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AKD Securities Limited – AKD Daily (15-03-2023)

Karachi, March 14, 2023 (PPI-OT): BAFL: Proceeding with Cautious Growth

Bank Alfalah Limited (BAFL) posted NPAT of PkR18.2bn (EPS: PkR11.5) for CY22, higher by 28%YoY. The growth, despite the higher taxation during the period, is attributable to the bank’s expanding NIMs.

BAFL grew its deposits on a sequential basis, to the tune of 7%, in the final quarter of the year. This was made possible by the cushion in its ADR, which stood at 56.1% at the end of 3QCY22.

Despite the strong financial position of the bank, we perceive BAFL to have substantial risks on the horizon, particularly in the form of its lending composition. As of CY22 end, 23% of the bank’s lending was to the Textile Sector, with another 15% to individuals – categories that are susceptible to macro shocks – present ng risks in terms of bad loans.

We have a Dec’23 TP of PkR41.0/sh on the stock, offering an upside potential of 35% from its last close. In addition to this, the bank offers an estimated dividend yield of 28% for CY23, representing a total return of 64%, warranting a “Buy” rating on the stock.

BAFL-Recapping CY22 earnings: Bank Alfalah Limited (BAFL) posted NPAT of PkR18.2bn (EPS: PkR11.5) for CY22, higher by 28%YoY. The growth, despite the higher taxation during the period, is attributable to the bank ’s expanding NIMs, which showed an increase to 4.6% in CY22 compared to 3.6% in CY21, aided by the contractionary monetary framework in the country. During the year, the bank’s deposit base increased by a phenomenal 31%, with an improvement in CA from 44% in CY21 to 44.5% in CY22.

Eyeing deposit growth: Contrary to the strategy employed by a majority of banks in 4QCY22, BAFL grew its deposits on a sequential basis, to the tune of 7%, in the final quarter of the year. This was made possible by the cushion in its ADR, which stood at 56.1% at the end of 3QCY22. This allowed the bank to increase its market share in domestic deposits to 5.6% from 5.2% in 3QCY22. The bank’s deposits have grown at a healthy CAGR of 21% over the past 5 years, accelerated in the past 2 years, wherein deposits have grown at an impressive 30%p.a. The bank is also looking to enhance its branch network, wherein it envisages addition of ~142 branches in CY23, taking the total branch count to north of 1,000. This is expected to aid in deposit growth for the bank going forward. Conservatively, our models incorporate the bank ’s deposits to grow at a CAGR of 15.7%p.a. in the next five years.

Risks present in BAFL’s lending book: Despite the strong financial position of the bank, we perceive BAFL to have substantial risks on the horizon, particularly in the form of its lending composition. As of CY22 end, 23% of the bank’s lending was to the Textile Sector, with another 15% to individuals-categories that are susceptible to macro shocks-presenting risks in terms of bad loans. The bank, in its latest Corporate Briefing Session, assured investors that it had not yet seen any stress on its Advances in 1QCY23 and would remain cautious in future lending practices, given the macro challenges being faced by the country. To note, the bank’s infection ratio currently stands at 4.0%, with a coverage of 108%.

Investment Perspective: BAFL’s deposits have grown at a healthy CAGR of 21% over the past 5 years. The bank’s capital position also remains strong, with BAFL’s CAR standing at 13.8% at the end of CY22, above the regulatory requirement of 11.5%, further strengthened by the PkR7bn ADT-1 issue completed in CY22. Furthermore, the bank is well-positioned to benefit from in- creased interest rates, with 85% of the PIB portfolio held in floating-rate instruments, which would reprice according to prevalent interest rates. BAFL is also eyeing branch growth, with the addition of 142 branches envisaged for CY23, which would aid in deposit growth for the bank.

Based on the same, and barring the aforementioned risks in terms of Advances, we have a Dec’23 TP of PkR41.0/sh on the stock (based on new number of shares), offering an upside potential of 35% from its last close. In addition to this, the bank offers an estimated dividend yield of 28% for CY23, representing a total return of 64% on the stock, warranting a “Buy” rating on the stock. Our forecasts for the bank incorporates the 20% policy rates in the country and the prevalence of the same through the rest of the year.