Karachi, May 12, 2022 (PPI-OT): BAFL: Favourable asset placement to reap benefits earlier

BAFL’s high ADR and 85% of PIB Investments parked in Floater PIBs bode well in the cycle of monetary tightening, where the recent sharp increase of 525 bp in PR in the span of seven months takes our base case ROE to 22%. These numbers cover a PR cut to 8% from mid-CY23.

With expectations of at least another 100 bp increase in PR, the management projects the bank’s NIMs to witness sequential expansion in the remaining quarters of CY22, where impact of the recent 250 bp hike announced in Apr-2022 will reflect from 2QCY22 onward.

BAFL remains among our top picks from the banking space. In addition to 2x capital upside (P/B: 0.55x), an attractive D/Y of 17% cannot be ruled out as the bank has the capacity to increase its CY22 dividend to Rs6/share. For now, we expect BAFL to step up its payout to Rs5/share during CY22 (~38% payout ratio). To recall, the bank’s payout ratio in CY21 was 50%, while last 3-year avg payout ratio has been 58%.

Strong earnings growth makes space for higher dividends

BAFL is well placed to be one of the highest beneficiaries of the ongoing interest rate increases. The bank’s strategy of holding a higher ratio of interest earning assets over interest bearing liabilities (145% vis-à-vis conventional peer average at ~135%) bodes well in the cycle of monetary tightening, where the recent sharp increase of 525 bp in PR in the span of seven months takes our base case ROE to 22%.

We expect earnings for CY22 to jump by more than 65% YoY, with sticky EPS thereafter. These numbers cover a PR cut to 8% from mid-CY23. With an expected BV of Rs61, we believe the stock valuations justify a P/B of 1.1x, translating to a Target Price of Rs70, reflecting a massive upside of 2x from its P/B of 0.55x.

With Tier II CAR maintained at 14.77%, we believe the bank has the capacity to take its dividend up to Rs6/share in CY22, elevating its D/Y to 17%. While our base case assumption for dividends is Rs5/share (~38% payout ratio), we highlight the bank’s payout ratio in CY21 was 50%, while last 3-year avg payout ratio has been 58%.

Asset re-pricing to start reflecting within a month

Going forward, despite rising interest rates, the management in its Corporate Briefing session held yesterday shared that it keeps targets for loan growth in CY22 unchanged.

Moreover, with management expectations of at least another 100 bp increase in PR, they project the bank’s NIMs to witness sequential expansion in the remaining quarters of CY22, where impact of the recent 250 bp hike announced in Apr-2022 will reflect from 2QCY22 onward. The key reasons for this are (1) the bank’s high ADR of 58% and (2) higher exposure to shorter re-pricing investments (53% of Deposits) as 85% of the bank’s PIB Investments are parked in Floater PIBs.