Karachi, September 09, 2021 (PPI-OT): MSCI downgrade may likely upgrade MEBL

In a key latest update on MSCI’s consultation to reclassify MSCI Pakistan from Emerging Market (EM) to Frontier Markets (FM), we have worked around the investability criteria on the most compliant scrip which leads us to conclude that a high possibility may likely emerge for Meezan Bank (MEBL) to emerge to the Standard Index where it could either replace MCB Bank (MCB) or become the fifth constituent.

We estimate overall cumulative net outflow of over US$100mn: The reclassification is likely to conclude in Nov’21 where a proposed weight of 2.3% (index capitalization of US$2.13bn at the end of Aug’21) and inclusion of OGDC back to the Standard Index. As per our calculations, the reclassification has already kicked off the selling spree where the remaining outflows from LUCK, HBL and MCB stand at US$46mn, US$28.7mn and US$26mn, respectively.

Low ATVR and ease of capital inflow/outflow at partial levels may likely put Pakistan ahead: Pakistan was excluded from MSCI EM in 2008 as the market was defined as a “standalone country index” initially upon freeze at the exchange. Later in May 2009, Pakistan was made a part of FM index from where it attracted nearly US$273.5mn over the remainder of the year. More inflows continued to emerge during 2010 when Pakistan attracted US$526mn in equities. We believe that the relaxed criteria of investability (i.e. Lower capitalization, Foreign Inclusion Factor capitalization and ATVR) may likely erupt a fair amount of flows towards Pakistan that will likely outweigh the outflows.

ESG standards may likely be a key worry bead: While ratings on ESG has been the foremost criteria for nearly all foreign investors, Pakistan offers a fairly low ESG Disclosure Score and most companies neglect fair disclosures on the ESG front. With increasing economic growth momentum of Pakistan and Sustainability of Economic Development not being a requirement for FM, Pakistan may likely attract foreign inflows and a likelihood of more ESG disclosures will emerge upon road shows and other capital market developments. As per Bloomberg estimates, Pakistan is placed extremely attractive in the Asia Pacific region at a PE of 5.4x and dividend yield of 5.7%.

MEBL makes a case for FM but why was it never there before? MEBL has traditionally had a lower Annual Traded Value Ratio (ATVR), less than 2.5% required, when Pakistan was in FM prior to 2017. It now trades at an ATVR which is nearly twice of MSCI FM’s investability criteria. MEBL has outperformed the bourse by 42% during YTD CY21 and it continues to be liked by various local participants across the board, also being one of JS Research’s top picks this year. Our liking for MEBL stems from stellar growth in deposit base to become the fourth largest by Current Accounts and a sustainable ROE of 28% which is twice the industry average (CY20: Tier I ROE of 33%).