We reduce our 2019-23f EPS estimates for ABL by 9% on average, following a weak 1HCY19 result on lower than expected NII and cost slippages. This also reduces our absolute dividend expectations, as we maintain a sustainable 60% cash payout. Our revised Dec’20 TP is now PKR105/sh (down from PKR115/sh previously), but we maintain our Buy rating due to the stock’s c 20% FYTD correction.
ABL’s NII grew by 18%yoy in 1HCY19 vs. 24%yoy for its peer group. We expect improvement in future, as asset re-pricing reflects more prominently in 2HCY19, while the deposit mix continues to hold up (CASA is c 75%). Moreover, ABL’s asset quality also remains strong, and we expect credit costs to remain at a modest 50 -60bps over the medium term.
ABL is a safer proposition relative to peers given its superior asset quality and capital strength (Jun’19 CAR: 21.5%). While the latter results in a high dividend yield (c11% at present), it also pushes down ABL’s ROE, projected at 16.0% in 2023f vs. 17-18% for HBL/UBL and 20% for MCB. ABL trades at a 2020f P/B of 0.80x and P/E of 5.8x, where our TP implies a 1x exit P/B.
Reduced estimates leading to a TP cut; Buy maintained
We reduce our 2019-23f EPS estimates by 9% on average, with the cuts concentrated in 2019f. Our new 2019/20f EPS estimates are PKR11.51/14.46, which imply flattish earnings this year before a significant improvement next year. The earnings cuts also drive a cut in our dividend expectations, where we now expect DPS of PKR8.0/9.0 in 2019/20f vs. PKR8.5/9.5 earlier. As a result, our revised Dec’20 TP is now PKR105/sh (vs. PKR115/sh earlier). However, we maintain our Buy rating given the stock’s c 20% FYTD correction.
2QCY19 earnings miss on lower-than-expected NII and cost slippages
ABL posted consolidated 2QCY19 NPAT of PKR3,148mn (EPS: PKR2.75), down 7%yoy, much lower than our projected EPS of PKR3.50/sh. Although ABL did not face impairment on its equity portfolio (unlike peers), it bore the brunt of reduced dividend income. The earnings miss was a function of lower-than-expected NII (lagged asset re-pricing), sluggish fee (up 1%yoy) and high admin expenses (up 22%yoy on implementation of IFRS-16, with C/I at 60% for the quarter). Positives included a continued reduction in the NPL stock, and a sequential 2ppt improvement in CASA led by current accounts.
Stable CASA mix in a high-interest rate environment
Deposit growth is a decent 11%yoy, while the deposit mix has improved despite a higher interest rate environment. The proportion of current deposits has improved by 2ppt to 34%. This, coupled with the lagged impact of asset re-pricing, should ensure robust NII pickup across the balance of the year, in our view. We expect ABL’s NIMs to expand by c 80bps to 3.8% in 2019f (and by another 45bps in 2020f).
Asset quality stands out
ABL has continued to reduce its NPL stock in 2QCY19, unlike BAHL and MEBL for instance, two other banks known for strong asset quality. We maintain our cost of risk estimate for ABL at c 50-60bps over the medium term vs. up to 100bps for some peers. This is partly due to ABL’s conservative lending stance - loan growth has decelerated to 5%yoy, and we expect a similar pace across 2019/20f before a return to double-digit growth from 2021f.
Cost efficiency to gradually improve
Admin expenses jumped 16%yoy in 1HCY19 due to implementation of IFRS-16 and higher deposit insurance expense. This took C/I to 60% in 2QCY19 and 54% in 1HCY19, vs. a previous 5yr average of 47%. We expect C/I to remain relatively elevated at 52% this year before gradually reducing to the mid-40% levels as revenue expands.
Capital strength provides safety but also pushes down on CAR
ABL’s strong capital base (CAR at 21.5%) results in one of the most stable dividend streams among Pakistani banks, with room for positive surprises. However, ABL is arguably overcapitalized as its mid-cycle ROE is below that of peers. As a result, our revised TP implies an exit P/B multiple of 1x for ABL, lower than for peers.
Risks: (i) Weaker than expected pick-up in NII, (ii) deterioration in asset quality and (iii) failure to control costs (core-admin expense).