MCB Bank Limited – CY10 Estimates Tweaked; HOLD Call!

Asset mix shifted towards investments

With interest bearing investments growing by 63% YoY whereas gross advances down 3% on YoY basis, we see major shift in the asset mix of MCB Bank Limited (MCB). This scenario, we believe will continue in rest of CY10 as well and is expected to lower yield on earning assets for the period.

NPLs provisioning to decline by 23% YoY, Gross infection ratio at 9.5%

MCB’s net earnings witnessed muted growth of 2% YoY during 1HCY10, mainly owing to 53% YoY reduction in the provisioning expense against NPLs. However, interestingly, Gross Infection Ratio rose by 51bps from December level to 9.2%, despite reduction in lending activities. This coupled with further accretion in NPLs post floods could once again cause spike in provisioning charge in coming quarters. Nevertheless, in our opinion, the expense is still expected to be lower by 23% YoY.

Administrative expenses up by 25% YoY from CY09 level

During 1HCY10, administrative expenses of the bank grew by 15% YoY and were up by 24% QoQ in 2QCY10, attributable to reduced pension fund (PF) reversals realized during the period. Adjustment of this change into our assumptions has increased our administrative expenses estimates for CY10 by 9%.

HOLD call with rollover and revised Jun-2011 PT of PKR220/share

At recent closing of PKR195.6/share, the scrip is trading at CY10F P/E and P/BV of 8.9x and 1.9x respectively and offers upside potential of 12% to our Jun-2011 PT of PKR220/share. HOLD!

Asset mix shifted towards investments

MCB’s interest income grew by a mere 2% YoY during 1HCY10, mainly due to decline in effective lending rates of the bank, as average earnings assets were up by 12% YoY. Interest bearing investments grew by 63% YoY whereas gross advances were down 3% YoY during 1HCY10. Given heightened credit risk and rising NPLs, the management shifted its assets mix towards investments, which shrunk Gross ADR of the bank by 126bps YoY to 63% by the end of June 2010. This scenario, we believe will prevail in rest of CY10 as well and is expected to lower yield on earning assets. On the other hand, MCB’s deposits were up by 16% YoY during

the half year period, which rose interest expense by 12% YoY, despite high share of CASA (81% during June 2010) in funds. We expect deposits to grow by 17% YoY in full year CY10; hence keeping NIMs lower from CY09 level of 8.3%.

NPLs provisioning to decline by 23% YoY, Gross Infection Ratio at 9.5%

MCB’s net earnings witnessed muted growth of 2% YoY during 1HCY10, mainly on the back of 53% YoY reduction in the provisioning expense against NPLs as pre-provision profit was down 2% YoY. However, bank’s asset quality continued to aggravate during the period despite reduction in lending activities, with Gross Infection Ratio rising by 51bps to 9.2% from December. This coupled with further accretion in NPLs post floods could once again cause spike in provisioning charge in coming quarters. Nevertheless, in our opinion the expense is expected to remain lower compared to provisioning charge booked in CY09, likely down by 23% YoY and bank’s Gross Infection is projected to rise to 9.5% by CY10 end.

Administrative expenses up by 25% YoY from CY09 level

During 1HCY10, administrative expenses of the bank grew by 15% YoY and were up by 24% QoQ in 2QCY10, attributable to reduced pension fund (PF) reversals MCB realized during the period. Adjustment of this change into our assumptions has increased our administrative expenses estimates for CY10 by 9% to PKR12.6bn and now expected to be up 25% YoY from CY09 level. We remain conservative on future PF reversals as well.

HOLD Call with rollover and revised Jun-2011 PT of PKR220/share

Taking all above factors into account, we have tweaked our full year CY10 earnings forecast by -4% to PKR16.7bn (EPS: PKR21.98), however, we have kept full year cash dividend estimates same at PKR11/share. Moreover, we have rolled over and revised MCB’s Price Target with June-2011 PT at PKR220/share. At recent closing of PKR195.6/share, the scrip is trading at CY10F P/E and P/BV of 8.9x and 1.9x respectively and offers upside potential of 12% to our Jun-2011 PT of PKR220/share. HOLD!

Economic & Political News

IMF likely to release USD1.8bn in December

The review for the fifth tranche is scheduled in early December, and Pakistan expects the IMF board to approve the next installment despite the reservations the fund expressed earlier this week. IMF mission chief for Pakistan Adnan Mazarei told a briefing in Washington that Islamabad needed to enforce its reformed General Sales Tax and move to eliminate its electricity subsidy to qualify for the fifth installment.
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