Great bank but normalization of ROE warrants a HOLD stance at these levels

By: Alfalah Securities Limited

 

We commence coverage of MCB Bank Limited (MCB), with a HOLD rating and Dec-16 Price Target of PKR255/share. The scrip offers a total return of 6.7%. Our Price target implies (1) CY16-20E average NIM of 4.8% vs 6 years historical average of 6.7%, (2) sustainable ROE of 18.1% vs last 6 years average: 22.13%, (3) average CY16-20E ADR 42% vs industry average of 49%.

We also review MCB’s 3QCY15 result; the bank posted an EPS of PKR5.94 in 3QCY15 (stable YoY/up 21% QoQ), taking 9MCY15 earnings to PKR18.03/share. Along with the result, the bank announced an interim dividend of PKR4.0/share (9MCY15 DPS: PKR12). On funded income side bank witnessed NII growth of 13.9% YoY in 3QCY15, mainly on the back of balance sheet expansion. Whereas, the nonmarkup income for the bank remained stagnant mainly due to high base effect caused by compensation on delayed refunds seen in 3QCY14.

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The bank conducted its post result conference call, key takeaways include

(1) average PIB portfolio yield of 11.56% with duration of 2.5 years,

(2) slow deposit growth due to transactional tax and

(3) banks expectation of continuation of provision reversals going forward.