- MCB’s profits are on track to deliver strong double-digit growth over the medium term, where margin expansion and a low cost of risk should help override slower loan growth. A lower risk-free rate of 10.5% (12.0% previously) leads to a revised Dec'20 TP of PKR246/sh (PKR210/sh previously) and we retain our Buy rating.
- Although NPL recoveries from NIB have slowed (15% recovered in 2 years), credit costs are not expected to cross 60bps in 2020/21f, vs. 80-90bps for peers. Instead, we draw attention to management’s plan to optimize the CASA mix (current a/c: just 33% in Sep’19). This should be supported by medium-term monetary easing and MCB Islamic.
- MCB remains a safer proposition relative to peers, given (i) stronger asset quality, (ii) superior ROE generation, (iii) good cost control, and (iv) capital strength (Sep’19 CAR: 16%). MCB trades at a 2020f P/B of 1.5x where our target price offers an upside of 16%. A greater than expected improvement in the CASA mix can unlock further upside.
Risk-free rate reduced to 10.5%, Buy rating maintained
Buoyed by a sharp reduction in bond yields and expectations of monetary easing from 2020, we reduce our risk-free rate to 10.5%, equivalent to the historical 10-year bond yield. This lifts MCB’s Dec’20 TP to PKR246/sh (from PKR210/sh previously). We thus reiterate our Buy rating.
Significant room for CASA optimization
MCB has historically been identified as the bank with the best deposit franchise in Pakistan, underpinned by a CASA of 90%. This held true until the SBP introduced a rate floor on savings deposits in 2008; which hurt MCB the most given its CASA mix continues to be heavily tilted towards savings deposits (MCB has the highest savings-to-total deposits ratio in our coverage space - 53% vs. 37% for peers). It has taken some time but management is now rightly focusing on optimizing the CASA mix; MCB is targeting to take current deposits to 40% of the deposit mix vs. c 33% at present. We think this is possible over the medium term, as interest rates come off and as MCB Islamic grows. As a result, we believe MCB has room to protect its margins even in a declining interest rate environment. We see MCB’s NIMs lifting by c 60bps to 4.9% in 2020f and by a further c 30bps in 2021f (we see a gradual improvement in current accounts to 38% of the mix by 2023f).
Focus will remain on cost control
We understand the CASA optimization drive will entail better leveraging of MCB’s large branch network and existing business strengths. For instance, MCB has a sizeable market share in the remittances segment and these flows can potentially be converted into deposits. Such efforts, however, will likely have to be accompanied by staff incentives which can add to costs. That said, we see room for MCB’s cost/income to converge to c 45%, down from 50% at present. This should be driven by both revenue growth and close monitoring by the head office on branch level expenses (head office approval needed for expenses above a certain cutoff). Moreover, MCB continues to have strong bargaining power which also helps with cost control, e.g. we understand that MCB averted the full impact of the weaker PKR on US$-denominated costs by having vendors absorb part of the currency depreciation.