Karachi, December 24, 2021 (PPI-OT): ABL: Rising rates and investment strategy to drive ROE

Allied Bank Ltd (ABL) deposit mix bodes well for earnings growth and ROE in 2022 in a rising interest rate environment. With ADR of 39%, the positioning of the investment book remains the key earnings driver, where IDR for the bank stands at 88% – partially funded by short term borrowings – as of 3QCY21.

Looking ahead, we foresee the bank’s ROE gradually rising from low teens to high teens (~18%) on a recurring basis.

We believe the expected ROE improvement warrants a re-rating closer to 1.1x P/B compared to 0.64x currently, implying a ~60% upside to our Target Price of Rs125. In addition, ABL also offers a D/Y of 10%, assuming a stable Rs8/sh dividend.

Tier I ROE can potentially reach to 18%

Allied Bank Ltd (ABL) has managed to take its current Investment book up to 88% of its Deposit size – one of the highest levels historically – on the back of increasing Borrowings through Repo (25% of deposits). With 54% of the Investment book parked in shorter tenor papers and 27% of the book in floater long term government bonds, as apprised in yesterday’s Corporate Briefing session of the bank, ABL is well placed to optimally benefit from the ongoing increase in interest rates.

Though its ADR has traditionally remained on a lower side, the larger Investment book has led to our expected recurring Tier I ROE to average at 18% (on a Policy Rate of 10.75%). We believe the stock justifies a P/B of 1x for the stock, as opposed to prevailing P/B of 0.64x. In addition to capital upside, the stock offers a decent D/Y of 10%. The D/Y is derived from an annual cash dividend of Rs8/share, unchanged since CY18. We maintain our ‘Buy’ stance on the stock.

Loan growth may outpace deposits in the near future

On the other hand, the bank’s loan growth clocked in at 19% YoY as at Sep- 2021, taking its ADR to 39%. Given the recent implementation of additional tax charges on lower ADR, the management shared that it would likely take the bank’s Gross ADR beyond 40% to avoid the 5% additional charge. The bank however intends to maintain ADR levels between 40%-50%, resulting in an additional 2.50% tax charge on the bank. To recall, ABL’s adequacy ratios are the highest in the banking sector, touching 24.95% as at Sep-2021, giving the bank ample room for growth in risky assets as the minimum required Tier II CAR levels stand at 12.50% (excluding COVID-19 relaxations). The bank’s loan book is re- priced on an average lag of 3-6 months.

Share of zero-cost deposits on a rise

Deposits increased by 21% YoY, driven by 24% YoY higher zero-costs deposits. As at Sep-2021, the mix of zero-cost deposits stands at 40%, while 43% of the share was contributed by savings deposits. Going forward, the management intends to continue prioritizing deposit mobilization in zero and/or low-cost deposits. Increase in focus would be seen in deposit growth from a balance of both, brick and mortar and digital model.