MEBL posted an impressive EPS of PKR3.06 in Q2 CY 19, with strong margin expansion more than offsetting new NPL formation and higher admin costs. A strong tailwind to margins leads us to raise our 2019/20f EPS estimates by 9%/16% to PKR12.61/PKR14.71, even as we build in a higher cost of risk. Our Dec’20 target price for MEBL is now PKR103/sh (vs. PKR99/sh previously) and we retain our Buy rating.
Asset repricing has come through more meaningfully in H1 CY 19 and should continue through the rest of the year. Margins are also supported by CASA improving by 2ppts since Dec’18 to 74%. While NPLs will likely continue to form in a challenging macroeconomic environment (we see the cost of risk at 85bps in CY 20f), strong revenue growth should deliver 81%/17% growth in 2019/20f.
We understand that MEBL is looking to issue a PKR4-6bn Tier-II instrument. This should help support a sustainable c40% cash payout, in our view. MEBL’s ROE is expected to remain above 30% in 2019/20f, with mid-cycle (2023f) ROE projected at 23.5%. MEBL trades at a 2020f PB of 1.5x, which is at a premium to peers, but its 2020f PE of 5.1x is at par with the sector.
Raise estimates on better revenue outlook, reiterate Buy
We increase our CY 19-23f earnings estimates for MEBL by 10% on average, due to a strong tailwind to margins. Strong asset repricing across the balance of the year should more than offset slower loan growth, higher credit costs and elevated admin expenses. Our new CY 19/20f EPS estimates are PKR12.61/14.71 vs. PKR11.54/12.67 previously. Our new Dec’20 target is PKR103/sh (PKR99/sh earlier), and we maintain our Buy rating.
Q2 CY 19 earnings in line with estimates
MEBL 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). This takes H1 CY 19 NPAT to PKR6,965mn (EPS: PKR5.42), up 68%yoy. High provisions (on fresh NPLs and impairment on equities) and elevated admin costs (up 26% yoy) were more than offset by strong 67% yoy jump in net markup income and impressive 19% yoy growth in fee income. MEBL announced a second interim dividend of PKR1/sh alongside the result.
Deposit franchise stands out in a high interest rate environment
MEBL has continued to grow its brick-and-mortar network, adding 18 new branches in H1 CY 19 (branches: 678). This has led to 19% yoy growth in deposits in Q2 CY 19 while, impressively, CASA has increased by 2ppts this year to 74%. Advantages include exemption from the rate floor on savings deposits, and a high c70% proportion of deposits emanating from individuals – which tend to be sticky and less rate sensitive. We thus expect margins to expand by c170bps in 2019f to 5.4%.
Cost of risk to rise, but stay in manageable limits
The NPL stock has increased by cPKR800mn in the quarter to PKR7.9bn (NPL ratio: 1.6%). We see NPL formation continuing, but do not see the cost of risk above 85bps across the medium-term (vs. 120bps-350bps in the previous bad cycle between 2008-2011). Factors likely to keep the cost of risk at manageable levels include (i) high loan book exposure to government entities and (ii) provisioning coverage at 130%.
Surging revenue leading to a significant improvement in cost efficiency
Admin expenses are likely to remain elevated (up c20% yoy in 2019f and by 13% over the medium term). However, high revenue growth – driven by margins, balance sheet growth and strong non-funded income should keep C/I below 50% going forward (vs. a previous five-year average of 58%). As a result, we see MEBL posting +30% ROE in both 2019/20f.
The go-to bank in a high interest rate environment
MEBL is the best bank in Pakistan to play high interest rates. Even if interest rates start to come off, a strong tailwind to margins should lead to a great next few years. At the same time, MEBL is also developing its non-funded income franchise – fee is up 15% yoy in H1 CY 19 driven by rising trade business volumes (+13% yoy) and focus on digital banking.
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) cost slippages.