Implications of Budget and Regulations More Than Priced-In: Detailed Sector Report

Commercial Banks
Detailed Sector Report
REP-092
Implications of Budget and Regulations More than Priced-in May 8, 2018
A majority of the Banks under our coverage have reached attractive levels due to the re- Valuation Summary
cent rout, which we believe is an over-reaction to recent developments in the Sector. These Target Price Closing
developments include certain tax measures as well as prospects of greater regulatory re- Jun-19 Price Upside Stance
quirements. On the other hand, Banks stand to gain from interest rate hike, of an expected (PKR) (PKR) (%)
100-125bps in the next one year. Our top picks within the sector are Habib Bank (HBL) and HBL 230.80 181.75 27.0% Positive
NBP 61.60 49.88 23.5% Positive
Allied Bank (ABL).
ABL 122.90 100 22.9% Positive
Interest Rate Hike to Support Earnings UBL 223.50 186.1 20.1% Positive
BAHL 87.20 74.06 17.7% Positive
We expect a 100-125bps hike in the next one year’s time partly because we expect the ex- MCB 231.10 205.76 12.3% Positive
ternal position to continue to be problematic, albeit at a less disconcerting level than it has BAFL 54.90 51.5 6.6% Neutral
been recently. We also expect monetary tightening in a number of regions across the globe Source: IIS Research
to push SBP to raise its policy rate in order to prevent further PKR devaluation. Moreover, Note: Closing Prices are as of May 4, 2018
we expect higher inflation than last year to encourage a rate hike.
Earnings' Estimates Snapshot
As per our calculations, Bank Al Falah (BAFL) and Bank Al Habib (BAHL) are likely to benefit
EPS EPS EPS
the most from rate hikes because of their favourable deposit mix as well as earnings assets CY17 CY18 %Chg CY19
mix. HBL 4.82 17.52 263.7% 22.32
Tax Measures in FY19 Budget to Constrain Earnings NBP 10.82 (5.65) NM 9.89
ABL 11.12 10.77 (3.2)% 12.64
Not only has the Super Tax been levied again in Federal Budget for TY18, a phasing out plan UBL 20.77 14.62 (29.6)% 25.42
has been announced wherein Super Tax will continue up to FY20. Theoretically Banks BAHL 7.78 8.04 3.2% 10.91
should take a larger impact from Super Tax in CY18 than prior years because of the retro- MCB 18.95 18.53 (2.2)% 23.09
spective and prospective imposition. However, according to our calculations, the effective BAFL 5.20 5.44 4.6% 7.20
tax rate in CY18 will be almost the same as that in previous years because of certain techni- Source: IIS Research
calities. All amounts in PKR
Moreover, the Budget has announced to disallow the adjustment of provisions for NPLs Valuation Inputs
from overseas branches against the income computed for tax purposes. We expect that Sustainable Justified June'19 June'19
this measure will increase UBL’s effective tax rate by 1%. ROE P/B BVPS TP
HBL 24.1% 1.85 125.1 230.80
Regulations to Create Some Pressures for Banks NBP 15.2% 1.07 57.6 61.60
Through a circular issued in April, SBP has notified that certain systemically important ABL 20.4% 1.65 74.5 122.90
banks (D-SIB) will have to meet enhanced regulatory requirements. Under this framework UBL 25.0% 2.00 112.1 223.50
BAHL 25.1% 2.01 43.4 87.20
the selected banks will have to meet additional CET1 ratio requirement in the range of 1-
MCB 24.1% 1.91 120.9 231.10
2%. BAHL and AKBL are two big banks that have CET1 ratio close to the border; therefore
BAFL 18.2% 1.28 42.9 54.90
they may face some problems in case they are included in the D-SIB list. Due to this addi- Source: IIS Research
tional CET1 requirement, banks may also have to meet enhanced CAR (total capital plus
capital conservation buffer, CCB) requirement too. A greater number of banks fall in the
Net Interest Margins
problem area when we consider CAR, with BAHL, BAFL, MEBL, and AKBL all close to the CY17 CY18 CY19 CY20
border. HBL 3.7% 3.6% 3.7% 3.9%
Another regulation that may affect Banks going forward is the implementation of IFRS 9. NBP 2.8% 2.9% 3.0% 2.9%
ABL 3.3% 3.2% 3.5% 3.7%
There are also two new liquidity standards, NSFR and LCR, which are less of a problem for
UBL 3.7% 3.5% 3.7% 3.6%
Banks.
BAHL 3.6% 3.8% 4.1% 4.2%
HBL and ABL Emerge as Top Picks MCB 4.1% 4.1% 4.4% 4.4%
BAFL 3.5% 3.9% 4.3% 4.3%
In our opinion, the recent rout in Banking Sector has been an over reaction to the negative Source: IIS Research
developments related to the Budget and introduction of new regulations. Due to the cor-
rection, HBL’s stock price has fallen to an attractive level; hence it is one of our top picks.
Shumaila Badar, CFA
Our other top pick is ABL as our June 2019 target price on the stock implies a 22.9% upside s.badar@ismailiqbal.com
to the stock’s May 4, 2018 closing price. Please see table on the right for a valuation sum-
