1. business and industrial

 Bank Al‐Falah Limited (BAFL) Result Review and Outlook Monday November 10, 2014 BUY Target Price: PKR 38 Current Price: PKR 31 BAFL Performance 1M 3M 12M Absolute % 7%
17%
46%
Relative to KSE % 5%
11%
12%
Bloomberg BAFL.PA
Reuters BAFL.KA
MCAP (USD mn) 414
12M ADT (USD mn) 1.0
Shares Outstanding (mn) 1,349
BAFL vs KSE100 Relative Chart 60%
BAFL
KSE100 Index
50%
40%
30%
20%
10%
Oct‐14
Sep‐14
Jul‐14
Aug‐14
Jun‐14
Apr‐14
May‐14
Mar‐14
Jan‐14
Feb‐14
Dec‐13
Nov‐13
0%
Source: BMA Research Iqbal Dinani iqbal.dinani@bmacapital.com +92 111 262 111 Ext: 2059 Bank Alfalah Limited (BAFL) held a conference call on Nov 7, 2014 to discuss its 9MCY14 financial results and outlook. During the period, the bank reported net earnings of PKR4.0bn (EPS: PKR2.98), up 21%YoY as against PKR3.3bn (EPS: PKR3.5) registered in 9MCY13. The robust increase in earnings can be attributed to i) 29%YoY increase in Net Interest Income (NII) after provision owing to higher PIB holdings and ii) 8%YoY increase in non‐funded income. On the flip side, higher than expected admin. expenses of PKR15.1bn (up 19%YoY) contained the growth in profitability during 9MCY14. As a result of higher opex, we have upward revised our opex assumption for CY14F‐CY16F by 2%‐
3% resulting in an EPS downward revision of 4% during the said period. We reiterate our ‘Buy’ call on the scrip with a TP of PKR38/sh, offering an upside of 22.6% along with DY of 8.6% (CY15F). At last close, the stock is currently trading at CY15F P/B and P/E of 1.1x and 6.5x, respectively. Robust core income to drive value: BAFL posted a robust growth of 24%YoY in core income to PKR15.5bn in 9MCY14 primarily due to swift accumulation in longer duration securities which offer ~250‐300bps higher yield than floating GOP securities. As of Sep’14, BAFL accumulated PKR111bn worth of PIBs taking the total tally to PKR143bn (25% of deposits) from PKR32bn (6% of deposits) in Dec’13. Furthermore, cautious lending has resulted in considerable decline in cost of credit/investments as it reduced by 32%YoY to PKR731mn. As a result, NII (after provisions) further expanded by 29%YoY to PKR14.7bn in 9MCY14. Going forward, we expect the bank’s core income to continue driving the growth in overall profitability on account of higher PIB holdings and expected decrease in cost of credit. Growing non‐core income to support profitability: BAFL’s non‐core income registered a decent growth of 8%YoY to PKR6.4bn during 9MCY14 from PKR5.9bn registered in the same period last year. The growth in non‐core income can be attributed to i) 7%YoY increase in fee income to PKR2.2bn owing to higher trade and remittances and ii) 35%YoY increase in income from dealing in fx. On the other hand, lower capital gains and meager growth of 3%YoY in dividend income restricted the overall increase in non‐core income. Going forward, the management expects better performance from recently launched ‘Mobile Paisa’, a product for catering branchless banking. Operating efficiency – branch expansion to keep opex elevated: The bank’s operating expenses grew a notable 19%YoY to PKR15.1bn during 9MCY14 primarily due to complete/full year impact of prior period branch expansions. That said, higher profitability during the period has reduced the bank’s cost to income ratio to 66% from 71% in 4QCY13. Going forward, we expect operating expenses to further swell in the next two years considering bank’s heavy expansion plans; however, higher core earnings will keep cost to income matrix under check. IFC Investment – potential dilution in ROE but will strengthen capital base: International Finance Corporate (IFC) has recently expressed its interest in injecting about PKR6.67bn (15% of equity). The management expects to receive consent from regulators by Dec’14, enhancing CAR to 13.0% from existing 11.5%. The increase in bank’s equity will ultimately expand bank’s appetite for equity investments and loan exposure. Moreover, we also expect the bank to maintain payout to ~65% going forward. On the flip side, we expect dilution in earnings by average 8% during CY14F‐CY18F, bringing down average ROE to 18% from 19% prior to IFC investment. As a result of lower ROE, our TP will reduce to PKR35/sh from prevailing PKR38/sh, down by 9%. BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.11
1