Karachi, November 08, 2022 (PPI-OT): MCB: Stable earnings to keep D/Y at 19%
We reiterate MCB Bank (MCB) among the attractive D/Y plays from our coverage as it currently offers an annual D/Y of 19%, in addition to significant capital upside. We believe the stock currently trading at 0.8x P/BV is at deep discount to its justified P/B of 1.3x. We flag the bank’s higher ROE has kept historical premium over peer multiples at 2x, vis-a-vis 55% currently.
The management, in yesterday’s Corporate Briefing, reiterated its earlier guidance regarding increasing ADR levels up to 50% by CY22 end (3Q: 42%) in order to avoid higher taxes related to ADR levels. This means it would need to increase existing Gross Advances portfolio by 20% QoQ in the last quarter, assuming deposit size remains unchanged.
On the Investment front, the management presented break up of its investment book, where floater PIBs and T-Bills contributed 47% and 18% to the total book, respectively, while Fixed PIB contribution declined to 24%.
Sustainable D/Y intact at 19%
Post release of MCB Bank’s (MCB) 3QCY22 financials and Corporate Briefing session held yesterday, we reiterate MCB Bank (MCB) among the attractive D/Y plays from our coverage, as it currently offers an annual D/Y of 19% for CY23E, in addition to 60% capital gain. Our investment thesis remains intact as the bank announced Rs5/share dividend alongside 3QCY22 results where EPS clocked in at Rs7.8/share (+16% YoY) over improving core income.
We believe the stock is currently trading at a discount to its justified P/B of 1.3x. We flag the bank’s historical premium over peer multiples has been 2x, vis-à-vis 55% currently. MCB’s Tier I ROE is expected to sustain at 24%, surpassing other conventional players. In addition, MCB has managed robust return generation in spite of staying largely conservative by maintaining a high Tier II CAR at 16.7% and low leverage ratio. Key upside to our base case is the bank’s capability of increasing pay-out ratio beyond 60%, further increasing the stock’s D/Y.
Gross ADR target intact at 50% by CY22-end
MCB reported 10% YoY deposit growth in 3QCY22, led by 18% YoY jump in zero- cost deposits. Asset allocation tilting to Investments, IDR stood at 66%, with ADR at 39% (Gross ADR: 42%). Management reiterated earlier guidance of increasing ADR levels to 50% by CY22 end to avoid higher taxes related to ADR levels. This would mean it would need to increase existing Gross Advances portfolio by 20% QoQ in the last quarter, assuming deposit size remains unchanged. Management has apprised that the bank would largely remain within existing customer base while expanding its loan portfolio. Meeting 50% Gross ADR mark would lead to reversal of the aforementioned additional taxes paid during 9MCY22, which may amount to an additional ~Rs1.25/share earnings impact on 4Q EPS.
On the investment front, the management presented break up of its investment book, where floater PIBs and T-Bills contributed 47% and 18% to the total book, respectively, while Fixed PIB contribution declined from 27% to 24%. Though further shift towards variable instruments signalled expectations of further monetary tightening from here, management apprised it does not view much increase in the Policy Rate from current levels.