Karachi, May 23, 2012 (PPI-OT): Changing strategies
Bank AlFalah (BAFL), now the sixth largest bank of Pakistan by deposit size, is gradually coming at par with the Big-5 banks in other aspects as well.
According to Elixir Securities Limited, the balance sheet has grown at a 5 year CAGR of 10% from CY06-11 funded by deposits growth at 11% for the same period. Advances have also increased in line with industry at 6%. It is pertinent to note that the bank has shifted its focus from term deposits to low-cost deposits over the past 2 years. For instance fixed deposits currently account for 26% of total deposits which used to account for 37% two years back. Simultaneously, CASA deposits have grown to 66% at present from 55% previously leading to lower deposit costs. BAFL’s NIM stood at 5.5% during 1QCY12, lower than 6.5% in 4QCY11 on account of the discount rate cut and suspended markup income.
Largest Islamic franchise in the conventional banking system
Bank Al Falah (BAFL) has the largest Islamic banking franchise (85 branches) amongst the conventional banks. It is currently operating with an asset base of PKR93bn (~15% of all Islamic banking assets). Rapid growth in this area will lead to further strength in BAFL’s profitability considering the low-cost nature of Islamic deposits.
Slow loan growth to keep NPL growth subdued
Non-performing loans (NPLs) have lately witnessed an addition of PKR1.3bn during 1QCY11 with NPL ratio at 9.6%, up from 9.0% as of Dec-11. 81% of NPLs are classified in the Loss category while coverage ratio stood at 65%. As the bank has only witnessed a meager 1% YoY growth in its loan book and has exited from consumer financing to a great extent, Elixir Securities Limited expects NPLs to grow at a 3 year CAGR of 5% from CY11-14E compared to a 29% growth over CY08-11E. Therefore, provisions will continue to decline (-17% YoY in CY12E) which will further be aided by FSV benefit.
Warid and Wateen only a matter of time
The bank has fully provided for its loan to Agritech while it has reclassified its investments in Wateen and Warid telecom as available for sale (AFS) from Associates which it plans to divest as soon they find a profitable deal. The bank has been gradually provisioning for its investment in Warid which is currently valued at PKR1.8bn. It plans to write-off the same by CY14E. Therefore, we see provision on investments to stand at PKR1.2bn for CY12E and PKR849mn in CY13E and CY14E each and discontinue thereafter.
Capital adequacy to enable future payouts
Strong capital adequacy (CAR at 11.6%) and a decline in non-distributable equity base (PKR1.89bn as of Mar-12 from PKR2.0bn as of Dec-11) will lead the bank to continue its payout trend going forward. Elixir Securities Limited expects the bank to announce a DPS of PKR2 in CY12, payout of 61%.
Investment Perspective: Jun-13 PT of PKR22; BUY!
Significant improvement in ROE to 19% during 1QCY12 from an average of 7.8% over the past 3 years and prospective payouts make the bank stand out amongst its peers. BAFL is trading at a low PBV of 0.79x. Elixir Securities Limited’s Jun-13 PT of PKR22 is based on target Justified P/BV of 1.0x, sustainable growth rate of 8%, Cost of Equity of 20%, and Return on Equity (ROE) of 20%. The scrip is currently trading at CY12E P/E and P/BV of 5.0x and 0.8x respectively and poses an upside of 32% from current levels in addition to a hefty dividend yield of 12%. BUY!