JS Securities Limited – Morning Briefing

Karachi, December 13, 2017 (PPI-OT): MEBL: Upgrade to ‘Buy’ on stock price decline, with TP of Rs80

We upgrade our rating on Meezan Bank (MEBL) to ‘Buy’ from ‘Hold’ on recent stock price performance, where the stock has declined by 15% – in line with market sentiments.

We believe the bank justifies premium multiples on the back of (1) one of the highest ROEs in the sector, (2) expected higher-than-peers earnings growth and (3) better asset quality.

We highlight MEBL’s balance sheet growth continues to exceed peers’ performance, where the bank’s deposit growth has reached 8% in YTD 9M2017 vis-a-vis sector’s growth of 7%.

Favourable asset allocation have kept earning yields steady at 5.6% during 9M2017, while earnings on net spreads increased by 18% YoY vs. muted growth amongst peers.

Upgrade to ‘Buy’ on recent stock price performance

We upgrade our rating on Meezan Bank (MEBL) to “Buy” from “Hold” on recent stock price performance, where the stock has declined by 15% – in line with market sentiments. We believe the stock now offers a total return of 30%, with a Dec-2018 Target Price of Rs80. While the bank trades at higher-than-peers 2018F P/B of 1.5x, we believe the bank justifies premium multiples on the back of (1) one of the highest ROEs in the sector, (2) expected higher-than-peers earnings growth and (3) better asset quality. We expect the bank’s earnings to grow by 28% YoY in 2018E vis-a-vis 3% YoY likely improvement in sector’s earnings (ex-HBL penalty). Key risks to our investment thesis include (1) lower-than-anticipated increase in interest rates and (2) lower-than-expected cash payouts to manage CAR.

MEBL’s balance sheet outperforming peers

We highlight MEBL’s balance sheet growth continues to exceed peers’ performance, where the bank’s deposit growth has reached 8% in YTD 9M2017 vis-a-vis sector’s growth of 7%. With no MDR regulatory requirement, the bank’s savings deposits increased by 10% (JS Banking Universe: 8%) during the same period, pushing CASA up to 75% (+128bps) and keeping cost of funds unchanged. Asset allocation remained tilted towards Advances with 15% YTD growth as at Sep-2017 (sector’s: 10%), taking ADR up to 59% (+373bps); while limited investment avenues resulted in IDR coming down to 20% (-319bps) with investments in lending to financial institutions rising to 24% of deposits (22% as at Dec-2016).

Favourable asset allocation limiting drop in NIMs

Favourable asset allocation have kept earning yields steady at 5.6% during 9M2017, limiting decline in NIMs to 9bps YoY (peer average: -46bps YoY). As a result, earnings on net spreads increased by 18% YoY during 9M2017, while peer average Net Interest Income (NII) growth remained muted. On the Fee Income front, the bank’s posted robust improvement of 74% YoY on (1) active consumer banking and (2) higher fee income from subsidiary.

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