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.
State Bank of Pakistan (SBP) sets FY14 inflation target at 11-12%:
Inflation has been on declining trend since December 2010; as a result, the CPI in FY13 came down to 7.4%. The deceleration in year over year (YoY) CPI inflation came from lagged effect of economic slowdown, stable international prices of major imports coupled with the modest exchange rates and bank financed subsidies of the government. While after the new government’s fiscal budget, YoY CPI inflation jumped to 8.5% in August 2013 compare to 5.9% in June 2013. Swift settlement of outstanding stock of energy sector circular debt, reduction in electricity tariff related subsidies and introduction of some taxation measures will lead to an increase in CPI inflation to 11-12% by the end of FY14.
MPS states that for last few years most of loans were used to fulfill the working capital requirement while loans availed for the fixed investment showed retirement even in the then lower interest rate environment, we flag a potential decline in advances in the current rising interest rate scenario. Moreover there might be an upside risk in Net Interest Income (NII) for all banks if the interest rates rise more than our anticipation as the SBP has set targeted inflation for FY14 at 11-12%. Furthermore, we flag higher Non Performing Loans (NPLs) for all banks.
Holding the highest CASA in the industry i.e.; 88%, MCB Bank Limited (MCB) will potentially benefit the most in increased interest rate environment as cost of funds will not raise vis-à-vis interest earnings. MCB Bank Limited (MCB) is best in its cost control strategy. The bank also witnessed significant improvement in its asset quality over the past two quarters and we continue to factor in improvement in asset quality for the bank. We expect MCB Bank Limited (MCB) to post CY14 earnings Rs. 26.15/share translating into a PAT of Rs. 26.5bn. Please refer to the valuation matrix on the following page.
2QCY13 Result Highlights:
Core earnings witnessed a sharp decline during 2QCY13 whereas reversals in provisions safeguard bottom-line coupled with 25% higher noncore earnings on the back of higher gains on sale of securities. The bank posted an EPS of Rs 6.05 translating into a PAT of Rs 6.12bn.
MCB Bank Limited (MCB) is currently trading at CY14(E) P/Bv of 2.42x. Based on our target exit P/Bv multiple of 2.58x for Dec-14, our target price arrives at Rs. 314, we have a Neutral stance for the stock.