AKD Securities Limited Equity Research – Daily Report

Karachi, March 13, 2019 (PPI-OT): MCB downgraded to Neutral from Buy

Post release of detailed financials, we revise down our earnings estimates for MCB Bank Limited (MCB) by PkR1.6/1.1/sh for CY19/20F to PkR/sh 18.8/25.2 (CY19/20F ROE down by 1.3/0.9% to 14.3/18.0%) as we extend super tax to terminal year (CY23) at 4%.

Resultantly, our valuation stance is revised to Neutral from Buy with a Dec’19TP of PkR207.1/sh (Previously: PkR224.7/sh), offering an upside of 6.5% from last close. Cumulated with dividend yield of 8.2%, the stock offers a total return of 14.7%.

We expect bank’s NIMs expansion to be a function of interest rates up-cycle (CY19-end policy rate: 11.5%) where we expect CY19/20F NIMs to expand by 24/85bps to 4.0/4.9% with potential PIB accumulation at higher yields coming into play in CY20, while pass through of rate hikes would be limited in CY19 due to re-pricing mismatch arising on the back of 51% SA deposits in the deposit mix (highest in our universe).

Expanding NIMs could translate into 3y earnings CAGR of 20.5% with subsiding of cost pressures. Gross cost of provisioning is likely to avg. at 0.6% (CY19-21F) that could be neutralized by possible recoveries from NIB portfolio. Moreover, we expect normalization in operating cost growth to low-teens in the medium term as against 20% in CY18 which included certain one-offs.

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