Initiate coverage with Dec-2011 PT of PKR18/share: We recommend HOLD on the scrip, with Dec-2011 PT of PKR18/share. Despite attractive CY11E P/BV of 0.5x, we expect near term ROE of the bank to remain lower than the cost of equity. At recent closing of PKR17.5/share, the scrip is fairly valued and is trading at a CY11E P/E of 7.2x. HOLD!
Advances’ to grow at low pace with focus toward investments in near term: We believe the bank’s aggressive lending strategy (17% CAGR in CY05-08) would not be repeated in the near term, given sluggish demand from the private sector as well as bank’s risk-averse policy to lend cautiously. Hence, we foresee, AKBL’s Gross ADR to remain in the vicinity of 71%, with deposits mainly channeling towards investments (IDR expected at 35% in coming years).
NPL provisioning to remain the key concern for future profitability: Given AKBL’s significant exposure towards the Textile sector (19% in CY09) followed by 13% to Individuals, we believe the asset quality of the bank will continue to feel the pinch, with NPLs expected to grow by an average 7% in next five years.
Low spreads despite high CASA: Maintaining comparatively high CASA in deposits has not strengthened bank’s spreads much in the past (due to high rates being offered on fixed term deposits). Going forward, we expect spreads to settle around 4.2%.
NFI’s contribution to decline further; opex to remain high: Due to low growth expected in major heads of non-funded income going forward, we expect its contribution in total income to be around 7%, compared to average share of 15% in past. Intermediation cost, nevertheless, are forecasted to remain at 28%, given inflationary pressures.
Valuation risks: Key risks to our recommendation include 1) Further accretion in NPLs leading to higher than estimated provisions 2) Inflationary pressures further increasing intermediation cost and 3) STA implementation, resulting in drain out of deposits.
Justified Price to Book based Dec-2011 PT of PKR18/shareWe initiate coverage on Askari Bank Limited (AKBL) with HOLD stance, with a Justified Price to Book Value based December 2011 Price Target of PKR18/share. Though, the scrip is trading at an attractive CY11E P/BV of 0.5x, we do not expect near term ROE of the bank to come at par with the cost of equity of 20%, given concerns regarding bank’s asset quality, muting bottom-line growth. At recent closing of PKR17.5/share, the scrip is fairly valued and is trading at a CY11E P/E and P/BV of 7.2x and 0.5x respectively. Advances’ to grow at low pace with focus toward investments in near term
AKBL’s advances grew at a CAGR of 17% over CY05-08, outperforming industry’s CAGR of 15%, on the back of rising demand from the manufacturing sector in addition to bank’s venturing into the consumer segment. Resultantly, bank’s Gross ADR settled around 83% in CY08, however dropped to 72% in CY09. Though, we expect advances to witness double digit growth of 13% YoY during CY10 (offsetting meager rise in advances in CY09), we do not foresee bank’s aggressive lending strategy to be repeated in near to medium term. This is due to the fact that credit demand outlook for the private sector remains dull besides bank’s risk-averse policy to lend cautiously. Hence, we expect AKBL’s Gross ADR to remain in the vicinity of 71%, with deposits mainly channeling towards investments. Investments to Deposits Ratio (IDR), hence, is estimated to jump to 35% in CY11-13 compared to 33% in CY09 and 22% in CY08.
NPL provisioning to remain the key concern for future profitability NPLs grew at a CAGR of 65% in past five years, to reach PKR17.7bn at the end of CY09. Asset quality of the bank further deteriorated during 9MCY10, with NPLs rising by ~ PKR2.0bn, nevertheless, Gross Infection ratio of the bank sustained at 12%. As per CY09 financials, major chunk of NPLs came from Textile sector (PKR5.3bn, 30% of total bad loans), where the bank has biggest exposure of 19%. Individuals’ segment (mainly consumer financing) had 13% share in total financing in CY09, with NPLs standing at PKR2.5bn (14% of total infected loans). Given AKBL’s hefty exposure in the above mentioned sectors, we believe the asset quality of the bank will continue to feel the pinch, with NPLs expected to grow by an average 7% in next five years, and will be detrimental for future profitability growth.
Low spreads despite high CASA
Sustaining the sector share of above 4%, AKBL’s funds grew at a CAGR of 20% over CY05-09, with 29% of deposits coming from the public sector/GoP. The breakup of deposits reveals that CASA’s share in total mix stands at a significant 76%, compared to top tier banks’ CASA share average of 66% (excluding MCB’s CASA that stands above 80%). Nevertheless, average cost of funds of the bank still remains high, in the vicinity of 6%, which, we believe is because AKBL is offering attractive rates on its fixed term deposits to keep deposits’ growth intact. Going forward, we expect bank’s cost of funds to hover around 6.7%, with interest rate spreads settling around 4.2%. However, further improvement in spreads could arise once the interest rates start to show the reverse trend.
Non-funded income’s contribution to decline further; opex to remain high
Non-funded income’s (NFI) contribution in total income, on average, stood at 15% in last five years, as fee, commission, FX and equity incomes grew steadily. However, remaining conservative on this front due to lesser volatility in exchange rate and declining consumer segment commissions, we expect NFI’s contribution to stand at 7% (on average) in total income during the next five years. Operating expenses of the bank, on the other hand, rose by a CAGR of 28% in CY05-09, as the bank aggressively expanded its network- number of branches increasing from 99 in CY05 to 226 in CY09. Hence, intermediation cost jumped from 25% in CY05 to 28% in CY09. Although, the management is pursuing a consolidation strategy, we foresee intermediation cost to remain around 28% due to inflationary pressures.
Valuation risks
Key risks to our recommendation include 1) Further accretion in NPLs leading to higher than estimated provisions 2) Inflationary pressures further increasing intermediation cost and 3) Single Treasury Account implementation, resulting in drain out of deposits.