Research is also available on Bloomberg (IISP), S&P Capital IQ , and Thomson Reuters Eikon Page 1
www.JamaPunji.pk
DISCLAIMER: Ismail Iqbal Securities (Pvt.) Limited does not warrant the timeliness, sequence, accuracy or completeness of this information. In no event will Ismail Iqbal
Securities (Pvt.) Limited be liable for any special, indirect, incidental, or consequential damages without limitation which includes lost revenues, lost profits, or loss of pro-
spective economic advantage resulting from the use of the information or for any omission or inaccuracies resulting from the use of information from this market report.
Copyright © Ismail Iqbal Securities (Pvt). Limited.
Commercial Banks
Table of Contents
1. Further Rate Hikes to Boost Banks’ Earnings ............................................................................................................................... 3
2. External position warrants further rate hikes ................................................................................................................ 3
3. Box 1: External Debt Position Not in Dire Straits When Seen in the Context of GDP .................................................... 4
4. Monetary Tightening Across the Globe to Keep SBP on its Toes ................................................................................... 5
5. Imported Inflation Remains a Threat ............................................................................................................................. 6
2. BAFL and BAHL to Benefit Most from Interest Rate Hike ............................................................................................................. 8
3. UBL’s Surplus on Revaluation of Investments Most Affected by Interest Rate Hike.................................................................. 10
4. Floating Rate PIBs to Somewhat Improve Yields ........................................................................................................................ 11
5. Attention Shifts to Capital Adequacy Again ............................................................................................................................... 12
6. Regulatory Risks High for the Sector (IFRS 9, NSFR and LCR) ..................................................................................................... 14
7. Low Earnings to Shield from Super Tax Implications in CY18 ..................................................................................................... 15
8. Top picks in the sector ................................................................................................................................................................ 16
9. Valuation Update on Covered Banks .......................................................................................................................................... 17
1. HBL ............................................................................................................................................................................... 17
2. ABL ............................................................................................................................................................................... 19
3. UBL ............................................................................................................................................................................... 21
4. BAHL ............................................................................................................................................................................. 23
5. NBP ............................................................................................................................................................................... 25
6. MCB .............................................................................................................................................................................. 27
7. BAFL .............................................................................................................................................................................. 29
9. Disclaimer ................................................................................................................................................................................... 32
10. Contact Us .................................................................................................................................................................................. 33
Page 2
Commercial Banks
Further Rate Hikes to Boost Banks’ Earnings

