MCB: Conference call takeaways; PT revised downwards

Investor Conference: MCB Bank (MCB) held its investor conference yesterday, February 23, 2012, with the management discussing both CY11 result as well as the future outlook of the bank. MCB recorded 15% YoY growth in CY11 as PAT reached PKR19.4bn (EPS: PKR23.23/share) however 4QCY11 PAT dropped by 11% YoY to PKR3.9bn (EPS: PKR4.68).

Expansion in investment portfolio: The investments portfolio of MCB witnessed an expansion of 49% YoY on the back of both 1) higher yields offered on the instruments and 2) conversion of power sector loans into government securities.

Downward revision in advances estimates: Gross loans declined by 9.5% during CY11 pulling down ADR to 51%. Bank’s cautious lending approach in addition to a weak macro economic situation hindering private credit demand has also led us to revise our loan estimates downwards to a 5 year CAGR of 6% from 9% previously. Deposits have remained strong, however, a high CASA at 80% and sticky deposit costs will likely lead to NIM contraction of -53bps during CY12.

Limited accretion in NPLs ahead: Non-performing loan (NPL) accretion slowed down significantly during 4QCY11 to PKR202mn from PKR1bn in the previous quarter while the management does not foresee significant additions in CY12.

Revision in earnings estimates; PT Revised downwards to PKR200: Declining ADR, higher operating expenditure and lower PF reversals lead to a downward revision in our earnings estimates by 5-11% during CY12-15E and in our Dec-12 PT by 7% to PKR200

MCB Bank (MCB) held its investor conference yesterday, February 23, 2012, with the management discussing both CY11 result as well as the future outlook of the bank. MCB recorded 15% YoY growth in CY11 PAT to PKR19.4bn (EPS: PKR23.23/share) and 11% decline in 4QCY11 PAT to PKR3.9bn (EPS: PKR4.68). The company also announced final dividend of PKR3.0/share taking the annual payout to PKR12.0/share along with a 10% bonus issue.

The investments portfolio of MCB witnessed an expansion of 49% YoY on the back of both 1) higher yields offered on the instruments and 2) conversion of power sector loans into government securities. Furthermore, the management highlighted that a drop in lending and tax arbitrage on money market mutual funds led the bank to take an exposure in the mutual funds amounting to PKR4bn.

We revise down our forecast for advances growth

Gross loans declined by 9.5% during CY11 pulling down ADR to 51% from 64% as of Dec-10 while IDR surging to 65% from 49% last year. Bank’s cautious lending approach in addition to a weak macro economic situation hindering private credit demand has led us to revise our loan estimates downwards to a 5 year CAGR of 6% from 9% previously. With fresh credit lines available for IPPs and OMCs post – debt swap deal, the management expects an uptick in advances during CY12 (MCB’s exposure was PKR8.9bn).

Deposit growth, on the other hand, remained strong at 15% during the year which will continue to grow at a 5 year CAGR of 11%. However, lower yields on investments and advances during CY12 combined with sticky deposit costs on the back of a high CASA at 80% will likely put further pressure on NIMs as we expect NIM contraction of 53bps during CY12. The same already declined by 15bps to 8.3% (adjusted for suspended markup income received) during CY11.

Limited accretion in NPLs ahead; infection to remain high on lower loan growth

Non-performing loan (NPLs) accretion slowed down significantly during 4QCY11 to PKR202mn from PKR1bn in the last quarter. The management was of the view that NPL growth has likely peaked out and does not see significant additions in CY12, while it also highlighted a reversal of PKR200mn during Jan-12. Furthermore, with 91% of NPLs classified in the ‘loss’ category, coverage at 84% and slow loan growth indicates towards a slowdown in NPL growth going forward (6% for CY12E against 9% for CY11). Although slow loan growth will keep infection high at 10.8% it will also likely result in a 32% YoY decline in provisioning losses in CY12 boding positive for the bottom line. The management also revealed that it took a hit on its SNGPL investments during the year which adversely affected the bottom line.

New branches and lower PF reversals; opex estimates revised upwards

Non-funded income increased by 30% YoY during CY11 which we think will continue to remain strong. However, addition of 40 new branches during the year led to 15% high salary expense while pension fund reversals have been on a declining trend since CY07. Management intention of 40 more branches during CY12 and a continuing PF trend has led us to revise our opex growth estimates upwards from 16%/15% to 18%/17% in CY12E/CY13E.

Revision in earnings estimates; PT Revised downwards to PKR200

Declining ADR, higher operating expenditure and lower PF reversals lead to a downward revision in our earnings estimates by 5-11% during CY12-15E. Also, ROE and ROA have also posted sequential declines since CY11 and dropped to 18% during 4QCY11. Our Dec-12 PT has also been revised downwards by 7% to PKR200.

Trading at CY12E PBV of 1.30x and offering 15% potential upside to our PT, we continue to maintain a BUY on the stock.

Economic & Political News

Pakistan forex reserves fall to USD16.64bn
Pakistan’s foreign exchange reserves fell to USD16.64bn in the week ending Feb 17, compared with USD16.77bn the previous week, the State Bank of Pakistan said on Thursday.

conomic & Political News
Analyst Certification:
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Disclaimer

The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

Contributed By