Quality is worth the price
We raise our CY21/22f EPS estimates for MEBL by 19%/16% as we build in stronger balance sheet growth (in the backdrop of consistent branch expansion), lower NPL provisioning in and a slightly higher mid-cycle ROE over 22%. This leads us to raise our December 2021 TP to PKR135/sh (vs. PKR120/sh previously).
MEBL delivered sector beating deposit growth in CY20: over 35%yoy, crossing the PKR1tn mark while improving the C/A base to 39% vs. 36% in CY19. MEBL has also improved its CAR to 18% (vs. 17% in Dec 2019). We think the capital base is strong enough to sustain a cash payout of c.35% over CY21-25f.
MEBL continues to deliver 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. MEBL trades at a CY21f P/B of 1.8x and P/E of 7.9x. Our target price offers an ETR of 28% and we maintain our Buy rating.
Estimates and TP raised on sector beating balance sheet growth
We raise our CY21-25f earnings estimates for MEBL by 19% on average where our CY21/22f EPS estimates now stand at PKR14.10/16.71, up 19%/16% vs. our previous estimates. This is led by strong balance sheet expansion (CY20 deposit growth: 35%yoy) without compromising on the mix (CA: 39% vs. 36% in Dec’19). We have also reduced our cost of risk for CY21/22f to 130/100bps (vs. 210/120bps previously) on an improving asset quality outlook and after MEBL front-loaded its provisions in CY20 (both specific + general). On the flipside, we continue to keep the Cost-to-Income at an elevated 48% (vs. 39% in CY20 and 45% in CY19), due to the bank’s continued branch expansion strategy (1,000 branches targeted in the next 2-3 years vs. 815 branches currently). We estimate that MEBL can deliver a mid-cycle ROE of c.22% (last 10yr average: 23.2%), with a 15% EPS CAGR across CY21-25f as interest rates rise. Higher EPS estimates and improved ROE outlook leads us to revise our December 2021 TP to PKR135/sh from PKR120/sh previously. An improved CAR of 18% can maintain a cash payout of c. 35% – this translates into a forward D/Y of 5.4%.
Growing deposits without compromising efficiency
MEBL plans to continue expanding its brick-and-mortar network (815 branches at end-Dec’20), targeting an equivalent increase in branches as seen in the last few years (c.60 branches per annum) towards 1,000 branches over the next 2-3 years. This has translated into a 5-year deposit CAGR of 22%, crossing the PKR1tn mark in CY20, importantly while improving the mix. MEBL’s current accounts have risen to 39% from 36% in Dec’19 which should lead to a more efficient repricing of the balance sheet as interest rates begin to rise this year. We project a 15% growth in deposits over CY21-25f, lower than the 21% CAGR in the last 5yrs but still a healthy clip. On the flipside, continued branch expansion may keep admin expenses elevated – we expect admin expenses to have a 5yr CAGR of 15% (similar to the last 5yr CAGR), with the Cost-to-Income ratio to remain elevated at 48% through the cycle vs. 39% in CY20 and 45% in CY19.
High provisioning coverage continues to give confidence
NPLs rose by a sharp 66%yoy in CY20 led by large subjective downgrades (particularly on account of a name in the oil marketing space in 4Q). That said, specific coverage has been beefed up to 91% (vs. a low of 82% in 2Q), while loans under SBP’s principal deferment scheme have reduced to just PKR11bn (or 3% of the loan book) at end-Dec 2020. MEBL also raised its general provisioning buffer to PKR5.5bn (or +1% of total loans), taking total coverage to 128% – this is more than adequate to offset the ECL charge under IFRS-9, in our view. We consequently reduce MEBL’s cost of risk for CY21/22f to 130/100bps (vs. 210/120bps previously), and subsequently to c.30bps by CY25f. MEBL has remained cautious on lending in CY20 (loans up 4% yoy), but an improving economic backdrop can lead to double digit loan growth in CY21f (12% yoy).
Capital adequacy continues to improve
MEBL has reduced its RWA density to 34% vs. 39% SPLY where CAR remains at a comfortable 18.1% in Dec’20 vs. 16.6% at end-Dec 2019. The bank endeavors to maintain CAR at levels not lower than 16-17% through the cycle while maintaining growth momentum. With limited room to further reduce RWA sensitivity, in our view, we expect MEBL to balance growth with modest payouts, and project a cash payout of 35% on average in CY21-25f. This translates into a forward D/Y of 5-6%.
4QCY20 Results – High provisions but earnings beat on core performance
MEBL posted 4QCY20 consolidated net profits of PKR4.1bn (EPS: PKR2.90), down 13% yoy, and 39% qoq, taking CY20 net profits to PKR22.4bn (EPS: PKR15.83). While the results were sharply lower than projected, this was largely due to a provisioning charge of c.PKR4bn against a specific client, excluding which the result would be an earnings beat. MEBL’s core performance remained strong with net spread income coming in higher than projected. MEBL also announced final cash dividend of PKR2.0/sh (in line with expectations), taking full-year DPS to PKR6.0/sh.
Courtesy – Intermarket Securities Limited.