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Pakistan

Allied Bank: Q4 CY 19 review: Reversal on Workers Welfare Fund helps drive growth

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

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    Intermarket Securities
    7 February 2020

    ABL has posted consolidated 4Q19 NPAT of PKR4,852mn (EPS: PKR4.24), up 66%yoy and 43%qoq, taking CY19 NPAT to PKR14,489mn (EPS:12.65), up 11%yoy. The result is significantly above our expected EPS of PKR2.88 as well as street consensus. The earnings beat was led by a (i) one-off PKR1,120mn reversal on Worker Welfare Funds (WWF) similar to 4Q18, (ii) higher than expected NII likely led by lower ST borrowings and (iii) higher than expected capital gains. This helped offset a large net provisioning charge of PKR900mn during the quarter (unclear if this has been driven by loan provisions or equities impairment). ABL announced a final cash dividend of PKR2.0/sh, taking CY19 payout to PKR8.0/sh, inline with estimates.

    Q4 19 Key highlights:

    • ABL reported interest earned of PKR35,653mn (inline with estimates), however interest expense came in lower than expected (down 8% qoq) likely due to lower short term borrowings. This consequently led to a 50%yoy increase in NII (up 27%qoq).
    • Non-interest income rose 34%yoy to PKR3,368mn higher than our projected PKR3,033mn. This was led by higher than expected capital gains of PKR853mn (up 5.4xyoy) and robust 20%yoy growth in fee income. These helped offset a decline in dividend and Fx income.
    • Non-interest expenses came in at PKR8,365mn rising by a modest 7%yoy, largely inline with estimates. However, a surprise reversal of PKR1,120mn on Workers Welfare Fund helped reduce ABL’s C/I to 48%, from 57% in the previous quarter. Normalizing for one-offs, ABL’s C/I remains largely stable at 56%.
    • A PKR900mn net provisioning charge is large relative to our expectation of a PKR100mn charge. While there may be some element of equity impairment, this is a high number and could include some year end-loan loss provisions.
    • Other highlights include an effective tax rate of 38%.

    CY 19 highlights:

    • ABL posted CY19 NPAT of PKR14,489mn (EPS: PKR12.65), up 11%yoy (pre-tax basis: up 16%yoy). This was led by strong 29%yoy growth in NII, which helped more than offset (i) a sharp rise in total provisioning expenses to PKR547mn in CY19 vs. net reversals of PKR1,249mn in CY18, (ii) flat non-funded income and (iii) a 16%yoy increase in admin expenses.

    This is a mixed result by ABL. Although we are encouraged by the continued strong uptick in NII and robust fee growth, net provisioning charge of PKR900mn could point towards nascent fresh NPL infection. That said, ABL still remains strongest on asset quality within our coverage space (3.5% NPL ratio in Sep’19, 98% specific coverage). ABL trades at a CY20f P/B of 0.91x and P/E of 6.68x while offering a strong D/Y of 9.3%. We have a TP of PKR121/sh on the name. Reiterate Buy.

    Risks: (i) Weaker-than-expected pick-up in NII, (ii) deterioration in asset quality and (iii) failure to control costs (core-admin expense).