AKD Securities Limited Equity Research - Daily Report (January 13, 2022)

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AKD Securities Limited Equity Research – Daily Report (January 13, 2022)

January 13, 2022

Karachi, January 13, 2022 (PPI-OT): MCB: An attractive dividend play!

Strong capital base of MCB represented by CET-1 capital standing at 15.0% in 3QCY21 (well above the minimum requirement of 7.5%), positions the bank to maintain strong payout levels in our view. However, in our estimates, we have assumed payout at avg. 72.4% over CY22-24F vs. avg. 86.1% in the previous 5yrs, to account for risks to capital ratio (CET-1: 15.0% in 3QCY21) from aggressive increase in financing book and IFRS-9 implementation. Yet, the bank offers a dividend yield of 12.4% in CY22F.

Earnings are likely to register a CY22-24F CAGR of 10.8% complemented by higher interest rate sensitive assets in the portfolio (73.5% of investment assets), and a potentially strong recovery pipeline from NIB portfolio.

MCB Bank is in process of conducting due diligence to acquire a 55% stake in Telenor Microfinance Bank which if goes through, should strengthen bank’s position in the ever-growing digital and retail space.

MCB is our top pick from the banking universe offering a total return of 24.4% on the last close. The bank is forecasted to realize an average ROE of 17.1% over our investment horizon, as opposed to realized ROE of 14.7% since CY17, putting the bank amongst the top tier in our coverage universe in terms of profitability outlook.

Offering a solid dividend yield with earnings posting a CY22-24F CAGR of 10.8%: Strong capital base of MCB Bank Limited (MCB) represented by CET-1 capital standing at 15.0% in 3QCY21 (well above the minimum requirement of 7.5%), positions the bank to maintain strong payout levels in our view.

However, payout level may fall below previous 5y avg. of 86.1% as, i) management push to capitalize on lending opportunities citing higher tax applicability on non- compliance with minimum ADR threshold of 50% recently introduced in the Budget 2022 and ii) implementation of IFRS-9 (one-time charge of, potentially dragging capital ratios of the bank.

Even, assuming a conservative dividend payout of avg. 72.4% over our investment horizon (CY22 -24F), the bank still offers a dividend yield of 12.4% in CY22. Earnings are likely to register a CY22 -24F CAGR of 10.8% complemented by higher interest-rate-sensitive assets in the portfolio. To highlight, MCB’s investment portfolio is bifurcated into 43.4% of T-bills (with majority of the instrument maturing in Jan’22), and 51.6% of PIBs (of which, 55% are floaters).

Additionally, as per management guidelines, the bank has ~PkR1.5bn worth of general provisions yet to be reversed (total PKR4.3bn reversed since 3QCY20) which together with recovery pipeline from NIB portfolio should buttress earnings in the near term (the bank due to 52.7% Saving Account in the de- posit mix have historically witnessed higher reprising drag on its earnings).

Acquisition of Easy paisa will allow the bank to focus on retail business: MCB Bank is in process of conducting due diligence to acquire a 55% stake in Telenor Microfinance Bank, the operator of the country’s leading digital payments platform, Easy paisa. MCB has lagged behind its peers such as UBL (UBL OMNI) and HBL (Konnect) on the digital front.

Acquisition of Easy paisa, with over 20% market share in mobile money, could fill in that gap, but could also be a great challenge at the same time. As of Dec’20, Easypaisa had 8mn active mobile wallets with an annual transaction value of PkR1.5trn. This translates to Easy paisa’s market share of around 22%, in terms of transaction value. However, the business like any other tech start-up is currently a loss- making entity and may potentially dent MCB’s profitability in the short term.

Investment perspective: MCB is our top pick from the banking universe offering a total return of 24.4% on the last close. The bank is forecasted to realize an average ROE of 17.1% over our in- vestment horizon (as opposed to realized ROE of 14.7% since CY17) putting the bank amongst the top tier in our coverage universe in terms of profitability outlook.

From the perspective of CY21 earnings forecast, we expect the bank to post an NPAT of PkR30.1bn (EPS: PkR25.3), flat YoY. For 4QCY21, we expect MCB to record earnings of PkR6.0/sh compared to PkR6.7/sh in the previous quarter owing the reprising lag between assets and liabilities, where upside to our estimates could come from the bank recording provisioning reversals at similar levels to previous quarters.