AKD Securities Limited

Member Karachi Stock Exchange

Equity Research / Pakistan

Todays Daily
MCB: Still a growth stock?
Following lower than expected NPAT of PkR15.5bn (EPS: PkR18.57) in 9MCY11, we trim our earnings estimates for MCB by 3% on average and cut our Dec12 target price to PkR180/share from PkR205/share. Steeper decline in TP is due to assigned weight to DDM (25%) to partly reflect low earnings growth visibility in what is shaping up to be a volatile interest rate environment. While MCB should post 25%YoY growth in CY11F (projected sequential improvement in 4QCY11F), unless asset quality improves, we believe the bank will be hard pressed to post double-digit profit growth across the next 2-3 years particularly if interest rates continue to swiftly decline (we anticipate a further 50bps in the DR by month end). As a result, while MCB should record average Tier-I ROE of ~25% across the medium-term, valuations may sustainably depart from the growth multiples traditionally associated with the bank. MCB trades at a CY12F P/B of 1.29x, PER of 6.01x and D/Y of 8.8%. Our revised TP of PkR180/share offers upside of 13% and implies an Accumulate stance.
KSE100 - Index
Current Previous Chg. 11,992.77 11,994.01 -0.01%

Mkt Cap. (PkRbn/US$bn)

Current Previous Chg. 3,123 / 35.94 3,123 / 35.93 0.01%

Daily Turnover (mn)

Current Previous Chg. 51.34 49.27 4.2%

Thursday, November 17, 2011

AKD Daily

Value Traded (PkRmn/US$mn)

Current Previous Chg. 3,131 / 36.03 2,479 / 28.52 26.3%

News and Views

The FBR has provisionally collected PkR534.043bn during Jul-Nov 1611, against PkR424.923bn in the same period last year, a growth of 25.7%YoY. In other news, regarding the ongoing Pak-IMF talks, Pakistan has agreed to downward revise its projections for international trade, which will inflate the gap between external receipts and payments by another US$1.2bn. The Income Tax Appellate Tribunal has set a uniform tax rate (income tax + royalty) of 55% for E&P companies. It has also set well-head value as benchmark for calculating royalty and depletion allowance. The Ministry of Petroleum has reportedly asked the Finance Ministry to guarantee the cost of oil supply to power companies on a daily basis. The MoP has also given a payment plan for oil supplies to the power sector to avoid pile-up of circular debt. SBP sold T-Bills worth PkR118.36bn (against bids of PkR200.78bn) realized value of PkR109bn, at an auction held yesterday. Cut off yields remained unchanged at 11.78% (3m), 11.81%(6m) and 11.87% (12m). The amount realized on 6m and 12m paper (PkR90.2bn) together . comprises 82.5% of total realized amount of PkR109.35bn.

SCRA Flow FYTD (US$mn)

15-Nov-11 14-Nov-11 Val. Chg (127.44) (124.92) (2.52)

(Shares mn) 350 300 250 200 150 100 50

(Index) 13,000 12,500 12,000 11,500 11,000 10,500 10,000 9,500

0 9,000 Nov-10 Feb-11 May-11 Aug-11 Volume (LHS) KSE-100 Index (RHS)

Important disclosures, including investment banking relationships and analyst certification at end of this report. AKD Securities does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
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Copyright2011 AKD Securities Limited. All rights reserved. The information provided on this document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject AKD Securities or its affiliates to any registration requirement within such jurisdiction or country. Neither the information, nor any opinion contained in this document constitutes a solicitation or offer by AKD Securities or its affiliates to buy or sell any securities or provide any investment advice or service. AKD Securities does not warrant the accuracy of the information provided herein.

AKD Securities Limited

Member Karachi Stock Exchange

MCB: Still a growth stock?

Following lower than expected NPAT of PkR15.5bn (EPS: PkR18.57) in 9MCY11, we trim our earnings estimates for MCB by 3% on average and cut our Dec12 target price to PkR180/share from PkR205/share. Steeper decline in TP is due to assigned weight to DDM (25%) to partly reflect low earnings growth visibility in what is shaping up to be a volatile interest rate environment. While MCB should post 25%YoY growth in CY11F (projected sequential improvement in 4QCY11F), unless asset quality improves, we believe the bank will be hard pressed to post double-digit profit growth across the next 2-3 years particularly if interest rates continue to swiftly decline (we anticipate a further 50bps in the DR by month end). As a result, while MCB should record average Tier-I ROE of ~25% across the medium-term, valuations may sustainably depart from the growth multiples traditionally associated with the bank. MCB trades at a CY12F P/B of 1.29x, PER of 6.01x and D/Y of 8.8%. Our revised TP of PkR180/share offers upside of 13% and implies an Accumulate stance.
Source: Estimates reversion Estimates Revision
(PkR) Revised EPS Old EPS % chg CY11F 25.12 25.54 -2% CY12F 26.57 27.72 -4% CY13F 29.09 30.63 -5% TP 180 205 -12% KATS Code Bloomberg Code Price PkR MCB MCB.PA 159.63

Target Price Justified P/B DDM TP/share (PkR)

Value 194 138

Weight 75% 25%

PkR 146 35 180

MCB Stock Performance

1M Absolute (%) Rel. Index (%) -4.9 3M 6M 12M -8.4 -21.7 -21.9

Thursday, November 17, 2011

AKD Daily

-5.0 -15.1 -22.4 -31.3

Absolute (PkR) -8.3 -14.6 -44.1 -44.8

Summarized P&L
(In PkRbn) 9MCY11 YoY 3QCY11 Int Inc 49.7 23% 16.8 Int Exp 16.7 26% 6.1 NII 33.0 22% 10.7 Total Provs 2.7 35% 0.3 Post Prov NII 30.2 21% 10.4 Fee Inc 3.6 20% 1.2 FX Inc 0.7 54% 0.2 Cap Gains 0.7 96% 0.1 Non Int Inc 6.2 31% 2.0 Total Inc 36.4 23% 12.4 Non Int Exp 12.3 19% 4.4 Sh of AICL 0.1 -16% (0.1) NPBT 24.3 24% 8.0 NPAT 15.5 24% 4.9 EPS (PkR) 18.57 5.86 QoQ -1% 9% -5% -76% 3% -6% -11% -69% -7% 2% 10% n.m. -4% -4%

