The State Bank of Pakistan (SBP) announced a 50bps hike in the discount rate to 9.5% in its September 2013 Monetary Policy Statement (MPS) against market expectation of maintaining the status quo. This brings much awaited relief for the banking sector specifically to the large banks which have seen a continuous decline in core earnings due to tighter spreads on the back of monetary easing of up to 300bps since July 2012. Rise in inflation has been intimated by the SBP, we anticipate further rise in discount rate to 150bps by the end of 2014. We hereby revise our estimates incorporating the hike of 50bps in our models.
We expect Bank Alfalah Limited (BAFL) to post considerable growth in earnings for CY14 after the hike in interest rates as its core earnings is more sensitive to interest rate. We think that asset quality will deteriorate slightly albeit not as witnessed on the previous tight monetary policy cycle. Bank Alfalah Limited (BAFL) also set to be a beneficiary of the potential sale of Warid Telecom as it holds 8.24% stake in Warid. The bank has completely provided for its investment against its stake in Warid Telecom. Although, we haven’t incorporated the impact of the potential deal in our current estimates, the deal will potentially increase the book value and target price of Bank Alfalah Limited (BAFL). Please refer to our flash note on the subject “Bank Alfalah Limited (BAFL) - Impact of ADG Sale of Warid Telecom on Bank Alfalah Limited (BAFL)” dated 5th August for potential capital gains.
2QCY13 Result Highlights:
2QCY13 result witnessed a decline in core earnings on the back of tight spreads and higher provisioning. Whereas non core earnings have grown 25% mainly due to higher gains on sale of securities. The bank post earnings of Rs. 0.69/share translating into PAT of Rs. 932mn for the quarter.
Bank Alfalah Limited (BAFL) stock is currently trading at CY14(E) P/Bv of 0.91x. The stock yields a significant upside on our Dec-14 TP of Rs. 33.02/share based on its justified P/Bv multiple of 1.29x. We reiterate Positive stance for the stock.