Equity Analysis /
Pakistan

Bank Alfalah: BAFL announces mega buy-back

  • Buy-back of up to 200mn shares (or 11.25%) announced.

  • Execution at market price will provide an ideal exit opportunity

  • Subsequent ADT1 issuance should cushion capital

Raza Jafri
Raza Jafri

Executive Director, Research

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Intermarket Securities
10 November 2022

Bank Alfalah’s Board has approved the buy-back of up to 200mn ordinary shares (11.25% of the paid up capital of the bank). This is subject to approval in an EOGM scheduled for 6th December 2022. BAFL’s share price hit an upper circuit PKR34.26/sh after the announcement. At this price, BAFL trades at a CY23f P/B of 0.5x and P/E of 2.1x. It is one of our top picks among Pakistan Banks with a TP of PKR50/sh.

About the offer: The buy-back period will be across 14th Dec 2022 – 2nd June 2023, or until the purchase is complete, after which these shares will be cancelled. The funding will be through the bank’s distributable profits. As per the notice, the buy-back will have a positive effect on ROE and EPS, and will also allow an exit opportunity to shareholders. Notable among these shareholders, in our view, is IFC which owns c 262mn shares or 14.74% of the bank. IFC acquired this stake in BAFL for PKR28/sh in 2015. While the size of BAFL’s buy-back is large (in comparison to other buy-backs e.g. 3.1% of issued shares for LUCK and 2.3% of issued shares for MLCF), a potential partial divestment by IFC may impact the exit opportunity for minority shareholders.

Impact on the Balance-sheet: Assuming the buy-back size is the full 200mn shares, the outlay comes to PKR6.85bn at the last closing price. The bank will fund the share purchase internally, which will reduce T1/CAR by about 70bps all else the same (3QCY22 T1: 11.4%; CAR: 14.3%). This will still leave a comfortable buffer. That said, we understand that BAFL may issue a fresh ADT-1 instrument of a similar amount, so as to offset the impact of the buy-back on capital ratios. We remain comfortable with BAFL’s recurring cash dividend payout ratio of c35%.