Equity Analysis /

MCB Bank (Pakistan): The safer option; reiterate Buy

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Raza Jafri
    Raza Jafri

    Executive Director, Research

    Intermarket Securities
    22 August 2019
    • MCB’s profit growth trajectory remains intact, where margin expansion and a low cost of risk should help override slower loan growth. One-offs in 1H19 (impairment on equities portfolio) are unlikely to repeat, in our view. We make minor changes to our 2019-23f earnings estimates, and retain our Buy rating on MCB with an unchanged Dec'20 TP of PKR210/sh.
    • Recoveries from NIB’s NPL stock remain on track (c15% recovered in the last two years). With MCB’s own portfolio also showing resilience, credit costs for MCB are not anticipated to cross 60bps over the next few years (vs. 80-90bps for peers). This, coupled with strong NIM expansion (+140bps from 2018 to 2020f) should lead to a 2018-21f earnings CAGR of 18%, with ROE to cross 20% over the medium-term. 
    • MCB remains a safer proposition relative to peers, given (i) stronger asset quality, (ii) superior ROE generation and (iii) capital strength (Jun’19 CAR: 16.5%). This merits a premium over peers, in our view. Our TPs imply a target 2020f P/B multiple of 1.5x for MCB vs. 1.1x for UBL and 1.0x for HBL.

    2QCY19 result was on track
    MCB posted 2QCY19 NPAT of PKR5,435mn (EPS: PKR4.59), up 15%yoy. This was a small miss driven by a higher than expected impairment on the equities portfolio (PKR1,708mn), which is unlikely to repeat in 2H19, in our view. Moreover, this does not detract from positives such as (i) strong margin expansion (NII up 28%yoy), (ii) PKR690mn reversal on loan provisions (largely NIB stock) and (iii) stable costs (C/I: 47% vs. 52% in 1Q19). The cash payout remained on track at PKR4/sh for the quarter.

    Our earnings estimates and TP remain largely intact
    We make only minor adjustments to our 2019-23f estimates for MCB, given the equities impairment charge should not repeat. Our new 2019/20f EPS expectations are PKR18.71/24.70 (up 2%/down 3% respectively). Our medium-term EPS projections also remain broadly intact, and we continue to see ROE improving to 18%+ in 2020f and then to more than 20% through the cycle. This is backed by c 10% earnings growth in 2019f followed by a 3yr CAGR of 20%. 

    Recoveries from NIB leading to continued provisioning reversals
    MCB acquired a fully provided NPL stock of PKR29.7bn via NIB in mid-2017. Thus far, recoveries stand at PKR4.3bn i.e. a recovery rate of c 15%. This is slightly lower than the target recovery run rate (initial guidance was for c 40% recovery over 3-4 years), but management has indicated that large recoveries from two accounts are possible in 2H19. At the same time, MCB’s own asset quality remains intact - the consumer portfolio (estimated 5%+ of loan book) has seen some late repayments (up to 30 days) but loans have not gone bad. MCB remains cautious with 6-7%yoy loan growth on the cards in 2019/20f. We see net provisioning reversals in 2019f followed by a 50-60bps credit cost charge in the next few years (lower than 80-90bps for peers).   

    Strong deposit franchise and cost control are key strengths
    CASA is sticky above 85% despite the higher interest rate environment. There is room for current accounts to fill out going forward (to 40% vs. 34% at present), and the bank is focusing on small-ticket retail deposits with this in mind. This, together with the anticipated shift into higher-yielding PIBs, should lead to margins expanding into the next year as well - we see MCB’s NIMs lifting by 140bps from 2018’s base to 5.1% in 2020f. At the same time, MCB continues to maintain tight cost control, with the C/I registering at 47% in 2QCY19. As income levels grow (margin expansion and accelerating fee), the C/I is expected to come off to below 45% across the medium-term. 

    Premium valuations are justified; Buy maintained 
    MCB trades at a premium to its closest peers (HBL and UBL). This is justified by a lower risk profile given that MCB has negligible foreign operations, has a conservatively structured loan book which should limit credit costs, and has a strong capital base which can sustain a high cash payout in our view. MCB trades at a 2019f P/B of 1.3x and P/E of 9.2x (2020f: 1.2x and 7.0x), while offering a forward dividend yield 9.3%. Our Dec’20 target price of PKR210/sh offers an ETR of 31%.

    Risks: (i) Key-man risk but this may be mitigated by the government’s recent proposal to exclude private citizens/businessmen from the ambit of the accountability bureau, (ii) failure to record provisioning reversals as per management guidance, (iii) continued sluggish fee income growth, and (iv) higher than expected admin expenses.