JS Securities Limited – Morning Briefing

Karachi, December 04, 2017 (PPI-OT): FABL: Reiterate ‘Hold’ with TP of Rs24

Post incorporation of 9M2017 detailed accounts; we reiterate our ‘Hold’ rating and Target Price of Rs24 on Faysal Bank (FABL). While the bank trades at a 2017E P/B of 0.7x, it only offers a ROE of 12%.

We expect bank’s Net Interest Income (NII) to grow by 13% YoY in 2017E, and with reversals under provisioning expenses already recorded during the year, we expect the bank’s profits to increase by 7% YoY to Rs3.5/share in 2017E.

Beyond 2018F, we expect earnings to grow on the back of anticipated increase in core income from higher interest rates and growth in asset base.

In 9M2017, FABL registered growth of 2% YoY in net earnings, in spite of (1) 16% YoY higher NII, (2) 12% YoY increase in Fee Income and (3) reversals under provisioning expenses, as 59% YoY lower realized capital gains limited growth in profitability.

FABL’s IDR has increased to 53% during 9M2017 (+312bps), as investments in MTBs increased to Rs123bn (65% of the total investments). ADR remained stable at 60%, one of the highest ADRs in our Banking Universe.

Reiterate ‘Hold’ with TP of Rs24

Post incorporation of 9M2017 detailed accounts; we reiterate our “Hold” rating and Target Price of Rs24 on Faysal Bank (FABL). While the bank trades at a 2017E P/B of 0.7x, it only offers a ROE of 12%. We expect bank’s Net Interest Income (NII) to grow by 13% YoY in 2017E, and with reversals under provisioning expenses already recorded during the year, we expect the bank’s profits to increase by 7% YoY to Rs3.5/share in 2017E. However, we expect such reversals are unlikely to materialize in 2018F, resulting in 19% YoY drop in profitability for the year. Beyond 2018F, we expect earnings to grow on the back of anticipated increase in core income from higher interest rates and growth in assets. We do not expect abnormal capital gains in the future as FABL‟s Surplus on Revaluation stands at Rs16mn as at Sept-2017. Key risks to our investment thesis are (1) delays in increase in interest rates, (2) higher-than-expected provisioning expenses and NPL accretion.

EPS growth in check in 9M2017 on absence of capital gains

In 9M2017, FABL registered growth of 2% YoY in net earnings, in spite of (1) 16% YoY higher NII, (2) 12% YoY increase in Fee Income and (3) reversals under provisioning expenses, as 59% YoY lower realized capital gains limited growth in profitability. The increase in NII was driven by improvement in spreads and 22% YoY expansion of asset base. Similarly in 3Q2017, FABL posted net earnings of Rs0.73/share, up 4% YoY. Though NII improved by 18% YoY and Fee Income increased by 35% YoY, absence of realized capital gains kept earnings growth in check.

Share of short-term investments remains high

FABL’s IDR has increased to 53% during 9M2017 (+312bps), as investments in MTBs increased to Rs123bn (65% of the total investments) from Rs55bn (53% of the total investments) as at Dec-2016. The peer average of share of MTBs in total investments stands at 48%. On the other hand, ADR remained stable at 60%, one of the highest ADRs in our Banking Universe, as the bank’s Advances slightly increased by 5% during the same period. Improvement in asset quality continued with NPLs sliding down to Rs27bn (-9% YTD) as Infection ratio declined by 156bps YTD to 11.5%, while Coverage ratio also inched up by 495bps YTD to 88%. On the liability front, FABL‟s CASA improved by 120bps YTD to 71%, however CASA expansion was driven by 8% YTD higher savings deposits while total deposits underperformed sector growth, clocking in at 5% YTD (sector: 7% YTD).

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