The outlook on asset quality has significantly improved, where MCB has started to reduce its stock of un-encumbered general provisions, and this trend should continue in CY21f. However, pressure on margins will likely restrict growth (even if interest rates depict a modest increase), where we see EPS of PKR25.03/25.42 in CY21/22f. We maintain our Dec’21 TP at PKR235/sh and our Buy stance.
MCB trades at a CY21f P/B of 1.21x and P/E of 7.41x. Our EPS estimates have room to depict positive surprises on (i) any improvement in the current account mix over and above our projections (currently c 35% of deposits), and (ii) admin expenses, which we project to grow in-line with inflation after being flattish for the last 2yrs.
MCB’s CAR has improved to more than 19%. Although it should come off as the bumper final 4QCY20 dividend is paid out, MCB appears to have some room to offset this via further lower RWA density (50% vs. less than 40% for UBL and HBL). As a result, we see MCB maintaining a relatively high cash payout ratio. This translates into a CY21f D/Y of 11%.
Estimates and TP maintained
We largely maintain our EPS estimates for MCB, where improving asset quality (prospects for net reversals in CY21f) may be offset by pressure on margins and a more normalized increase in admin expenses (after being flat for the last 2yrs). Our CY21/22f EPS estimates are PKR25.03/25.42. To recall, MCB frontloaded provisions in CY20 (both specific and general), and the management has now guided for reversals in its unencumbered provisions (c.PKR4.5bn) in addition to recovery in NIB’s fully provided NPL portfolio in CY21f. We have therefore reduced our cost of risk for CY21/22f to -25/+17bps (vs. +87/+71bps previously). Despite the range-bound earnings over the next 1-2 years, a high cash payout ratio should help in improving MCB’s mid-cycle ROE to c.20%, up from 16% in CY20. We maintain our Dec’21 TP of PKR235/sh and a Buy stance.
Asset quality strength remains strong
Despite a conservatively structured loan book, MCB took some subjective downgrades in CY20 (NPLs up 4%yoy to PKR51.9bn), while raising general provisions to PKR5.5bn or 13% of domestic NPLs. High specific coverage (96% domestic) and muted credit stress so far indicate that initial asset quality concerns are not valid. Together with continued recoveries from NIB’s portfolio and room to reduce general provisions, MCB should be among the few banks that may post a net provisioning reversal in CY21f. As a result, we reduce CY21/22f credit costs to -25/+17bps (vs. +87/+71bps previously), and to 30bps over the medium term.
Non Funded Income is likely to remain muted
MCB’s non-funded income rose 10%yoy in CY20, due mostly to realization of capital gains (PKR3.4bn vs. PKR829mn in CY19). While sizeable unrealized gains on government securities still remain (PKR8.4bn or 4% of total SHEQ), we conservatively keep overall non-funded income flat in CY21f. Fee income however, is expected to recover in CY21f (+9%yoy) on rising trade commissions and bancassurance sales. Stress on revenues, together with normalizing admin expenses (c.9%yoy in CY21f), are likely to raise Cost-to-Income to 47% (vs. 41% in CY20 but in-line with the previous 5yr average).
Relatively high cash payouts can continue
MCB’s RWA density is the highest in our coverage space at 50% (HBL: 36%, UBL: 40%, MEBL: 34%). Going by this, there is room for further RWA efficiency, which can help MCB maintain a high cash payout. While we expect some normalization in the payout ratio (last 5yr average: 86%), there seems to be ample room to maintain a sustainable payout of 60%. This together with renewed focus on balance sheet growth, should enable MCB’s ROE to rise from 16% at present to c. 20% through the cycle.
Courtesy – Intermarket Securities Limited.