ABL has posted Q2 CY 19 consolidated NPAT of PKR3,148mn (EPS: PKR2.75), down 7% yoy (-15% yoy on pre-tax basis). This takes H1 CY 19 NPAT to PKR6,242mn (EPS: PKR5.45), down 14% yoy (-6% yoy on pre-tax basis). The Q2 CY 19 results came in below our expected EPS of PKR3.50, with the deviation stemming from (i) lower-than-expected NII (PKR9,146mn vs. projected PKR10,400mn), and (ii) unusually higher admin expenses. Results were accompanied with a second interim cash dividend of PKR2.0/sh, taking the half-year payout to PKR4.0/sh (in line with estimates).
- Net interest income rose by 17% yoy but was down by 5% qoq. Similar to BAFL, it is possible that ABL may also have suspended some markup on certain loans.
- Provisioning reversal of PKR85mn was in line with expectations, and is encouraging given that its peers have booked large impairments on their equities portfolios in the same period.
- Overall non-interest income was down 12% yoy. However, excluding capital gains, it is up by 1% yoy. Core fee income was flat in Q2 CY 19 but it is up by 9% yoy in H1 CY 19, possibly reflecting timing differences between quarters. Fx gains reported a 56% yoy jump in Q2 CY 19.
- Admin expenses of PKR7,187mn (up 24% yoy) came in higher than our expectations of PKR6,515mn. This, coupled with a weaker-than-expected NII, has led the cost/income ratio to shoot to 60% in Q2 CY 19, vs. 51% in SPLY (and 49% in Q1 CY 19). ABL has historically showed a c60% cost/income ratio in the last quarter of the year (likely on year-end employee bonuses), but it is unusual to see a mid-year spike.
- Effective tax rate reduced to 36% from 52% in the previous quarter.
While we are encouraged by continuation of provisioning reversals, this is a weak result by ABL with misses on NII and cost efficiency. ABL’s investor call later in the week should shed clarity on the reasons behind the low NII and high costs. ABL trades at a 2019f P/B of 0.9x (2020f: 0.8x) while offering a double-digit forward dividend yield. Our Dec’20 target price of PKR115/sh implies an ETR of 44% (maintain Neutral), but we will look to revisit our earnings estimates after the investor call.
Risks: (i) Weaker-than-expected pick-up in NII, (ii) deterioration in asset quality and (iii) failure to control costs (core-admin expense).