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Meezan Bank (MEBL): Analyst Briefing Key Takeaways

Meezan Bank (MEBL) today conducted analyst briefing, where the company discussed its 2018 results and provided future outlook to investors/analysts.

The Bank is the largest Islamic Bank in Pakistan with a market share of around 35%. The Bank has a branch network of 660 branches. Total assets of the bank are at Rs938bn while total deposit size of the bank is Rs785bn.

Following are the key takeaways of today’s session:

• The bank has significantly improved its capital base, where the Tier I CAR has improved to 12.09% compared to 9.94% in the same period last year while CAR has improved to 14.55% compared to 12.89% in Dec 2017.
• The management feels comfortable at this CAR level and the bank will manage capital requirements using fresh issue of Rs4bn of Tier II capital as well as rely on retained earnings while maintaining dividend payout. The capital issue should be expected by the end of 3Q2019. The bank intends to maintain a CAR of 15% going forward.
• The company made a dividend payout of 45% in 2018 (35% cash + 10% Bonus issue) as compared to 30% last year.
• Regarding the issue of Rs200bn Sukuk for resolution of circular debt, the bank informed that MEBL’s share in the issue will be around Rs80-85bn. The investment will yield KIBOR plus 80bps and the transaction is expected to happen next two weeks. To note, this Sukuk will be SLR (statutory liquidity ratio) eligible.
• The management expects further issues of Sukuk for circular debt resolution where as per the management the government is already in talks for a second tranche.
• NPLs to Loan ratio has reduced to 1.3% in 2018 compared to 1.6% in the same period last year while coverage ratio has increased to 139% compared to 133% in Dec 2017. The bank has done Rs550mn general provisioning during 4Q2018 which has led to the increase in coverage ratio.
• The management stated that they are tracking their loan portfolio and do not expect significant deterioration in it while the provision has already been made where the bank feels there was a need for.
• The management stated that there will be no material impact from adoption of IFRS-9. To note, the bank is amongst only two Pakistani banks to have a coverage ratio of more than 100%.
• NIMs are expected to stabilize at this level (around 5%) given bank’s expectation of only a further 50-75bps hike in policy rate. As per rough estimates by management, every 1% increase in policy rate leads to Rs1bn increase in net profit.
• MEBL also informed that the bank has not yet reversed the Workers Welfare Fund (WWF) expense. As per management, Rs500mn could be reversed if court decision is favorable.
• The bank has opened 59 new branches during 2018 taking total branch network to 660 branches. The management contends that the Brick and Mortar plus technology strategy will continue. The bank plans to open 125 new branches during 2019. Moreover, the bank is targeting branchless banking space in Pakistan with the idea of tapping microcredit market.
• Despite rapid branch expansion, cost to income ratio has dropped to 55% in 2018 compared to 59% last year.
• Growth in fee income (26% YoY) was primarily led by increase in trade business volume to Rs1tn (up43% YoY).
• MEBL’s loan book is comprised of 68% corporate loans, 19% SME loans and 12% consumer loans. 
• The management stated that there is some slowdown in mortgage financing uptake but the risks from mortgage portfolio is low as it is a very small proportion of total portfolio (around 3%) and the loan to value ratio is around 65% on average, making defaults less likely.
• The bank is amongst top 3 banks in Pakistan with respect to car financing market share. The management believes that despite economic slowdown, risk is manageable considering the good return.
• The management believes that the risk return on car financing and home mortgages is comfortable.
• MEBL’s current account deposits have grown at a 4-Yr CAGR of 25%.
• MEBL has a market share of 35% in total Islamic banking deposits of about Rs2tn.
• In view of the management, Pakistan will opt for IMF while PKR is expected to be in the range of Rs145-150 with a further 50-75bps increase in interest rates by Jun 2019.
• Meezan Bank Limited (MEBL) announced PAT of Rs2.7bn for 4Q2018 (EPS Rs2.3, up 70% YoY) much better than expectation. The primary reason for growth in earnings was 59% YoY uptick in net spread earned as well as 45% increase in fee and commission income. Moreover, the bank also announced final cash dividend of Rs2.0/share.
• The aforementioned rise in net spread earned is attributable to 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). In absolute terms, NII increased by Rs3.3bn for the outgoing quarter.
• Fee income of the bank increased by 45% YoY to Rs1.5bn. However, despite higher fee income, other income declined by 9% due to Rs448mn lower dividend income and Rs817mn lower capital gains.
• Due to continuation of branch expansion, where the bank increased branch network by 59 during the year, admin expenses of the bank rose to Rs5.4bn, up by 25% YoY. However, cost to income ratio during the quarter dropped to 49.3% compared to 55.1% in the same period last year.
• For the year 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 rate environment where policy rate has gone up by 425bps in 2018  which led to NIMs expansion to around 5%.
• ROE for the year clocked in at 23.8% compared to 19.3% in the same period last year while ROA was clocked in at 1.0% compared to 0.9% in the same period last year.
• 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.