Source: AKD Research

9MCY11 could have been better: MCB posted NPAT of PkR15.5bn (EPS: PkR18.57) in 9MCY11, up 24%YoY. 3QCY11 NPAT clocked in at PkR4.9bn (EPS: PkR5.86), +9%YoY/-11%QoQ. Lower sequential profitability was largely due to unexpectedly lower interest income (we understand that PkR700mn markup was suspended in connection with circular debt exposure) and a spike in admin costs (lower PF writebacks). Regarding the former, suspended markup should find its way onto the P&L in 4QCY11F, . thereby enabling MCB to post a strong end to the year. Asset quality in for improvement: NPL stock reached PkR26.6bn (NPL ratio: 10.0%, coverage: 83%) on Sep 3011, up 11%YoY/4%QoQ. In our view, asset quality metrics have troughed out where we see marked improvement ahead in a more dovish interest rate environment. We build in average credit costs of 0.75% across the next 5yrs (vs. avg. of 1.32% across previous 5yrs) where we believe MCBs asset quality has the potential to surprise on the upside (90% of NPLs already in fully-provisioned Loss category). Outlook: With its business model facing margin pressure, MCB may look to leverage its strong capital base (CY10 CAR: 22.04%) to expand the asset book. This could also be overseas and management has hinted as much. That said, unless asset quality depicts swift improvement, we believe MCBs valuation may sustainably depart from the growth multiples of yesteryears. Our revised target price of PkR180/share (75% weight to Justified P/B, 25% weight to DDM) offers upside of 13% from current levels.
raza.jafri@akdsecurities.net
www.akdsecurities.net

Source: AKD Research & Company reports

NIMs heading down

9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% CY10F CY13F CY09A CY12F CY14F CY11F

Source: AKD Research & Company reports

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AKD Securities Limited

Member Karachi Stock Exchange

Valuation Statistics
Year End Dec 31 CY09A EPS (PkR) 18.73 EPS Growth 2% P/B Tier I (x) 2.11 Total BVS (PkR) 86.5 P/B (Total SHEQ) (x) 1.85 PER (x) 8.52 Loan to Deposit (conventional)69% Yield on earning assets 12.90% Cost of Funds 4.04% NIMs 8.86% Cost/Income 27% Normalized Cost/Income 34% ROE (average) 23.7% DPS (PkR) 9.1 Dividend yield 5.69% CY10A 20.18 8% 1.87 98.1 1.63 7.91 59% 12.08% 4.06% 8.01% 31% 36% 21.9% 10.5 7% CY11F 25.12 25% 1.68 108.7 1.47 6.35 49% 12.41% 4.40% 8.01% 32% 35% 24.3% 12.5 7.8% CY12F 26.57 6% 1.46 123.4 1.29 6.01 49% 10.72% 3.77% 6.95% 34% 37% 22.9% 14.0 8.8% CY13F 29.09 9% 1.28 137.1 1.16 5.49 48% 11.36% 4.03% 7.33% 36% 36% 22.3% 15.0 9.4%

Source: Company Reports & AKD Research

Income Statement (PkRmn)

Year end Dec 31 Interest Earned Interest Expensed Net Interest Income Total Provisions Post Provisioning NII Fee Income Non-Interest Income Non-Interest Expenses Profit from Associate NPBT NPAT CY09A 51,622 15,840 35,782 7,322 28,460 3,337 5,755 11,066 200 23,350 15,666 CY10A 54,829 18,027 36,802 3,597 33,205 4,133 6,442 13,406 270 26,510 16,873 CY11F 66,073 22,757 43,316 3,397 39,919 4,960 8,496 16,527 306 32,194 21,010 CY12F 67,002 22,712 44,290 2,759 41,531 5,704 9,659 18,293 398 33,295 22,223 CY13F 78,481 26,750 51,732 3,318 48,413 6,417 9,989 21,920 298 36,781 24,323

Thursday, November 17, 2011

AKD Daily

Source: Company Reports & AKD Research

Balance Sheet (PkRmn)

Year end Dec 31 Investments Advances Total Assets Deposits Total Liabilities Net Assets Tier I Equity Total Tier II Equity Total SHEQ Total SHEQ and Liabilities CY09A 169,485 253,248 511,742 367,581 439,429 72,313 63,121 9,193 72,313 511,742 CY10A 215,748 254,565 570,482 431,295 488,483 81,999 71,225 10,771 81,996 570,479 CY11F 324,238 248,474 681,581 507,912 590,709 90,871 79,561 11,310 90,871 681,581 CY12F 349,571 282,971 763,260 574,487 660,033 103,228 91,352 11,875 103,228 763,260 CY13F 388,634 308,683 828,783 640,941 714,106 114,677 103,989 10,688 114,677 828,783

Source: Company Reports & AKD Research

I, Raza Jafri, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is/or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I further certify that I do not have any beneficial . holding of the specific securities that I have recommendations on in this report.

Rating Definitions
Buy Accumulate Neutral Reduce Sell > 20% upside potential > 5% to < 20% upside potential < 5% to > -5% potential < -5% to > -20% downside potential < -20% downside potential

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