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Takeaways from Meezan Bank analysts briefing

Meezan Bank is Pakistan’s largest and full service Islamic bank, enjoying a market share of around 35 percent. Total assets of the bank are reported at Rs938 billion, while total deposits touch Rs785 billion. It enjoys an extensive outreach comprising of a network of 660 branches. Meezan Bank announced a dividend payout of 45% in 2018 (35% cash + 10% bonus issue) as compared to 30% last year. Following are the key takeaways from the latest analysts briefing.

Meezan Bank has significantly improved its capital base, where the Tier-I capital has improved to 12.09% compared to 9.94% in the same period last year. The CAR has improved to 14.55% at end December 2018 as compared to 12.89% reported at end December 2017.

The management feels comfortable at this CAR level and expected to manage capital requirements using fresh issue of Rs4 billion of Tier-II capital as well as rely on retained earnings while maintaining dividend payout. The capital issue is likely to be over by end of 3Q2019. The bank intends to maintain a CAR of 15% going forward.

As regards issue of Rs200 billion Sukuk for the resolution of circular debt, Meezan Bank informed that its share in the issue will be around Rs80-85 billion. The investment will yield KIBOR plus 80bps and the transaction is expected to be completed shortly. A point to be noted is that the proposed Sukuk will be SLR (statutory liquidity ratio) eligible. The management expects further issues of Sukuk for circular debt resolution, where as per the management the government is already in talks for a second tranche.

NPLs to Loan ratio has reduced to 1.3% in 2018 from 1.6% in the same period last year, while coverage ratio has increased to 139% as compared to 133% at end December 2017. The Bank has made Rs550 million general provisioning during 4Q2018, which has led to the increase in coverage ratio. The management informed that it was tracking loan portfolio and does not expect significant deterioration in it.

The management stated that there would be no material impact from adoption of IFRS-9. To note, Meezan Bank is amongst only two Pakistani banks to have a coverage ratio of more than 100%.

NIMs are expected to stabilize at around 5% level, given Bank’s expectation of only a further 50-75bps hike in policy rate. As per management estimates, every 1% increase in policy rate leads to Rs1 billion increase in net profit.

Meezan Bank informed that it has not yet reversed the Workers Welfare Fund (WWF) expense. As per management, Rs500 million could be reversed in case the court decision is favorable.

It has opened 59 new branches during 2018 taking total branch network to 660 branches. The management contends that the brick and mortar plus technology strategy will continue. The bank plans to open 125 new branches during 2019. Moreover, the bank is targeting branchless banking in Pakistan with the idea of tapping microcredit market. Despite rapid branch expansion, cost to income ratio has dropped to 55% in 2018 as compared to 59% last year. Growth in fee income (26%YoY) was primarily led by increase in trade business volume to Rs1 trillion up 43%YoY).

 

The bank’s loan book comprises of 68% corporate loans, 19% SME loans and 12% consumer loans. The management stated that there is some slowdown in mortgage financing uptake but the risks from mortgage portfolio is low as it is a very small proportion of total portfolio, around 3% and the loan to value ratio is around 65% on average, making defaults less likely.

The bank is amongst top 3 banks in Pakistan with respect to car financing market share. The management believes that despite economic slowdown, risk is manageable considering the good return. The management also believes that the risk return on car financing and home mortgages is comfortable.

The bank’s current account deposits have grown at a 4-year CAGR of 25%. It has a market share of 35% in total Islamic banking deposits of about Rs2 trillion. In view of the management, Pakistan will opt for IMF, while rupee is expected to be in the range of Rs145-150 with a further 50-75bps increase in interest rates by Jun 2019.

Meezan announced profit after tax of Rs2.7 billion for 4Q2018 (EPS Rs2.3, up 70%YoY), better than expected. The primary reason for growth in earnings was 59%YoY uptick in net spread earned as well as 45% increase in fee and commission income. Moreover, the bank also announced final cash dividend of Rs2.0/share.

The rise in net spread earned is attributable to non-applicability of Minimum Deposit Rate (MDR) on Islamic banks which has resulted in higher sensitivity of income to the tightening monetary policy (policy rate up by 425bps in 2018). In absolute terms, NII increased by Rs3.3 billion for the outgoing quarter.

Fee income of the Bank increased to Rs1.5 billion up 45%YoY. Despite higher fee income, other income declined by 9% due to Rs448 million lower dividend incomes and Rs817 million lower capital gains.

Due to continuation of branch expansion, admin expenses rose to Rs5.4 billion, up by 25%YoY. However, cost to income ratio during the quarter dropped to 49.3% as compared to 55.1% for the same period last year.

For the year 2018, earnings of the bank were reported at Rs7.7/share, up 42%YoY due to 35% higher net spread earned. The primary reason for this increase in earnings is the rising interest rate environment where policy rate has gone up by 425bps in 2018, which led to NIMs expansion to around 5%.

ROE for 2018 rose to 23.8% as compared to 19.3% for 2017, while ROA touched in 1.0% as compared to 0.9% a year ago.

The key risks facing the bank remain: 1) deterioration in Pakistan macros, 2) uptick in provisioning charge, 3) lack of investment avenues and 4) lower than expected rate hike.

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