MEBL management held a corporate briefing today to discuss CY25 financial performance and the outlook. Profit After Tax declined 12% YoY to Rs 89.0bn (EPS: Rs 49.54) for CY25, primarily due to the sharp drop-in average policy rate from 19.67% to 11.39%, which compressed net spreads on the bank’s predominantly variable-rate asset portfolio.
§ Despite the profit decline, the bank demonstrated resilience through strong volumetric growth, with deposits increasing 28% to Rs 3.30 trillion and assets growing 23% to Rs 4.81 trillion, partially offsetting the margin compression.
§ Return on Equity stood at 33.8%, significantly above the industry average of 21% and well above management’s comfort level of 30%, reflecting the bank’s superior profitability metrics.
§ The bank maintained a healthy Cost-to-Income Ratio of 30.4%, reflecting operational efficiency despite inflationary pressures, and remains within the long-term target range of 35-40%.
§ Dividend payout remained robust at 280% (Rs 28 per share), consistent with the previous year, with management guiding for a similar payout ratio of around 50% of profits going forward, translating to approximately Rs 7 per share.
§ Total deposits grew 28% YoY, with CASA mix at a healthy 91% (Current Accounts: 48%), providing a stable and low-cost funding base that supports net interest margins.
§ The investment portfolio surged 39% to Rs 2.60 trillion, with 83% invested in Government Sukuk (73% variable rate, 27% fixed rate yielding 11.4%), providing clarity on the book’s interest rate sensitivity.
§ The Advances to Deposits Ratio stands at 51.1%, which is healthy compared to the industry average of 36%, with management targeting a range of 45-50% going forward.
§ Asset quality remains robust with NPL ratio at 1.84% and coverage ratio at 146%, one of the highest in the industry, indicating strong credit risk management.
§ SME financing grew 65% YoY and consumer finance increased 49% YoY, reflecting successful priority sector focus and diversification of the lending portfolio.
§ Capital Adequacy Ratio stands at a comfortable 19.2% (CET-1: 16.45%), well above the regulatory requirement of 9% and management’s comfort level of 16%, providing ample headroom for growth.
§ Management guided for deposit growth of 20-25% in CY26, supported by aggressive branch expansion plans targeting 125-150 new branches, citing Pakistan’s 650+ urban centres with populations over 100,000 as underserved.
§ The bank’s subsidiary, Al Meezan Investment Management, remains the largest AMC in Pakistan with AUM of Rs 724bn and ROE of 76.36%, providing diversified income streams.
§ Digital penetration continues to strengthen, with 93.6% of transactions by volume now digital, mobile app users at 3.36 million, and a debit card base of 4.7 million, supporting fee income growth over the medium term.
§ Spreads on Islamic instruments are 80-100 basis points lower than conventional instruments, reflecting the structural disadvantage of Islamic banks in the current regulatory environment.
§ The decline in CAR from 20.3% to 19.2% was driven by increased private sector credit, reclassification of 25% of investments to trading book, and Tier 2 Sukuk repayment, factors that investors should monitor for future capital adequacy trends.
§ Fee income growth moderated to 6%, with debit card-related fees flat due to deliberate first-year waiver strategy, though this is expected to normalise upon card renewals.
§ Stock Split & Dividend: No stock split is currently planned due to limited financial rationale, though management will review it if market demand emerges. Dividend policy remains clear, with payout ratio guided at ~50% of profits, translating to approximately Rs 7 per share.
§ Branch Expansion vs Digital: Physical expansion continues as 27-33% of Pakistan’s currency remains cash-based and over 650 urban centers with 100,000+ population are underserved. Notably, 92% of transactions are already digital, and branches serve specific profitable segments after thorough feasibility analysis.
§ Interest Rate Sensitivity: The investment book is largely repriced, with an additional 20-30 bps of margin impact expected if rates hold around 10%. The fixed Sukuk duration is 2.4 years. Islamic instrument spreads are structurally 80-100 bps lower than conventional products.
§ Regulatory Impact: MDR pressure on profitability was offset by volumetric growth in deposits and investments. CRR reduction benefits will be neutralised through the bank’s voluntary export finance scheme.
§ Asset Quality: Provisioning pressures in the textile sector (due to US tariff changes) are manageable. Management expects the infection ratio to remain at 1.8-2.0%, backed by a strong 146% coverage ratio providing ample cushion against potential losses.
Courtesy- AHCML Research
