Hot Stocks

MCB Bank poised to yield monetary tightening benefits

The MCB Bank’s balance-sheet is well-positioned to yield the benefits of monetary tightening, as 70 per cent of the earning assets are placed in shorter duration avenues.

Similarly, strong growth in CASA deposits will also support solid net interest margins (NIMs) expansion in the near-term.

Analysts expect average NIMs of the bank to reach 4.6 per cent against 4.1 per cent reported in CY21.

Recently, the bank established an online digital banking platform that brings the banking system on a customer’s fingertip. This was the first step towards the digital journey and will definitely improve the bank’s cost-to-income ratio, going forward.

Further, the bank is also eyeing to expand itself into branchless banking by acquiring 55 per cent share of Telenor Microfinance Bank (Easypaisa). Recently, the State Bank of Pakistan (SBP) has granted conditional approval to conduct due diligence for potential acquisition.

Analysts believe this will bring a new revenue line to the non-funded income and further improve the cost to income ratio.

Asset quality remained impressive, wherein gross infection of the bank stands at 7.94 per cent and coverage reached 90.8 per cent, including general provisioning. The MCB Bank charged net reversal in non-performing loans (NPLs) provision, amounting to Rs4.8 billion in CY21, whereas the management is eyeing to book reversal of Rs3 billion in CY22.

The MCB Bank is currently trading at P/E and P/Bv of 5x and 0.9x of CY22 estimates, which implies a discount of 33 per cent to historical P/Bv of 1.5x, whereas the bank’s capital ratios are still strong enough to support a lucrative dividend yield of 13 per cent.

Key risks associated include lower recovery from NIB-related loan portfolio, lower-than-estimated deposits and advances growth, regulatory risks higher impact of IFRS-9 implementation on the government securities and abrupt change in the interest rates.

Faysal Bank posts earnings of Rs8.2B in 2021

Faysal Bank Limited (FABL) is one of the only three bets from the banking space that could be obtainable by Shariah investors beyond CY22. The conversion timeline is set for the second half of CY22, while the management’s initial target was CY23.

Analysts believe the stock may witness re-rating over higher demand from the Shariah-based investors. However, this would be subject to the completion of the conversion.

Going forward, a key trigger to the bank’s ROE improvement should stem out from the improvement in the cost-to-income ratio, as FABL is operating at one of the most inefficient cost-to-income ratios, which has limited the bank’s potential ROE.

In addition, any implementation of the minimum deposit rate (MDR) on Islamic banking is likely to impact FABL on the lower side, as the bank already carries a higher cost of deposit ratio, compared with the existing Islamic banks.

FABL posted CY21 earnings at Rs8.2 billion (EPS Rs5.37), up 25 per cent YoY, while the fourth quarter of CY21 earnings clocked-in at Rs2.1 billion (EPS Rs1.4), up 109 per cent YoY/2 per cent QoQ. The jump was largely led by increase in the low-cost deposits volume and strong growth in fee income across all product lines.

With controlled operating expenses, the cost-to-income ratio for the year was reported at 60 per cent. This has resulted in the bank’s ROE to increase up to 14 to 15 per cent, while the management targets for 18 to 20 per cent in the coming years.

Alongside the results, the bank announced total DPS of Rs1.50. FABL’s Tier-II CAR reached 17.5 per cent, where the management intends to maintain a healthy CAR in the future too.

Updating on the Islamic conversion, the management said, at present, 67 per cent of the total deposits were Islamic, compared with 53 per cent in September 2021, while the total advances, comprising Islamic loans, stood at 89 per cent, compared with 83 per cent in September 2021.

The management is optimistic that the Islamic banking will contribute around 80 per cent of the balance-sheet by 2023.

With higher Sukuk auctions in the fourth quarter of CY21 (FABL added Rs120 billion), the investment mix in Shariah increased from 20 per cent in September 2021 to 47 per cent at the end of December 2021.

The management expects 85 to 90 per cent of profitability contributed by the Shariah operations during CY22, while around 85 per cent of the deposit size is likely to convert to Islamic banking by June 2022.

Deposits clocked-in at Rs644 billion for the year where the deposit mix comprised current, savings and term with 33 per cent, 42 per cent and 25 per cent, respectively. During the same period, advances increased 25 per cent YoY, while the investment book expanded 29 per cent YoY.

The management shared its view of at least 50bps to 100 bps interest rate hike in the near future. The investment book has accordingly been largely parked in liquid government securities. 73 per cent of the advances were from the CIBG book on the back of increase in the economic activities, whereas the retail segment comprised 12 per cent of the total advances.

The NPL ratio clocked-in at 5.6 per cent for CY21 compared with 7.7 per cent for CY20.

Pakistan Oilfields cash balance stands at Rs51.9B by December 2021

The crude oil prices remained volatile during FY22 to-date. During the first half of FY22, average crude oil rallied 49 per cent YoY and currently hovers over $100/bbl. This is primarily driven from higher oil demand which outpacing the supply due to rapid vaccination drive across the globe and easing of pandemic-related restrictions, leading to higher economic recovery.

Whereas in the second half of FY22, Russia’s invasion of Ukraine made the situation even worse. To note, Russia is one of the biggest oil and gas producers, as its accounts for 12 per cent to 17 per cent of the global oil and gas production, respectively.

In an environment of rising crude price, one should opt for Pakistan Oilfields Limited (POL), as the company has most of its revenue tilted towards oil and; thus, the company’s sensitivity to oil prices is highest in the listed space.

Apart from operating income, the company also has a cash balance of Rs51.9 billion as of December 2021, which is equivalent to its free float market capitalisation (50 per cent of the total market capitalisation).

However, declining production and higher concentration towards TAL Block (61.5 per cent of oil production from TAL) flags risk on POL production sustainability, while previously added reserves, i.e., Jhandial and Joyamair were also not materialised into production.