Equity Analysis /
Pakistan

Bank Alfalah: Come for the valuations, stay for the growth

  • After strong performance in 1Q, we raise our CY21f estimates for BAFL by 10% and leave subsequent projections unchanged

  • BAFL is an excellent post-Covid play premised on high margin sensitivity and normalizing asset quality

  • Forward P/E is close to just 5x while the D/Y is also nearly 10%. Reiterate Buy with a Dec’21 TP of PKR45/sh

Raza Jafri
Raza Jafri

Executive Director, Research

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Yusra Beg
Yusra Beg

Senior Investment Analyst

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Intermarket Securities
17 May 2021

After very strong profit delivery in 1QCY21 (EPS: PKR1.92), we raise our CY21f EPS estimates for BAFL by 10% to PKR6.30 but leave subsequent projections largely unchanged. As a result, our Dec’21 TP stays at PKR45/sh (ETR: 52%). We have a Buy stance on BAFL, which remains a top pick in the Banking space. 

BAFL is an excellent post-Covid play. Our liking for BAFL is based on its higher margin sensitivity to rising interest rates, greater delta from normalizing asset quality, and focus on growing its digital footprint. A renewed drive on regaining lost market share is also a plus, in our view. 

We see BAFL’s ROE expanding from c.12% in CY21 to 15% by CY24f. This stacks up well against a CY21f P/B of 0.57x, at a discount of 32% to the previous 5yr average. Forward P/E is close to just 5x while the dividend yield is also nearly 10%.  Earnings are projected to grow at a robust 3yr CAGR of c.15% after flattish profits in CY21f. 

Soft provisions and capital gains lead to a stellar start to the year

BAFL posted NPAT of PKR3.4bn (EPS: PKR1.92) in 1QCY21, up 18%yoy and 57%qoq, and much higher than our projected EPS of PKR1.25. This is the second highest quarterly profit recorded by BAFL, after 4QCY19. The strong earnings beat was driven by a sharp decline in provisions as the NPL stock came down, as well as by robust capital gains realization on the fixed income book. NII also flattened earlier than expected, with tail-end margin compression being offset by balance sheet growth (loans and deposits up 16%yoy and 21%yoy, respectively). 

Lift CY21f EPS but subsequent estimates are largely intact

We raise our CY21f EPS estimates for BAFL to PKR6.30, up from PKR5.75 earlier. This has largely been driven by the incorporation of a lower cost of risk (60bps vs. 95bps before), as well as higher capital gains. In subsequent years, however, stronger balance sheet growth is being offset by a sticky cost of risk and higher admin expenses, to leave estimates largely unchanged. This follows a more aggressive strategy to recapture market share; we estimate that BAFL’s deposit market share has again crossed 5% after falling below this level last year for the first time in almost two decades. A more aggressive asset growth strategy is also visible with BAFL exploring the possibility of acquiring SILK’s consumer finance portfolio. If this goes through, we estimate it will increase the size of BAFL’s consumer portfolio by roughly 20%.

An excellent post-Covid play

Although it is possible that domestic interest rates stay unchanged across CY21f, a gradual increase across the medium-term seems unavoidable. BAFL is one of the most margin-sensitive banks in our coverage owing to its deposit mix (current a/c are 45% of deposits vs. 32% for the industry), high 65% ADR vs. 46% for the industry, and sizeable Islamic window operations. Similarly, BAFL’s cost of risk also stands to come off quickly once asset quality dynamics fully normalize– this was aptly demonstrated by the reduction in BAFL’s NPL stock in 1QCY21 as the Covid situation improved in Pakistan, as opposed to an increase in NPLs for other private banks in the same period. Lastly, with digitization expected to outlast Covid, BAFL appropriately continues to focus on expanding its digital footprint.

ROE has bottomed out and valuations are very attractive

While earnings may only be flattish in CY21f (after the 17%yoy drop in CY20), we see BAFL subsequently posting a 3yr EPS CAGR of c 15%. With the market not looking beyond near-term profits, BAFL is trading at a highly attractive valuation set (CY21f P/B: 0.57x, P/E:5.02x, D/Y: 9.5%). ROE is projected to expand to c 15% through the cycle, better than in the past, and we see significant room for valuation rerating, particularly as the P/B multiple is at a sizeable 32% discount to the previous 5yr average. The improved CAR footing (Mar’21: 15.5%) can also support a sustainable cash payout of 40%, with any Tier II capital raising likely not on the cards for the next few years, in our view. Our Dec’21 TP of PKR45/sh offers upside of 42% and an ETR of 52% (inclusive of dividend yield).