We raise our CY22-23f EPS estimates for MCB by 5% on average as we incorporate higher interest rates. This, together with a valuation rollover, compensates for a higher Rf rate of 11.0%. Our new Dec’22 TP is PKR215/sh vs. PKR210/sh previously.
MCB appears comfortably placed on asset quality where positive surprises can emerge from an accelerated pace of growth in MCB Islamic (30%yoy deposit growth in 3Q), a more efficient deposit mix (CA: 36%), and room for CAR improvement as it reduces its RWA density (from c. 45% presently).
MCB is conducting due diligence on Telenor Microfinance Bank, which can boost its NFI, but we believe the transaction is a low probability event. As a result, we expect MCB to continue delivering a high cash payout which translates into a D/Y of about 13% – the highest in our banks coverage.
Estimates marginally raised, maintain Buy
We raise our CY22-23f EPS estimates for MCB by 5% on average as we incorporate higher interest rates in the near term, while leaving our terminal year estimates unchanged. Our new CY22/23f EPS estimates stand at PKR29.12/31.42. We estimate advances growth of 9%/13% in CY22/23f, with ADR to cross the 40% threshold as the remaining TERF disbursements come in. This should remove the additional 2.5% tax burden. Higher EPS estimates and a TP rollover should compensate for a higher Rf rate of 11.0% vs. 10.5% previously. Our new Dec’22 TP stands at PKR215/sh up from PKR210/sh previously.
Asset quality strength remains intact
MCB has PKR1.5bn worth of unencumbered general provisions yet to be reversed (total PKR4.3bn reversed since 3QCY20). Additionally, the bank plans to recover 40% of the legacy NPLs from NIB in the next 12-18 months (23% or PKR6.8bn of PKR29.6bn recovered so far). Limited exposure to the Consumer & SME segments provides adequate cover against implementation of IFRS-9, where MCB is eyeing a one-time charge to retained earnings of c.PKR6-7bn (c 4% of SHEQ) and recurring gross credit cost charge to P&L of c.75-90bps on average per annum (exclusive of any reversals) on incremental loans. We continue to eye net NPL reversals in CY22f of c.PKR1.5bn (albeit lower than PKR1.8bn previously) and a 30bps cost of risk over the medium term.
NFI to remain muted for now
The potential Telenor Microfinance Bank transaction will fill the gaps in MCB’s digital transformation and help leverage its 8.2mn user base. That said, the financial implications lead us to believe a deal is unlikely. To recall, Telenor Microfinance Bank is in heavy losses and can negatively impact MCB’s consolidated financials, possibly necessitating a cut in the payout ratio. Our takeaway is that MCB wants to rightly address its relatively weak franchise but the Telenor transaction may not be the solution. For now, we anticipate MCB’s non-funded income to remain muted in CY22f before rising at a modest 10% pa. rate over the medium term, leaving room for positive surprises.
MCB offers a solid dividend yield
MCB’s CAR has reduced to 17.9% in 3QCY21 vs. 19.7% in CY20 but this should still easily support a 60%+ cash payout over the medium term (the last 5yr payout has been 85%+ on average). While there have been some payout misses (MCB is on track for a PKR19/sh dividend across CY21f vs. PKR20/sh last year), the bank still offers the best dividend yield in our coverage of c. 13%. We also note that there is room for MCB to improve is RWA density, currently more than 45% vs. an average of 35% for peers. MCB’s valuation set is punctuated by its high D/Y but its forward P/B and P/E are also 27%-45% lower than the 5yr average. We expect MCB’s ROE to lift from 16% at present (and previous 5yr average of 15%) to about 20% over the medium-term.