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Askari Bank (AKBL): Better Capitalization to Spur Growth; Initiating coverage with a 'Buy'

• Investment Thesis: We initiate coverage on Askari Bank (AKBL) with a ‘Buy’ call and target price of Rs29 offering 22% upside. We like the stock due to 1) improving capitalization amid tightening regulatory environment, 2) highest CASA amongst peers to keep cost of deposit sticky, 3) high coverage ratio to keep margins in control, 4) improving cost efficiency and 5) backing of one of the largest conglomerates in Pakistan.
• Better capitalization to help growth : AKBL issued its first ever Additional Tier 1 (ADT-1) capital, which will have a ~200bps impact on its CAR (~14% 2018E) as per our estimates. This will play an instrumental role going forward as the bank’s operations in the past had been constrained due to capital requirements.
• Amongst the highest CASA in peers: AKBL has one of the highest Current Account Savings Account (CASA) ratio that stands at 84% (as of Sep 2018)  of deposits. In comparison, CASA of BAFL and BAHL stands at 80.4% and 82.5%, respectively. For the period 2018-22, we expect AKBL to increase CASA ratio by 50bps per year on average led by growth in CA ratio by 70bps per year that will lower its cost of deposit and boost Net Interest Margins (NIMs).
• High coverage ratio to keep provision charge in check: AKBL has one of the most improved asset quality in Pakistan listed banks. The bank has improved its NPLs to Loan ratio to 7.8% (as of Sep 2018) compared to 17.3% back in Dec 2013. On the provisioning front, the bank has improved its coverage ratio to 95% (as of Sep 2018), which should keep provision charge in check as sector NPLs start to grow again amid decelerating economic growth.
• Expected cost efficiencies: We expect cost to income ratio of AKBL to drop to 58% on average for period 2018-22 compared to 65% on average for the period 2013-17. Similarly, we expect Admin expenses to grow at a 5-Year (2018-22) CAGR of 10% compared to 11% 5-Year (2013-17) CAGR due to normalization of branch expansion going forward.
• Strong Sponsor: Backing of Fauji Group makes for a significant competitive advantage that AKBL has over its peers. This backing not only provides AKBL with a financially sound sponsor but also provides a source of potential business, which might also make for sticky deposits, in our view.
• Valuation: We have a ‘Buy’ stance on AKBL with a target price of Rs29/share. AKBL is trading at 2019E PE of 5.0 (Peer Banks 7.6x; Topline Banks 8.6x), PBV of 0.8x (Peer Banks 1.3x; Topline Banks 1.2x), with ROE of 16.2% (Peer Banks 19.5%; Topline Banks 16.7%).
• Key Risks: Key risks for the bank include 1) lower than expected uptick in interest rates, 2) faster uptick in NPLs due to economic slow down and 3) growth slowdown due to CAR concerns.