Earnings Report /
Pakistan

Bank Alfalah: Q2 CY 19 results – Better-than-expected cash payout

    Raza Jafri
    Raza Jafri

    Executive Director, Research

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    19 August 2019

    BAFL has posted Q2 CY 19 consolidated NPAT of PKR3,270mn (EPS: PKR1.84), up 12% yoy, taking the H1 CY 19 NPAT to PKR6,452mn (EPS: PKR3.63), up 4% yoy (pre-tax: up 15%yoy). The Q2 CY 19 result is lower than our projected EPS of PKR2.15, with the difference largely due to lower-than-expected net interest income (lagged re-pricing and some suspended markup). However, the interim cash dividend of PKR2.0/sh came in higher than our expectations of PKR1.5/sh. 

    Key highlights:

    • Net interest income came in at PKR10,489mn, up 34% yoy but down 6% qoq. This was contrary to our expectation of sequential growth, where we understand the miss is due to (i) lagged asset re-pricing (impact to be more visible in Q3 CY 19) and (ii) suspended interest on certain loans (possibly government guaranteed and in the energy space, in our view). 
    • The provisioning charge of PKR534mn came in within our expectations. Similar to other banks, we understand this is largely due to impairment on the equities portfolio, and not representative of loan book deterioration. 
    • Non-interest income is flattish, but core fee income has risen by 12% yoy to PKR1,941mn. Fx income has also come in at a high PKR786mn (up 67% yoy), and there has been a notable pickup in share of profit from associates (a power sector asset has started commercial operations). However, the positives have been diluted by a small capital loss of PKR38mn (likely on equities). 
    • Although broadly in line with our estimates, admin expenses rose by a quick 22% yoy to PKR7,253mn, driven by higher workforce expense, digital spend and customer acquisition costs. As a result, the cost/income ratio has slipped to 53% vs. 50% Q1 CY 19, but still better than 54% in Q2 CY 18. 

    Despite the miss in Q2 CY 19, NII growth in H1 CY 19 still stands at a strong 41% yoy, and should accelerate across the balance of the year. Provided the provision charge has been driven by impairment on equities, credit quality also appears to be holding up. The cost/income has slipped sequentially, but we expect it to improve in H2 19 as income levels pick up. Finally, we are encouraged by the better-than-expected cash payout, which underscores the improved capital strength in our view. BAFL trades at a 2019f P/B of 0.75x and P/E of 4.8x (2020f: 0.67x, 4.3x), and is on track to deliver c25%yoy earnings growth this year. Our Dec’20 target price of PKR53/sh implies a Buy stance (ETR: 52%). 

    Risks: (i) Greater-than-expected asset quality deterioration, and (ii) cost slippages.