MCB posted consolidated NPAT of PKR5,435mn (EPS: PKR4.59) in 2QCY19, up 15%yoy. This is 8% lower than our projected EPS of PKR5.00, with the deviation coming from higher than expected provisions (likely impairment on the equities portfolio, in our view). This brings 1HCY19 profits to PKR10,421mn (EPS: PKR8.79), up 11%yoy (pre-tax: up 15%yoy). Alongside the result, MCB announced a second interim dividend of PKR4/sh, in line with expectations.
The key highlights from MCB’s 2QCY19 results include:
- Strong 28%yoy growth in net interest income (in line with expectations), with margin expansion coming through more meaningfully
- Total provisions of PKR1,356mn in the quarter. Similar to other banks, we believe this is likely due to impairment on the equities portfolio rather than deterioration in the loan book.
- Non-interest income grew by 7%yoy to PKR4,595mn, largely driven by a doubling in FX income to PKR1,325mn. Core fee income lifted by a modest 6%yoy only.
- Non-interest expenses grew by 10%yoy to PKR9,592mn, inline with expectations. The Cost/Income ratio for the quarter has come in at 47% vs 52% in 1QCY19.
- The effective tax rate has normalized at c 39%.
If, as we suspect, the provisions charge is largely driven by impairment on equities, then there is little to dislike about MCB’s 2QCY19 result, with the strong NII growth in particular a key highlight. Fee income could be better but we expect improvement in 2HCY19. MCB trades at a 2020f P/B of 1.1x and P/E of 6.3x while offering a dividend yield of nearly 10%. Our Dec’20 target price of PKR210/sh implies a Buy stance (ETR: 40%).
Risks: (i) Failure to record provisioning reversals as per management guidance, (ii) continued sluggish fee income growth, and (iii) higher than expected admin expenses.