Friday 4 October 2013

Allied Bank Limited Way Back To Glory

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.

Allied Bank Limited (ABL) is expected to post 28.37% higher earnings for 2014 on the back of increased interest rates. Bank’s Non Performing Loan’s (NPLs) declined 4% during 1HCY13 improving its asset quality. Going forward, we expect limited asset quality deterioration despite increase in interest rates. Allied Bank Limited (ABL) has one of the best return on equities among the tier 1 bank while its lower beta justifies a relatively higher P/Bv multiples. Please refer to the valuation matrix below for key financials.

2QCY13 Result Highlights:
Allied Bank Limited (ABL) reported 11.6% higher Net Interest Income (NII) after provisioning on relatively lowers provisioning against Non Performing Loan’s (NPLs) during the 2QCY13. However, the top-line growth was off-set  by  decline  in  non-core  income  witnessed  during  the  quarter  under  review mainly  because  of  lower  gains  on  sale  of  securities  and  dividend  income.  Bank posted Rs. 2.59/share earnings translating into a PAT of Rs. 2.7bn for the quarter. Furthermore, the bank also paid an interim dividend of Rs. 1.25/share.

Valuation:
The  stock  is  currently  trading  at  CY14(E)  P/Bv  of  1.28x  resulting  in  significant potential  upside  to  its  justified  P/BV  multiple  of  1.90x.  We maintain a Positive stance for the stock with Dec-14 TP of Rs. 117.51/share.  

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