We raise our EPS estimates for MEBL by 7% on average as we build in higher interest rates, stronger balance sheet growth (backed by c.19% CAR), and a resultantly higher mid-cycle ROE at 27%. This leads us to raise our (rolled over) Dec’22 TP to PKR175/sh. We retain our Buy rating.
Margins should cross 5% over the medium term on MEBL’s strong deposit franchise in a higher interest rate setting – current accounts in the mix are already more than 40%, one of the highest among Pakistani banks. This should help drive an over 15% EPS CAGR over the next 3yrs.
While the upside to our TP is modest vs. peers (ETR : 21% vs. 34% for peers), we maintain our Buy rating as the interest rate up cycle is set to continue and there is room for positive surprises. The CY22f P/B of 2.2x is at a c.40% premium to the previous 5yr average, but the 8.2x forward P/E is at a more moderate 15% premium to the 5yr average.
Multiple positives call for a lift in estimates
An improved earnings outlook in the backdrop of rising interest rates, strong balance sheet growth and modest asset quality risks leads us to raise our CY22-25f earnings estimates for MEBL by 7% on average. Our new CY22/23f EPS estimates now stand at PKR18.19/22.10, up 7%/10% from previous. MEBL can deliver a mid-cycle ROE of c. 27%, with over 15% EPS CAGR across CY21-25f as interest rates lift. This, together with a TP rollover, leads us to revise our December 2022 TP to PKR175/sh from PKR165/sh previously. An improved CAR of 19% can maintain a cash payout of c.35% which translates into a D/Y of 4.3%.
Deposit growth is coming without compromising the mix
MEBL continues to quickly grow its deposits (35% yoy in CY20, c. 20% yoy in CY21f). Importantly, this has been achieved while improving the mix as current accounts rose to 42% of deposits in 3QCY21, second only to BAFL. Absence of a rate floor on savings deposits (27% of the mix) together with a sticky individual depositor base should afford a significant funding cost advantage to MEBL particularly in a rising interest rate environment. A strong deposit franchise amid higher interest rates should spearhead 18% pa NII growth through the cycle. We see margins rising from 4.7% in CY21f to 5.3% by CY25f.
Well positioned for IFRS-9
NPLs have remained flat in 9MCY21 following the large subjective downgrade in 4QCY20 (c.PKR4bn on account of Hascol). MEBL has sustained its specific coverage at 91%, while raising its general provisions to PKR5.8bn (or over 1% of total loans). This takes total coverage to 131%. While this is adequate, we have prudently lifted our cost of risk for CY22/23f to c.20/40bps (vs. c.18/25bps previously) ahead of the implementation of IFRS-9. This is still conservative given peer banks are eyeing credit costs of 75bps on incremental loans. We think MEBL can sustain a loan growth of 17% on average which translates into an ADR of 41% which helps attract a lower tax bracket.
NFI has room to surprise
We flag that MEBL’s returns can clock in above our expectations in case non-markup income surprises, where we have been conservative in our projections for fee income and capital gains. We estimate a 10% sustainable growth in fee income which translates to 0.5% of average assets (much lower than 0.7% pre-Covid-19). On the flip side, we expect admin expenses to grow at a 5yr CAGR of 17% with the Cost-to-Income ratio to remain limited at 43% through the cycle. This is aligned with MEBL’s target to grow its network to 1,000 branches over the next 2-3 years. We estimate an 18% average growth in deposits over CY21-25f.
Modest upside is balanced by potential for positive surprise
While the upside to our TP is modest vs. peers (ETR: 21% vs. 34% for peers), we maintain our Buy rating as the interest rate up cycle is set to continue and there is room for positive surprises. Moreover, MEBL continues to maintain CAR at over 18% since 2019 and aims levels not less than 16-17% through the cycle while maintaining growth momentum. This can easily sustain a payout of over 35% on average in CY21-25f which translates into a modest forward D/Y of 4.3%. The CY22f P/B of 2.2x is at a c.40% premium to the previous 5yr average, but the 8.2x forward P/E is at a more moderate 15% premium to the 5yr average.
3QCY21 Results – Strong NII pick-up; in-line with estimates
MEBL posted 3QCY21 consolidated NPAT of PKR7.0bn (EPS: PKR4.31), up 4%yoy, and 5% qoq. The result was in line with estimates – taking 9MCY21 NPAT to PKR19.7bn (EPS PKR: 12.14), up 8% yoy. Key takeaways from the result included (i) strong 7% qoq pick up in NII, albeit flat yoy (ii) higher than expected fee income of PKR2.9bn, up 54% yoy, and (iii) soft provisioning expense of PKR121mn. MEBL also announced an interim cash dividend of PKR1.50/sh, slightly higher than expected DPS of PKR1.25, taking 9MCY21 payout to PKR4.11(bonus adjusted).
Courtesy- Intermarket Securities Limited.