MEBL has posted consolidated Q2 CY 19 NPAT of PKR3,940mn (EPS: PKR3.06), more than double the profits it posted in Q2 CY 18 (pre-tax: up 81% yoy). The results are in line with our estimated EPS of PKR2.95. This brings H1 CY 19 NPAT to PKR6,965mn (EPS: PKR5.42), up 68% yoy. MEBL announced a second interim dividend of PKR1/sh alongside the result.
- Exceptional 77% yoy/28% qoq growth in net spread to PKR11,656mn, driven by higher margins (MEBL is very sensitive to rising interest rates – since it is an Islamic bank, it does not own any legacy PIBs and is not subject to a rate floor on savings deposits).
- Provisions totaling to PKR1,152mn, which is high. In the absence of detailed financials, it is unclear whether this pertains to the loan book or impairment on investments.
- Non-interest income is up 27% yoy to PKR2,829mn despite negligible capital gains. Growth has come from fee (up an impressive 19% yoy) and from Fx income (similar to other banks).
- Admin expenses are up a quick 26%yoy to PKR6,038mn. Even after adjusting for the deposit insurance cost (in effect from Q3 CY 18), this is a large number. However, due to the swift revenue increase, the cost/income for the quarter has come in at 42% – the lowest since when we maintain data (2004) and much lower than the previous five-year average of 57%.
This is a good result from MEBL. Even if the provisions pertain to the loan book, high coverage levels (137%) are a mitigating factor. Similarly, the admin cost increases are easily offset by the revenue jump. MEBL trades at a 2019f P/B of 1.9x and P/E of 6.4x (2020f: 1.6x and 5.8x). These are premium valuations, but justified by the bank’s high ROE (c30% in 2019/20f and 24%-25% through the cycle). At current levels, we have a Buy stance on MEBL with a Dec’20 target price of PKR99/sh.
Risks: (i) Inability to maintain the current sizeable funding cost advantage, (ii) sharp jump in credit costs given high loan growth in prior years, (iii) possibility of further capital raising if profitability falls short of estimates and (iv) continuation of a high cost/income ratio.