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.
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.