Allied Bank Limited – Liability Management supported bottom line in 9MCY10

21% QoQ jump in net earnings led to 17% YoY rise in PAT in 9MCY10: Allied Bank Limited (ABL) posted net earnings of PKR2.2bn (EPS: PKR2.85) during 3QCY10, up 21% QoQ (highest QoQ growth during CY10). This took 9MCY10 net profit up 17% YoY to PKR5.8bn (EPS: PKR7.48).

Decline in interest expense pushed NII up by 21% YoY: Maintaining CASA’s share in total deposit mix at 72% in Sept-10 compared to 69% in Dec-09, and attrition in high cost fixed term and FIs deposits by PKR11bn YTD, lowered interest expense by 1% YoY during 9MCY10 and resulted in 21% YoY surge in net interest income (NII).

Provisions went up 18% QoQ; but down 6% YoY: NPL charge remained on the high side in 3QCY10, up by 18% QoQ, owing to increase in NPLs and absence of reversals (during 2QCY10 the bank booked PKR280mn reversal). However, during 9MCY10, the reversal resulted in 6% YoY decline in cumulative provisioning and write-offs, as NPLs’ expense was up 10% YoY.

Non-interest income & Opex – A drag to the bottom line: During 9MCY10, bank’s non-interest income declined by 22% YoY due to decrease in fee, commission & brokerage income and dividends, along with reduction in FX income. Opex, on the other hand, rose by 17% YoY.

BUY at current levels: We have tweaked full year CY10 earnings forecast for ABL post 9MCY10 results, down 2% from earlier EPS estimates of PKR10.54, Jun-2011 PT also revised down by 4% to PKR80/share. At recent closing, the scrip provides upside potential of 44% to revised PT and is trading at a CY11E P/E and P/BV of 4.7x and 1.0x respectively. BUY!

Decline in interest expense pushed NII up by 21% YoY

17% YoY rise in interest earning assets during 9MCY10 (mainly emanated from 48% YoY hike in interest earning investments) resulted in 9% YoY growth in interest income. On the other hand, the management pursued its strategy of low cost funds, and shed high cost fixed term and FIs funds by PKR11bn YTD, resulting in 72% CASA’s share in total deposit mix in Sept-10, compared to 69% in December-09. This lowered interest expense by 1% YoY during 9MCY10 and caused 21% YoY surge in net interest income (NII).

Provisions went up 18% QoQ; but down 6% YoY

ABL, despite containing its infection ratio to single digit and reducing its lending by 6% CYTD, witnessed PKR3bn increase in NPLs during 9MCY10. Hence, NPL provision remained on the higher side in 3QCY10, up by 18% QoQ. Moreover, the bank booked a reversal of PKR280mn during 2QCY10, which was not the case in 3QCY10. Nevertheless, during 9MCY10, the reversal resulted in 6% YoY decline in cumulative provisioning and write-offs, as NPL expense was up 10% YoY. Coverage ratio of the bank also improved to 81% during the period under review from 77% in CY09.

Non-interest income & Opex – A drag to the bottom line

PKR321mn reduction in fee, commission & brokerage income, PKR415mn decline in dividend income and gains on sales of securities, and PKR355mn decrease in income from FX resulted in 22% YoY drop in non-funded income of the bank. On the other hand, operating expenses were up by 17% YoY, which also included one-time charge of PKR294mn against VSS offered by the management. Barring VSS, operating expenses would likely have been up by 13% YoY.

BUY at current levels

We have tweaked full year CY10 earnings forecast for ABL post 9MCY10 results, down 2% from earlier EPS estimate of PKR10.54 to PKR10.35. Moreover, Jun-2011 Price Target has also been revised down by 4% to PKR80/share from PKR83/share. At recent closing, the scrip provides upside potential of 44% to revised PT and is trading at a CY11E P/E and P/BV of 4.7x and 1.0x respectively. BUY!

Economic & Political News

Pakistan to go bankrupt if power sector not reformed, warns IMF

Adnan Mazarie, head of the mission, has asked the government to introduce the irreversible plan to implement power sector reforms otherwise no funding will be provided to Pakistan, a senior official who is privy to the talks with IMF on power sector. The Fund has also warned that all IFIs including WB, ADB and even USAID will cease their credit lines and resultantly Pakistan will go into default.
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