JS Securities Limited – Morning Briefing
Web Desk
Karachi, January 16, 2018 (PPI-OT): MCB: 4Q2017E growth to surpass peers, ‘Buy’ with TP of Rs252
We expect MCB Bank (MCB) to post earnings of Rs25.39bn (EPS: Rs21.42) in 2017, 16% YoY higher primarily on the back of lower effective tax rate of 29% as the bank had recorded a tax adjustment in 2Q2017.
In 4Q2017, we expect the bank to report 40% YoY higher profitability at Rs6.25bn (EPS: Rs5.27), on the back of (1) 23% YoY increase in NII and (2) 24% YoY higher Fee Income.
We expect the bank to announce a final cash dividend of Rs4.0/share, taking cumulative dividend to Rs16.0/share in 2017.
We maintain our ‘Buy’ rating on MCB with a Target Price of Rs252, offering a total return of 20%. We expect bank’s earnings to grow at a 5-year (2017E-22F) CAGR of 10% (vs. CAGR of 2% during 2011-16).
Our earnings estimates account for Rs1.5bn reversals under provisioning expenses (~6% of NIB NPLs) vis-a-vis management expectations of ~15% recovery from NIB NPLs during 2018F.
Impressive asset growth to support NII
We expect MCB Bank (MCB) to post earnings of Rs25.39bn (EPS: Rs21.42) in 2017, 16% YoY higher primarily on the back of lower effective tax rate of 29% as the bank had recorded a tax adjustment in 2Q2017. We estimate Net Interest Income (NII) for the year to remain largely similar to 2016 levels, as we expect Asset growth (+32% YoY, highest in JS Banking Universe) because of merger with NIB to compensate for decline in income from investments in PIBs after their maturities during 2016.
Meanwhile, we expect growth in non-core income to clock in at 14% YoY on the back of 25% YoY higher Fee Income. The merger with NIB is also likely to increase operating expenses by 25% YoY. Overall, we estimate the bank’s Tier I ROE to inch up to 20% vis-a-vis 19% during 2016. In 4Q2017, we expect the bank to report 40% YoY higher profitability at Rs6.25bn (EPS: Rs5.27), on the back of (1) 23% YoY increase in NII and (2) 24% YoY higher Fee Income. We expect the bank to announce a final cash dividend of Rs4.0/share, taking cumulative dividend to Rs16.0/share in 2017.
‘Buy’ intact with TP of Rs252
We maintain our ‘Buy’ rating on MCB with a Target Price of Rs252, offering a total return of 20%. We expect bank’s earnings to grow at a 5-year (2017E-22F) CAGR of 10% (vs. CAGR of 2% during 2011-16). Though we expect merger with NIB will gradually inflate the bank’s leverage ratio in the near future, we highlight that the bank has a high capital adequacy (Tier II CAR: 17.3%) that gives it enough room for additional loan book expansion. Our earnings estimates account for Rs1.5bn reversals under provisioning expenses (~6% of NIB NPLs) vis-à-vis management expectations of ~15% recovery from NIB NPLs during 2018F. Key risks to our investment case are (1) delays in expected interest rate hikes, (2) loss of market share because of sidestepping from lending to the energy sector and (3) lower- than-expected recoveries from infected loans.
