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BAFL 2QCY19 result underperform our expectations

Bank Alfalah Limited (BAFL) reported financial results for 2QCY19 wherein the company reported below expected consolidated EPS of PKR1.84 (up 3%/12% QoQ/YoY), taking 1HCY19 EPS to PKR3.65 (up 4% YoY).

 Along with the result, the bank also announced cash DPS of PKR2.0, which was higher than our expectations. Our expectation of lower dividend was due to the bank’s high ADR (of ~73%) and higher loan book exposure to commercial and consumer segments.   

Result was below our expectations where deviation mainly came from 6% dip in NII instead of our expectations of modest increase. We believe that this drop in NII might be a result of delay in loan repricing, however, we await further clarity on this.

 Non-interest income declined 3% YoY but posted a significant gain of 27% on QoQ basis. This impressive QoQ performance was primarily driven by the fee income (up 8% QoQ), foreign exchange income (up 64% QoQ), and share of profit from associates (up 4.84x on QoQ).

 Operating expenses grew 5%/25% on QoQ/YoY basis that pushed up cost/income ratio to 53% compared to 51% in the previous quarter.

 Following the ongoing trend, BAFL has also recorded loss on securities worth PKR37.7mn. Although the number is not very significant (0.02/share), it supports our narrative that banks will start reporting losses on their invested securities.

 Going forward, we expect NII to record sharp recovery, however, higher provision on loans and losses on securities may affect the bottom-line

 Key risks include; i) sharp uptick in infection ratio leading to higher provisions as ~33% of bank’s loan book is composed of consumer and commercial loans and ii) slower than expected uptick in NIMs.

 In light of the above we maintain out “BUY” stance on the stock.