Karachi: Following lower than expected NPAT of PKRI5.5bn (EPS: PKR1 8.57) in 9MCYII, AKD Securities trims its earnings estimates for MCB by 3% on average and cut its Dec’12 target price to PKR180/share from PKR205/share.
According to AKD Securities, steeper decline in TP is due to assigned weight to DDM (25%) to partly reflect low earnings growth visibility in what is shaping up to be a volatile interest rate environment. While MCB should post 25%YoY growth in CY11F (projected sequential improvement in 4QCY11F), unless asset quality improves, AKD Securities believes the bank will be hard pressed to post double-digit profit growth across the next 2-3 years particularly if interest rates continue to swiftly decline (AKD Securities anticipates a further 50bps in the DR by month end). As a result, while MCB should record average Tier-I ROE of ~25% across the medium-term, valuations may sustainably depart from the growth multiples traditionally associated with the bank. MCB trades at a CY12F P/B of 1.29x, PER of 6.01x and D/Y of 8.8%. AKD’s revised TP of PKR180/share offers upside of 13% and implies an Accumulate stance.
|Source: AKD Research|
9MCY11 could have been better: MCB posted NPAT of PKR15.5bn (EPS: PKR18.57) in 9MCY11, up 24%YoY. 3QCY11 NPAT clocked in at PKR4.9bn (EPS: PKR5.86), +9%YoY/11% QoQ. Lower sequential profitability was largely due to unexpectedly lower interest income (AKD Securities understands that PKR700mn mark-up was suspended in connection with circular debt exposure) and a spike in admin costs (lower PF write backs). Regarding the former, suspended mark-up should find its way onto the P&L in 4QCY11F, thereby enabling MCB to post a strong end to the year.
Asset quality in for improvement: NPL stock reached PKR26.6bn (NPL ratio: 10.0%, coverage: 83%) on Sep 30’11, up 11%YoY/4% QoQ. In AKD’s view, asset quality metrics have troughed out where AKD Securities see marked improvement ahead in a more dovish interest rate environment. AKD Securities builds in average credit costs of 0.75% across the next 5yrs (vs. avg. of 1.32% across previous 5yrs) where AKD Securities believes MCB’s asset quality has the potential to surprise on the upside (90% of NPLs already in fully-provisioned Loss category).
Outlook: With its business model facing margin pressure, MCB may look to leverage its strong capital base (CY10 CAR: 22.04%) to expand the asset book. This could also be overseas and management has hinted as much. That said, unless asset quality depicts swift improvement, AKD Securities believes MCB’s valuation nay sustainably depart from the growth multiples of yesteryears. AKD’s revised target price of PKR180/share (75% weight to Justified P/B, 25% weight to 0DM) offers upside of 13% from current levels.