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Meezan Bank (MEBL): 4Q2018EPS of Rs2.3, up 70% YoY (28% QoQ); DPS Rs2/share (Above expectations)

• Meezan Bank Limited (MEBL) announced PAT of Rs2.7bn for 4Q2018 (EPS Rs2.3, up 70% YoY) which was above expectation. The primary reason for growth in income was the rise in net spread earned by 57% YoY. The bank also announced final cash dividend of Rs2.0/share.
• We attribute this significant rise in net spread earned to the non-applicability of minimum deposit rate (MDR) on Islamic banks which has resulted in higher sensitivity of income to the tightening monetary policy (policy rate up by 425bps in 2018), where profit earned has grown by 57% YoY.
• Other income of the bank decreased by 7% YoY due to 76% decline in dividend income to Rs143mn. However, fee income of the bank exhibited a robust growth of 45% YoY to Rs1.5bn.
• Admin expenses of the bank rose to Rs5.4bn, up by 25% YoY. However, cost to income ratio dropped to 49.3% compared to 55.1% in the same period last year.
• During 2018, earnings of the bank clocked in at Rs7.7/share, up 42% YoY due to 35% higher net spread earned. The primary reason for this increase in earnings is the rising interest environment where policy rate has gone up by 425bps in 2018.
• Key risks for the bank include 1) deterioration in Pakistan macros, 2) uptick in provisioning charge, 3) lack of investment avenues & 4) lower than expected rate hike in policy rate.