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Pakistan Banks: BOP - Clear road to narrowing discount!, (AKD Detailed Report, Nov 18, 2019) - Coverage Initiation

The Bank of Punjab (Detailed Report)

 

Clear road to narrowing discount!

We initiate coverage on Bank of Punjab (BoP) with a ‘Buy’ stance and a TP of PkR14.0/sh, implying an upside of 34.8% from last close. Capital reinforcements (Tier-I/II Cap raised in CY17/18: PkR6.1/4.3bn) of yesteryears coupled with higher interest rate driven earnings growth (CY20-22F CAGR: 15.7%) is likely to keep dividends healthy (CY20F dividend yield: 12.0% vs. 7.7% of our universe) at least in the medium run. Earnings growth is expected to be driven by, i) Gross NIMs swelling to ~4.4% over the medium term vs. 3.9% in 9MCY19, benefitting from structural alignment to interest rates and change in investment mix to longer tenor instruments, magnifying impact of branch expansion (158 branch added in the past 3y) and ii) one of the lowest administrative expenses/branch of PkR23.2mn across our banking universe despite being Government owned, which not only minimizes drain on core income (PBT/NII net of provisioning at 57.0% in 9MCY19) but also compensates for the higher cost of deposits (9MCY19 CoD: 7.0% vs. 6.0% of peers). Even after providing for cost of provisioning at 1.0%, BOP offers CY20-22F ROE of 20.1%. The stock is currently trading at a CY20F P/B of 0.52x, whereas taking peers’ valuation multiples into consideration the stock should trade at a P/B of 0.8x based on ROE per unit of PB. Awaiting details regarding modalities of Treasury Single Account (TSA), we have incorporated 10% pa. withdrawal from CY23 onwards (Without TSA: TP PkR17.5/sh ceteris paribus).

Cheaply placed on valuations: We initiate coverage on Bank of Punjab (BoP) with a ‘Buy’’ stance and a TP of PkR14.0/sh, presenting an upside of 34.8% and a dividend yield of 12.0%. Capital reinforcements in yesteryears coupled with interest rate driven earnings growth (CY20-22F NPAT CAGR: 15.7%) is likely to keep dividends healthy at least in the medium run (CAR buffer assumed at >1.0% over the medium run keeping room for possible asset quality stress).  The bank is likely to generate CY20-22F ROE of 20.1% vs. avg. 18.1% of our universe (exc. MEBL), but is trading at a CY20F P/B of 0.54x compared to our universe’s P/B of 0.97x. This huge discount seems unjustified given, i) compliance with capital regulatory requirements, and ii) extended timeline of possible TSA implementation. However, we do rule out complete elimination of discount due to credit risks associated with Government-owned banks (NBP traded at 25.1% discount on ROE/PB vis-à-vis HBL and UBL in CY08-12— the period of high interest rates and slower economic growth cycle).

NIMs to escalate to ~4.4% over the medium term: BoP is likely to witness its NIMs swelling to ~4.4% by CY20 vs. 3.9% in 9MCY19, benefitting from structural alignment to interest rates (Sep’19 ADR: 58.0% | CA as a % of deposits: 19.6%) and change in investment mix to longer tenor instruments. This is achieved despite bank’s sticky deposit mix where we have assumed CASA at around 70-73% over the medium term, falling in the longer run as the bank moves to reduce dependence on Government deposits (due to TSA). Consequently, and along with strong earnings asset growth (CY20-22F CAGR: 15.8%) at the back of branch expansion (158 branches added in the past 3y, 26.0% of branch network), NII is likely to record a 3y CAGR of 14.6%. Higher NIMs could also absorb possible asset quality issues where we expect cost of provisioning to escalate to avg. 1.0% over the medium term (peaking at 1.4% in CY21) possibly keeping NIMs net of provisioning to ~3.2% over CY20-22F (longer term avg.: 3.6%), higher than last 5y avg of 1.7%. 

Cost containment strategy to enhance return: BoP’s admin expenses/branch of PkR23.2mn is one of the lowest across our banking universe despite being Govt. owned, and is the primary reason minimizing drain on NII net of provisioning (PBT/NII net of provisioning at 57.0% in 9MCY19), given non-material contribution from NFI in total income (12.4% in 9MCY19).  We expect the bank’s cost-to-income to remain at ~45% over the medium run, creeping up to ~60% in the longer cycle as TSA snakes into estimates (could be nullified  given possible transaction handling commissions—not yet incorporated). Further, the contained admin costs compensate for comparatively higher cost of deposits (9MCY19 CoD: 7.0% vs. 6.0% of peers), and hence total acquisition costs/deposits stands at 9.3%, similar to peers.

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