Equity Analysis /
Pakistan

Bank Alfalah: On track and well placed

  • We maintain our EPS estimates with a Dec’22 TP of PKR50/sh, offering an ETR of 64%.

  • BAFL continues to deliver consistently strong profits

  • High margin sensitivity, increasing digital footprint, and attractive valuations reinforce our liking

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
29 March 2022
  • BAFL continues to deliver consistently strong profits. A high margin sensitivity, increasing digital footprint and an attractive valuation set reinforce our liking for the name. We maintain our CY22/23f EPS estimates with a Dec’22 TP of PKR50/sh, offering an ETR of 64%.

  • BAFL’s loan and deposit growth remain robust (up 17% yoy and 29% yoy). Importantly, with ADR well above 50%, BAFL can afford to be choosy on the lending front, which bodes well for asset quality outlook and the cost of risk, in our view. 

  • We see BAFL’s mid-cycle ROE at 16% vs. our CoE of 17.5%. Earnings are projected to grow at a robust 3yr CAGR of c.14%.  BAFL trades at a CY22f P/B of 0.5x and P/E of 3.6x, while offering a dividend yield of c.12%. While CAR has dipped to 14.3% in CY21 vs. 16.4% in CY20, we think this is enough to sustain a 35-40% cash payout ratio. 

Estimates and TP maintained

We broadly maintain our CY22-26f EPS estimates for BAFL, where our CY22/23f earnings stand at PKR9.21/10.88. BAFL continues to deliver strong balance sheet growth (loan/deposit growth of 17%/29%) while maintaining credit quality (NPL ratio under 4% and coverage greater than 100%). We reduce our cost of risk from 24bps to 18bps in CY22f, and to 25bps through the cycle vs. 45bps previously. This is because, while other banks have accelerated their lending to meet the 50% ADR watermark and avoid punitive taxation, BAFL can afford to be more selective with its c.60% ADR. That said, this is balanced by an elevated cost-to-income ratio close to 60%, as BAFL continues to invest in its digital strategy. We reiterate our Buy rating with a December 2022 TP of PKR50/sh.

Margins are poised to expand

The Policy Rate has risen by 275bps in the last 6 months to 9.75%. However, T-bill yields / KIBOR have risen by more.  With the rate floor on savings deposits linked to benchmark interest rates, this distortion between the Policy Rate and secondary market yields is positive for margins; where we flag that BAFL is one of the most margin-sensitive banks in our coverage. This is due to c.45% of the deposits being current accounts, ADR of nearly 60% and sizeable Islamic window operations (which do not face a deposit rate floor).  As a result, NIMs are expected to increase 30-40bps through the cycle vs. 3.4% in CY21.

Cost to income is likely to remain elevated

BAFL continues to focus on its growth initiatives (IT expenses up 9% yoy in CY21), branch expansion (64 branches opened in CY21 taking the total to 770 branches) and investment in Alternate Delivery Channels. BAFL’s digital banking transactions have crossed 1.3tn, with internet banking usage accelerating through its Alfa app and diverse range of product offerings. This should reward in the longer run but is likely to keep Cost-to-income elevated in the 58-60% range over the medium term. We expect absolute costs to rise 12% yoy on average in CY22-26f.

An inline result in 4QCY21

BAFL posted 4QCY21 consolidated NPAT of PKR3.7bn (EPS: PKR2.09), up 71% yoy and flat qoq. This took CY21 NPAT to PKR14.4bn (EPS: PKR8.12), up 33% yoy. The result came in line with estimates. Key takeaways included an in-line NII, higher than expected provisions of PKR893mn (a single a/c downgrade exposure and Afghanistan), and swift growth in admin expenses (21% yoy). This was offset by a very strong delivery in NFI courtesy higher than expected capital gains – mostly on foreign securities, strong fx and fee income. BAFL announced a final cash dividend of PKR2.0/sh, taking full-year DPS to PKR4.0/sh.