interest earnings, AKD Securities Limited also like BAFL’s non-funded income franchise which can receive a further boost post launch of a branchless bankings proposition last year in collaboration with Warid Telecom.

SBP push on Islamic banking: In view of limited asset-side opportunities, BAFL has consciously pared its Islamic book’s contribution to less than 15% from 20%+ at end-CY12. While the picture may not change in the near-term, AKD Securities Limited retains AKD Securities Limited’s liking for Islamic banking given (i) GoP push for Islamic products (launch of global sukuk), (ii) SBP anticipated push for the same under high-level appointees and (iii) win-win situation for the GoP to borrow at cheaper rates from highly liquid Islamic banks. Not for nothing is MCB planning to set up a separate Islamic banking subsidiary where revival in BAFL’s Islamic business over the medium to longer term has the potential to result in +ve earnings surprises.

Valuation rerating: Beyond CY15F, BAFL should depict a rising ROE trend with Tier-I ROE projected to rise from 12.6% across the last 5yrs to 18.7% by CY18F – the larger private banks, coming from a prolonged period of 20%+ ROE, may struggle to replicate the same. This should lead to a compression in BAFL’s valuation discount vs. peers( 26% /21% /61% on forward PB/PE/Mkt Cap-to-Deposits). BAFL trades at a CY15F P/B of 1.18x and P/E of 7.8x where AKD Securities Limited’s revised TP of PkR38/sh offers a 1-yr total return of 19% (with Warid TP: PkR40.5/share). However, AKD Securities Limited flags that increase of 50bps in MDR on savings deposits will compress TP to PkR36.6/sh (total return: 16.5%).

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