National Bank of Pakistan a yield play – AKD Research
By: Raza Jafri,
UAN: 111-253-111 Ext: 693
AKD Securities Limited
Following a poor 1HCY13, we trim our CY13F-CY17F EPS estimates for National Bank of Pakistan (NBP) by 2% on average but raise our TP to PkR55/share due to rollover onto CY14F. Since CY06, NBP’s EPS has remained mired between PkR7.4-PkR9.1 and we expect EPS for each of CY13F and CY14F to close within this range before sustainable improvement kicks in. That said, while steep subjective provisions in Bangladesh will likely make CY13F the third consecutive year of declining profits, we see NPAT growing by 15% in CY14F, paving the way for 13%+ NPAT CAGR across the medium-term. This should largely be driven by higher NIMs as interest rates rise, as well as a resilient fee income franchise. However, areas of concern remain where GoP-owned NBP’s story continues to be limited to that of high payouts on the back of strong CAR cushion (CY12: 17%). Our revised TP of PkR55/share for NBP (CY14F P/B: 0.64x, P/E: 6.0x, D/Y: 12.1%) offers 10.5% upside.
1HCY13 Result Review: National Bank of Pakistan (NBP) posted consolidated NPAT of PkR6.89bn (EPS: PkR3.25) in 1HCY13, down by a hefty 30%YoY. The result was much below consensus expectations with the deviation emanating from subjective provisions of PkR3bn pertaining to Bangladesh operations. In this regard, 2QCY13 NPAT came in at PkR3.07bn (EPS: PkR1.44), the lowest quarterly profit in 4yrs. Key highlights of NBP’s 1HCY13 result included 1) 5%YoY reduction in NII on tighter NIMs, 2) sharp 154%YoY increase in loan provisions, 3) strong 20%YoY non-interest income growth on higher fees and capital gains and 4) 11%YoY increase in non-interest expenses
85% coverage but risks remain: Higher general provisions have propelled coverage to 85%, the highest since mid-CY08. That said, risks remain where NPLs have risen for the last 2qtrs to PkR93bn at present where NBP is the only large bank that has been consistently growing its loan book over the last few years. As such, while we expect credit costs to peak in CY13, we keep subsequent tapering off modest with provisioning charge for NBP likely to remain relatively high compared to private sector peers.
Other slippages: NBP’s 21%YoY deposit growth in FY13 has been driven by a steep 71%YoY increase in fixed deposits that has reduced CASA to a 2yr low of 47%. This may push CY13F NIMs down to less than 4%, levels not witnessed since CY04. At the same time, although core admin expense growth has been limited to 9%YoY in 1HCY13, NBP’s track record on this front over the past years has been poor. This has driven the C/I ratio to the mid-50%s which we project will at best be maintained going forward.
Valuations & Investment Perspective: NBP trades at a CY14F P/B of 0.64x, P/E of 6.0x and D/Y of 12.1%. Within the backdrop of weaknesses, we believe that only the high D/Y pushes the case for a tactical entry into the stock. This is particularly true within the context of historical price performance where the bulk of full-year share price returns in NBP tend to be concentrated in the Jan-Mar quarter when annual results (and dividends) are announced. Our revised TP of PkR55/share offers modest 10.5% upside.