Meezan Bank: The best long-term play!

  • Estimates and TP raised on strong balance sheet growth, lower provisioning and a higher sustainable ROE
  • Premium valuations (CY21f P/B: 1.8x) are backed by the highest ROE within our coverage space.
  • In the backdrop of rebounding GDP growth, MEBL is the best exposure to the domestic growth cycle.

We raise our CY21/22f EPS estimates for MEBL by 12% and 3% as we build in stronger balance sheet growth (in the backdrop of consistent branch expansion), lower provisioning and a marginally higher mid-cycle ROE at 23%. We therefore raise our December 2021 TP to PKR140/sh (vs. PKR135/sh previously).

MEBL is well placed to benefit from rebounding GDP growth, especially as it continues to focus on quick balance sheet growth (c.15% CAGR). This should again lead to a double-digit EPS CAGR over the medium term, after flat earnings in CY21f.

Premium valuations (CY21f P/B: 1.8x) are backed by the highest ROE within our coverage space. Our target price offers an ETR of 30% and we maintain our Buy rating. Higher-than-expected margins and cash payouts (currently c.35% over CY21-25f) can lead to more upside.

1QCY21 results: Earnings beat on strong core performance

MEBL posted 1QCY21 consolidated NPAT of PKR6.0bn (EPS: PKR4.28), up 20% yoy, and 47% qoq. This was an earnings beat led by (i) surprisingly flat net spread income (vs. an expected decline), (ii) lower-than-expected provisioning expenses, and (iii) strong rebound in fee income likely to be led by high trade commissions. MEBL also announced an interim cash dividend of PKR1.5/sh, higher than our projected DPS of PKR1.0.

Estimates and TP raised on strong balance sheet growth

A considerably improved earnings outlook in the backdrop of strong balance sheet growth and moderate asset quality headwinds lead us to raise our CY21-25f earnings estimates for MEBL by 5% on average. Our new CY21/22f EPS estimates now stand at PKR15.75/17.25, up 12%/3% from previous estimates. MEBL continues to expand its brick-and-mortar network while maintaining a healthy deposit mix. We have also reduced our cost of risk for CY21/22f to c.30/40bps (vs. c.70/50bps previously) on an improving asset quality outlook. That said, Cost-to-Income is likely to remain elevated, where we project 48% through the cycle in line with MEBL’s branch expansion strategy. MEBL can deliver a mid-cycle ROE of c.23%, with a 12% EPS CAGR across CY21-25f as interest rates lift. This leads us to revise our Dec’21 TP to PKR140/sh from PKR135/sh previously. An improved CAR of 18% can maintain a cash payout of c. 35%, in our view.

Balancing growth with mix

MEBL continues to expand its brick and mortar network (825 branches at end-Mar’21). This has helped deliver a 5-year deposit CAGR of 22%. Over the next 5 years, we expect a 15% deposit and loans CAGR, which would still be quicker than the industry. This is aligned with MEBL’s target to grow its network to 1000 branches over the next 2-3 years. On the flipside, we expect admin expenses to grow at a 5-year CAGR of 16% with the Cost-to-Income ratio to remain elevated at 47% through the cycle vs. 39% in CY20. That said, with current accounts rising to 40% of deposits in 1QCY21 – second only to BAFL – MEBL is well placed to depict margin expansion when the interest rate cycle turns.

Asset quality remains best in class

NPLs have remained flat following the large subjective downgrade in 4QCY20 (single account), sustaining specific coverage at 91%. MEBL has however raised its general provisions by PKR300mn to PKR5.8bn (or +1% of loans) taking total coverage to 130%. This is more than adequate to offset the ECL charge under IFRS-9, in our view. Improved asset quality leads us to reduce MEBL’s cost of risk for CY21/22f to 30/40bps (vs. 70/50bps previously), before converging towards 50bps across the medium term. This is still conservative given peers are eyeing reversals in general provisions in CY21f – leaving room for positive surprises.

Ample buffer over regulatory CAR can sustain payouts

MEBL continues to improve its RWA density (33% vs. 34% in Dec 2020) having consistently maintained CAR over 18% since 2019. The bank endeavors to maintain CAR at levels not lower than 16-17% through the cycle while maintaining growth momentum. Ample buffer over the regulatory CAR requirement (12.5%) may possibly lift MEBL’s payout above our projected c. 35% on average over CY21-25f. The latter translates into a modest forward D/Y of 5%.

Valuations are not frothy; MEBL is an ideal LT play

MEBL is delivering on all fronts where aggressive balance sheet expansion, superior asset quality, leverage to rising interest rates against a unique low cost depositor base round up our liking for the bank. This, in the backdrop of over 4.0% projected GDP growth, makes MEBL the best exposure to the domestic growth cycle. Premium valuations (CY21f P/B: 1.8x) are backed by superior ROE generation, while the P/E multiple is not stretched (CY21f: 7.1x, CY22f: 6.5x). Our target price offers an ETR of 30% and we maintain our Buy rating.

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