Finance and Business Normalization of Provisions Charge to Boost Earnings in 2017
Finance and Business
Bank Al Falah Ltd (BAFL) posted earnings of PKR 1.03 per share (Net Income: PKR 1.6b) in the last quarter of 2016, Finance and Business to bring full year earnings to PKR 4.97/share (NI: PKR 7.9bn). BAFL’s earnings negatively surprised us in the last quarter because it provided for the remaining portion of an NPL that had been “subjectively” classified in the last quarter of 2015. Going forward, we expect earnings to be higher in 2017 compared to 2016 due to return to normal provisions for NPLs charge, as well as an absence of super tax. We have revised our December 2017 target price for BAFL to PKR 44/share, almost unchanged from our earlier TP of PKR 43. As our TP implies an upside of 17% to BAFL’s last closing price, we are maintaining a Positive stance on the stock.
Normalization of Provisions Charge to boost earnings in 2017
According to disclosures made in BAFL’s conference call, provisions charge for NPLs was recorded at a high level of PKR 815m, because the Bank booked the remaining portion of a loan “subjectively” classified as non-performing back in the last quarter of 2015. Going forward, we expect BAFL’s NPLs to grow only slightly, and consequently provisions charge to be low for 2017.
Management aggressive in its target of current deposit growth
In the recently held analyst briefing, the management disclosed that they are targeting a double digit growth (around 10%) of deposits for 2017. Moreover, Finance and Business the management expects a current account deposit growth of 20-22%, which implies a current to total deposit ratio of 48.3%. To be on the safe side, however, we are assuming a 16% growth in current deposits during CY17 which gives CA/total Deposits ratio of 46% by the end of 2017.
The strong growth in deposits, and consequently earnings assets, is expected to make up for low net interest margin expected to remain constant through 2017.
NIMs expected to remain stable at around 4% for most of 2017
Further improvement in the deposit mix is expected to lower the cost of funds this year. However, we expect this lower cost to be countered by lower earnings yield of Finance and Business, especially in the wake of another maturity of a significant portion of PIBs in the mid of 2017. According to the management, around PKR 40bn (17% of the existing PIB portfolio) is scheduled to mature in the mid of 2017, which will take yields even further downwards. We expect the lower cost of funds and the lower yields to counter each other, such that net interest margin remains stable at around 4% through most of 2017.
We had previously expected a policy rate hike in the mid of 2017 and another by the end of the year, to bring the total rate hike in 2017 to 75bps. We are now expecting the rate hike at a later stage, such that we are now expecting only a 50bps hike by the end of 2017, and a 25bps hike in early 2018.
Re-imposition of super tax could take earnings down by PKR 0.32/share
While in our base case we are assuming that super tax will not be levied again this year, there are chances that the Government will levy it once again in order to finance higher spending in the last year before the General Elections. In case super tax is levied again, we expect our earnings of Finance and Business to dip by PKR 0.32/share for CY17, to stand at PKR 5.04/share.
Value little changed at PKR 44/share
We have updated our December 2017 target price for Finance and Business BAFL to PKR 44/share from PKR 43/share previously. Our TP has been derived by the Justified Price to Book Value method and is based on Justified P/B multiple of 1.2x (sustainable ROE of 16.8%, growth rate of 6%, required return of 15%) and December 2017 BVPS of PKR 36.2/share. As our TP implies an upside of 17% to BAFL’s last closing price, we are adopting a Positive stance on the stock.