Karachi, August 20, 2021 (PPI-OT): MEBL: Maintaining highest ROE, Buy

Post release of Jun-2021 financial accounts and corporate briefing held by the management of Meezan Bank Ltd (MEBL), we revise our earnings estimates for CY21E-CY23F by 5%-10%, leading to upward revision of the bank’s TP to Rs185.

MEBL’s Tier I ROE for CY21 is expected to clock in at 33%, where we project its sustainable ROE to average at 28%. This is the highest ROE generated in the Pak Banking space (industry average: 14%). The stock currently trades at CY21E/CY22F P/B of 2.25x/1.95x.

MEBL’s deposits expanded by 31% YoY during 2QCY21, driven by 44% YoY higher current account deposits. The bank’s deposit mix turned more favourable with zero-cost deposits now contributing 41% (+3.8ppt YoY) to its total deposits base. We highlight that with MEBL standing as the fifth largest bank of the country, it is only Rs18bn away (~3%) from becoming the fourth largest bank in terms of zero-cost deposit accounts.

TP revised to Rs185, 30% upside on the cards

Post release of Jun-2021 financial accounts and corporate briefing held by the management of Meezan Bank Ltd (MEBL), we revise our earnings estimates for CY21E-CY23F by 5%-10%, leading to upward revision of the bank’s TP to Rs185. Key reasons for upwards revision in estimates are (1) higher than expected current account growth and (2) lower credit cost during 2QCY21. With the revised TP, the stock still offers capital upside of 30% from current levels, despite recent run up of 25%. MEBL’s Tier I ROE for CY21 is expected to clock in at 33%, where we project it’s sustainable ROE to average at 28%. This is the highest ROE generated in the Pak Banking space (industry average: 14%).

The stock currently trades at CY21E/CY22F P/B of 2.25x/1.95x. We highlight our assumptions do not incorporate 15% Bonus issue announced by the Board of the bank with recent results. To note, the bank is adequately capitalized with Tier II CAR at 18.67%. Furthermore, MEBL has announced to call its existing Rs7bn Tier II Capital Sukuk Issue and raise a fresh Tier II Sukuk Issue of up to Rs10bn, which includes a green shoe option of Rs3bn. Details of the Sukuk will be shared in the near future.

Current account growth at 44% YoY in 2QCY21

MEBL’s deposits expanded by 31% YoY, driven by 44% YoY higher current account deposits. The bank’s deposit mix turned more favourable with zero-cost deposits now contributing 41% (+3.8ppt YoY) to its total deposits base. We highlight that with MEBL standing as the fifth largest bank of the country, it is only Rs18bn away (~3%) from becoming the fourth largest bank in terms of zero-cost deposit accounts. The sequential increase in deposits was reported at 10% QoQ, which was widely used in expanding the bank’s loan portfolio (+9% QoQ) and lending to Financial Institutions through Bai Muajjal.

As at 2QCY21 end, the bank’s ADR and IDR have reached 42%and 35% respectively while Lending to FI as % to Deposits has grown to 28%. In-line with management’s target’s we expect Deposits growth to slow down for CY21E (20% YoY), where we expect Advances growth at 15% YoY and Investments at 5% YoY. Upside to our base case assumption could stem from fresh Sukuks during 4QCY21 as suggested by management. To note, our estimated ADR remains below the minimum requirement of 50%, resulting in higher tax charge from CY22F onward.

Higher asset base supports bottom-line growth

Given higher deposit growth, the decline in the bank’s Net Spread Earned was restricted to 8% YoY despite complete re-pricing of assets on lower interest rates. Moreover, the bank’s core income reported a 7% QoQ growth over improved contribution from current account deposits and higher asset base. On the non- core income front, MEBL’s Fee Income remained broadly unchanged as compared to 1QCY21, while an 80% YoY growth was reported over lower base set in 2QCY20 (lockdown period). In addition, credit cost declined to 2bps, reporting provisioning expenses at Rs148mn (Rs93mn under provisioning expense for loans).

Referring to exposure to Hascol Petroleum Ltd (HASCOL), the management apprised about the 100% provision already taken on the total exposure of Rs4bn. The bank’s Cost to Income ratio clocked in at 43% (+4.2ppt YoY) as operating expenses increased by 11% YoY during the quarter. As a result, the bank’s bottom-line was reported at Rs4.72/share (+10%/3% QoQ/YoY), taking 1HCY21 earnings to Rs9.00/share (+10% YoY). With slowdown in branch expansion during 1HCY21 (+20 branches), management targets to gear up to open a total of 100 new branches during CY21; hence we keep our operating expenses growth assumption at 17% per annum throughout our investment case.