Equity Analysis /
Pakistan

Meezan Bank: Correction has opened up valuations

  • We raise our EPS estimates for MEBL as we build in higher margins and a larger balance sheet

  • MEBL’s ROE should clock in at more than 30% over the next two years

  • This stacks up well against a CY22f P/B of 1.8x and P/E of 6.0x. Our TP of PKR175/sh offers a 42% ETR.

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
21 March 2022

We raise our CY22/23f EPS estimates for MEBL by 10%/5% as we build in higher margins and a larger balance sheet. This is partly offset by higher admin costs while we also increase our cost of risk following the c.50% yoy loan growth seen in CY21. Our Dec'22 TP is unchanged at PKR175/sh.

Deposit growth decelerated to 16% yoy in CY21 vs. a 5yr CAGR of 21%. This is due to (i) MEBL’s much larger size – it is now the 5th largest bank by deposits, and (ii) more focus on mix, with CASA at 82%, up 7ppt. We expect medium-term deposit growth in the 15-16% pa range. However, margins should stay north of 5% given the improved deposit mix.  The next 3yr EPS CAGR is a healthy 17%.  

MEBL’s ROE should clock in at more than 30% over the next two years. This stacks up well against a CY22f P/B of 1.8x and P/E of 6.0x, with MEBL having corrected by 10% since its CYTD high. MEBL continues to remain the best story in the Pakistan banking space.  We reiterate our Buy rating.

Strong 4Q results lead to a lift in estimates

An improved earnings outlook in the backdrop of higher interest rates and strong balance sheet growth leads us to raise our CY22-25f earnings estimates for MEBL by 6% on average. Our new CY22/23f EPS estimates now stand at PKR21.52/24.09, up 10%/5% from previous estimates. We have built in slightly higher margins, which is partly offset by higher admin costs and some increase in our cost of risk projections. MEBL should deliver over 30% ROE over the next few years (mid-cycle ROE of c.24%), with a healthy 17% EPS CAGR across the next 3yrs. A cash payout of c.30% translates into a D/Y of nearly 5%. Our Dec’22 TP is unchanged at PKR175/sh.

Deposit growth and improving mix should drive markup income

MEBL’s deposits grew by 16% yoy in CY21 vs. its 5yr CAGR of 21% and 1ppt lower than the industry’s deposit growth. This follows MEBL’s much larger size (it is now the fifth largest bank by deposits), and also its focus on improved mix where CASA has lifted by a sharp 7ppt to 82%. Current accounts, in particular, have risen to 45% of deposits in 4QCY21, one of the highest in our banks’ coverage. We see medium-term deposit growth in the 15-16% pa range and a similar trajectory for loan growth. Together with higher margins of more than 5%, we expect net markup income to grow in the 16-17% pa range over the medium-term.  

NFI will further support revenues but C/I may rise overtime

MEBL reported a very strong 52% yoy jump in non-markup income to PKR4.5bn in 4QCY21, led by fx (up 1.8x yoy) and a sharp 31% yoy rise in fee – courtesy trade commissions and card related fee. We estimate a 14% yoy growth in fee in CY22f and 11% sustainably, with the latter having room for positive surprises. That said, we expect the Cost-to-Income ratio to lift to 45% through the cycle (vs. 40% previously), as revenues normalize in line with interest rates, even though incremental branch additions may not be as quick as in previous years (management is aiming to hit 1,000 branches in about 2yrs vs. the current size of 902 branches).  

Comfortable on asset quality, capital is more than adequate

NPLs have come off 3% yoy in CY21, following the large PKR4bn subjective downgrade SPLY on account of a single industry-wide exposure. MEBL has sustained its specific coverage at 92%, with general provisioning buffer of PKR5.9bn (0.8% of gross loans) taking total coverage to 133%. While this is adequate, we have prudently lifted our cost of risk for CY22f to c. 30bps vs. 20bps previously, ahead of IFRS-9 and after the robust c.50% yoy loan growth in CY21.

Correction has opened up valuations

Valuations have opened up, with MEBL having corrected by 10% from its CYTD high. The CY22f P/B of 1.8x stacks up well against ROE of more than 30% over the next 2yrs, while the CY22f P/E of 6.0x is at a c.15% discount to the last 5yr average.  Capital buffer is strong, with CAR at 18%, and we think a c.30% cash payout is easily sustainable. This translates into a forward dividend yield of nearly 5%. Our TP offers a total return of 42%.

Strong revenues offset sharp rise in costs during 4QCY21

MEBL posted 4QCY21 consolidated NPAT of PKR8.5bn (EPS: PKR5.21), up a sharp 2.0x yoy and 21% qoq. This took CY21 NPAT to PKR28.2bn (EPS PKR: 17.35), up 26% yoy. The result was higher than anticipated, with the deviation stemming from better-than-expected net spread (up 35% yoy) and high fx income (PKR1bn, up c. 2.0x qoq), which helped offset a sharp rise in non-interest expenses (up 37% yoy to PKR9.9bn). MEBL also announced a final cash dividend of PKR1.50/sh, in line with our estimates.