BAFL has posted 1QCY20 consolidated NPAT of PKR2,892mn (EPS: PKR1.63), down 9%yoy and 13%qoq. The result is below our projected EPS of PKR1.86, with the deviation stemming from (i) higher than expected provisioning which we understand is due to the subjective downgrading of certain loans and (ii) a capital loss likely on the equities portfolio.
1QCY20 key result highlights
NII came in-line with expectations at PKR11,780mn, up 6%yoy and 2%qoq. We believe the full impact of repricing of the asset book (on prior interest rate hikes) stands complete this quarter, with the sharply lower interest rates since mid-March to start reflecting from 2QCY20 onwards.
Provisioning & impairments charge of PKR1,528mn (vs. PKR1,016mn in 4Q19), is higher than expected. We understand this is attributable to (i) subjective downgrading of loans similar to the previous few quarters, and not due to an increase in NPLs and (ii) an element of impairment on equities where we understand the bank has chosen not to stagger this charge across the year, unlike other banks.
Non-interest income rose 16%yoy (flat qoq), but came in lower than expectations due to a capital loss of PKR47mn and marginally lower fee income (down 5%yoy). This was, however, partially compensated by high fx gains.
While admin costs are in-line with expectations at PKR8,094mn, (up 19%yoy and 7%qoq), this is nevertheless a high number. Other than branch expansion in 4Q19 and higher digital spend, we understand there is an element of one-offs too. As a result, the cost-to-income ratio has risen to 55% (vs. 52% average quarterly run rate in CY19).
With BAFL being more sensitive to interest rates vs. peers, we expect a relatively swift decline in NIMs in the coming quarters which, together with expected deterioration in asset quality (as for the rest of the sector), may add pressure to earnings. Capital gains realization and high investment income may help cushion this to some extent. BAFL trades at CY20/21f P/B of 0.60x/0.56x where the recent sharp correction in the share price has opened up entry points.