JS Securities Limited – Morning Briefing

Karachi, January 02, 2019 (PPI-OT): BAFL: Recent correction and expected growth outlook make valuations attractive

Recent 15% correction in Bank Alfalah’s (BAFL) stock price in the past month (12% underperformance to KSE-100) has made room for investors to make fresh allocations in the stock given enticing valuations.

The bank’s sustainable Tier-I ROE of 18% warrants a higher multiple than current multiple that is at par with sector’s P/B of 0.95x, despite generating higher ROE than sector average of 17%.

We reiterate ‘Buy’ as BAFL offers 25% capital upside to our Target Price of Rs56.

Going forward, with robust 22% CAGR in NII, the bank’s NIMs are expected to gradually improve to 4.7% during 2019, from 3.32% during 2017, generating highest NIMs from the mid-tier category.

We believe our investment case incorporates prudent assumptions as we have increased the bank’s credit for the coming years given anticipation of fresh NPLS from the bank’s relatively higher loan growth in consumer and SME segments compared to peers.

Recent price decline opens opportunity for fresh allocations

Recent 15% correction in Bank Alfalah’s (BAFL) stock price in the past month (12% underperformance to KSE-100 index) has made room for investors to make fresh allocations in the stock given enticing valuations. We believe the recent correction is unjustified, given robust earnings projections from 2019F onwards. The bank’s sustainable Tier-I ROE of 18% warrants a re-rating as it is currently trading at par with sector’s P/B of 0.95x, despite generating higher ROE than sector average of 17%. We reiterate ‘Buy’ as BAFL offers 25% capital upside to our Target Price of Rs56.

Asset placement to give higher gain on interest rate hike

From JS Banking Universe, BAFL has maintained (1) highest contributions from zero-cost deposits, (2) one of the lowest exposures in PIB investments amongst peers and (3) one of the highest ADRs in the industry, placing it as one of the potentially highest beneficiaries of ongoing monetary policy tightening. We estimate that for every 100bps hike in the Policy Rate, the bank’s annual earnings would increase by ~10%. Also, with robust 22% CAGR in NII, the bank’s NIMs are expected to gradually improve to 4.7% during 2019, from 3.32% during 2017, hence it is expected to generate the highest NIMs among mid-tier banks. As a result, we expect its 3-year earnings CAGR to hover around 24% (2018E-2021F). We believe that given the recent efforts of the incumbent govt. towards enhancing financial inclusion, any positive material development regarding the same would leave BAFL with a fairly higher advantage than peers given relatively higher exposure to the SME sector.

Investment case incorporates fresh NPLs

We highlight that selectively disbursing loans in the past five years has given the bank ample time to improve asset quality and broadly maintain a premium clientele portfolio, taking credit cost down to 0.02% (Gross Infection: 3.3%) during 2016- 2018E. Going forward, we believe our investment case incorporates prudent assumptions as we take the bank’s credit cost up to 0.40% (Gross Infection: 3.5%) for coming years given anticipation of fresh NPLS from the bank’s relatively higher loan growth in consumer and SME segments than peers.