JS Securities Limited – Morning Briefing

Karachi, January 10, 2019 (PPI-OT): ABL: 2018 outperformance encompasses future growth

ABL has outperformed the sector by 32% and benchmark index by 35%, as the stock rallied by 27% in 2018. With the ongoing performance, the stock’s 2019E P/B has now reached to 1.1x.

We believe current valuations incorporate the upcoming earnings CAGR of 18% and book value CAGR of 8% expected in the next three years, which translate to a potential average ROE (Tier I) of 19%.

The bank is expected to witness the highest growths in Net Interest Income (NII) during 2019 among the banks in the same tier on account of (1) impact of interest rate increase and (2) potential of larger PIB investment accumulation.

However, we expect the bank’s average deposit base to continue to expand on a moderate growth level in the coming years.

2018: ABL emerges as best performing stock among Big 5

The year 2018 augured well for Allied Bank Ltd (ABL) emerged as the only bank to report positive return among the Big 5 during the year. ABL outperformed the sector by 32% and benchmark index by 35%, as the stock rallied by 27% in 2018. The positive trend has continued during 2019 as well with 2% return during the first six trading sessions of the year. With the ongoing performance, the stock’s 2019E P/B has now reached to 1.1x. We believe current valuations incorporate the upcoming earnings CAGR of 18% and book value CAGR of 8% expected in the next three years, which translate to a potential average ROE (Tier I) of 19%. We flag the stock is currently trading at 10% premium to sector’s average multiple while we expect the sector’s ROE to average at 18%. However, the stock offers a D/Y of 7%, one of the highest D/Y offered by banking stocks.

2019E: Ready to leave peers behind in NII growth

The bank is expected to witness the highest growths in Net Interest Income (NII) during 2019 among the banks in the same tier on account of (1) impact of interest rate increase and (2) potential of larger PIB investment accumulation. The bank’s asset and liability mix gives higher benefit of an interest rate hike with (1) higher exposure to short tenor investments and (2) high mix of zero-cost deposits. Moreover, with PIB as a % to Deposits standing at 7% only (Big 5 average: ~15%), ABL relatively has more room to accumulate any PIB investments on higher yields in the near future. Our base case incorporates PIB to Deposit ratio for ABL to increase to an average of 20%.

Future growth likely to remain moderate

With the tallest Tier II CAR (Sep-2018: 22%) and lower leverage ratio, we believe the bank has ample room to increase its risky weighted assets, and outpace peer average growth. However, we expect the bank’s average deposit base to continue to expand on a moderate growth level in the coming years. To recall, ABL’s 5-yr Deposit growth (11%) has remained below industry average (12%), which has been allocated towards a high IDR and low ADR as compared to the industry. Going forward, we believe the current strategy will continue, however the same will also benefit the bank to maintain a lower credit cost during 2019F-20F.

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