Karachi, October 25, 2021 (PPI-OT): AKBL: TSA a key risk to the 19% ROE
With chatters reportedly resurfacing during IMF negotiations regarding implementation of the Treasury Single Account (TSA) phase II, we highlight AKBL as a key contender of impact on its books.
As there has not been any deadline for the closure defined the impending impact on AKBL’s financials and adequacy ratios is expected to continue the deep discount on the stock’s multiples, despite a strong ROE track record.
Maintaining a payout ratio of 35%-40%, similar to CY20, the stock’s DY computes to 12% at current levels. However, we highlight its CET I stands at 10.40%, one of the lowest among our coverage and only 190bps above the minimum requirement.
AKBL has entered the Rs1trn club during 3QCY21, as its deposits marked 32% YoY growth, closing at Rs1.01trn. The bank’s Tier I ROE sustained at 19%.
Deep discount on multiples to persist till TSA clarity
With chatters reportedly resurfacing during IMF negotiations regarding implementation of the Treasury Single Account (TSA) phase II, we highlight Askari Bank Limited (AKBL) as a key contender of impact on its books. To recall, AKBL still had 33% of its deposits coming from the Government (Federal and Provincial) as at CY20, post government’s letter that directed ministries to close certain banks accounts with commercial banks. As there has not been any deadline for the closure defined, the impending impact on AKBL’s book’s and adequacy ratios is expected to continue the deep discount on the stock’s multiples, despite a strong ROE track record.
Where no material impact was witnessed post implementation of TSA phase-I, our base case estimates derive the bank’s Tier I ROE to remain in the range of 18%-20% in the mid-term and long-term amid increase in interest rates and nominal deposit growth. Maintaining a pay-out ratio of 35%-40%, similar to CY20, the stock’s DY computes to 12% at current levels. However, we highlight its CET I stands at 10.40%, one of the lowest among our coverage and only 190bps above the minimum requirement.
Deposits cross Rs1trn
AKBL has entered the Rs1trn club during 3QCY21, as its deposits marked 32% YoY growth, closing at Rs1.01trn. The deposit mix however did not play in the bank’s favour with CASA dropping by 337bps YoY as fixed deposits increased by more than 60% YoY. We believe this directs towards the bank’s strategy to lock in term deposits on current rates for the next three to six months at the time when benchmark rates are anticipated to rise. On the other hand, current account growth clocked in at 24% YoY, declining its share to 29% (-181bps YoY). The deposits were broadly used to build investments in government securities (IDR: 57%, -208bps YoY), while Advances portfolio expanded by 17% YoY (Gross ADR: 48%, -610bps YoY). During the quarter, AKBL’s NPLs further accreted by Rs1.7bn, maintaining its Gross Infection ratio at 6.8%. Similar provisioning during 3Q also kept Coverage ratio steady at 94%.
3QCY21: Earnings decline on higher base
The 23% YoY asset base growth was not sufficient to support NIMs, as NIMs during the 3Q declined by 79bps YoY over higher base in the preceding period. Moreover, Non-Core Income also declined during the quarter over higher base of realized capital gains during 3QCY20. Nonetheless, Fee Income reported 11% YoY growth, driven by 27% YoY higher trade income. As a result, earnings for the quarter declined by 33% YoY to Rs2.13/share, taking 9MCY21 earnings to Rs5.41/share (-16% YoY). As at Sep-2021, AKBL’s core book value has expanded by 14% YoY, which is one of the highest growth from financial reports of banks released as yet. However, on account of spike in government paper yields resulting in a steep decline in Surplus on Revaluation; total BV growth limits to 10% YoY. The bank’s Tier I ROE sustained at 19%.