We expect a 100-125bps hike in the next one year’s time partly because we expect the external position
to continue to be problematic, albeit at a less disconcerting level than it has been recently. We also ex- 100-150 bps hike in policy
pect monetary tightening in a number of regions across the globe to push SBP to raise its policy rate in rate expected in the next one
year
order to prevent further PKR devaluation. Moreover, we expect higher inflation than last year to encour-
age a rate hike. Details on our economic outlook follow in the sections ahead.
Fig 1: 100-150bps hike in policy rate foreseen

CPI (YoY) Discount Rate
Jan 2019
10.0% May 2016 May 2018
Jan 2018 50bps hike
25bps cut 50bps hike
25bps hike DR: 7.50%
8.0% DR: 6.25% DR: 7.00%
DR: 6.50%
6.0%
4.0% May 2019

25bps hike
2.0% DR: 7.75%
0.0%
Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20
Source: SBP, IIS Research
External Position Warrants Further Rate Hike

Although the trend of declining exports and rising imports has reversed, partly thanks to PKR devalua-
tion, the improvement is still slow and it could take some time to get to a comfortable external position. PKR expected to depreciate
High imports and insufficient exports is one of the major reasons why we expect foreign exchange re- to PKR 120/USD by December
2018 end
serves to continue to face pressure till at least the end of FY19. Consequently we expect PKR to depreci-
ate to PKR 120/USD by December 2018 end before it stabilizes. Our exchange rate assumption and re-
serves position expectation is given in the chart below.
Fig 2: Further PKR Depreciation and Foreign Exchange Reserve Depletion Expected
PKR per USD (period end) Forex Reserves (RHS) Forex Reserves
PKR/USD
160 (USD
- m)
132.1 5,000
123.2 127.5 10,000
120 115.5 120.0
15,000
20,000
Reversed
80 25,000
30,000
35,000
40
40,000
45,000
0 50,000
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Source: SBP, IIS Research
Page 3
Commercial Banks
Another factor behind a problematic external position is debt repayment of an estimated USD 8bn in
FY19. Investors are also worried that the heightened external borrowing that the country has been un-
dertaking recently will take a toll on reserves position in the future. We believe that while the external
borrowing number is worrying in absolute terms, it is not very disconcerting when taken with GDP.
Please see Box 1 for a more detailed discussion on the topic of public debt.
Due to the external position outlook, we expect policy rate hike in the range of 100-125bps in the next
one year. The charts below summarize the movement we expect in Pakistan’s foreign exchange reserves
position for CY18 and CY19.
Fig 3: Foreign Exchange Reserves Expected to Deplete to USD 16.2bn by CY18 End
Fresh Goods
(all amounts in USD
Borrowing Imports
million)
19,000 59,152
Remitta
nces
Services 19,516
Goods Exports
Exports 6,071
Opening 24,071 Services
Imports Ending
Reserves
11,051 Reserves
CY18
Repayments Others CY18
20,154
7,000 4,565 16,176
Source: IIS Research
Box 1: External Debt Position Not in Dire Straits When Seen in the Context of GDP
Investors have been panicking since last year over the large better than what the country has faced in the past. Pakistan’s
amount of external borrowing Pakistan’s Government has been Net Debt to GDP ratio was as high as 78% back in FY01.
doing in order to finance its heightened current account deficit.
Emerging economies usually have lower Net-Debt to GDP ratios
While the absolute amount of external borrowing is disconcert-
than Pakistan has historically had, but developed economies
ing, the number is not very worrying when we standardize it
usually have greater. According to IMF, Major Developed Econo-
using GDP. The chart below gives our estimates and IMF’s fore-
mies had an average ratio of 83.5%. Meanwhile, Emerging
casts of net-debt/ GDP ratio.
economies, such as Turkey (23.4%), Mexico (50.5%) and Brazil
As can be seen from the chart below, the net-debt to GDP ratio (46.2%) had lower ratios than Pakistan. Egypt had a ratio of
is expected to stay below 65% in the next five years, which is 88.1% in 2016.
100% Actual Debt to GDP IIS Estimates IMF's Estimates

78%
80% 73%
66% IMF's
63% 64% 64% 63% 63%
59% 59% 60% 58% 58% 61% 62% 62% Estimat
60%
54% 53% 54% 57% 56%
48% 47% es
62% 63% IIS' Estimates
40%
20%
0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18FFY19FFY20FFY21FFY22FFY23F
Source: IMF, IIS Research
Page 4
Commercial Banks
Fig 4: Foreign Exchange Reserves Expected to Stabilize in CY19
(all amounts in USD Fresh Goods

million) Borrowing Imports
19,000 56,786
Remitt
ances
Services 19,516
Goods Exports
Exports 6,374
Services
Opening 25,997 Ending
Imports
Reserves 11,603 Reserves
CY19 Repayments Others
CY19
16,176 7,000 4,565 16,240
Source: Research Department
Monetary Tightening Across the Globe to Keep SBP on its Toes

Another factor that we believe will incentivize SBP to raise rates is monetary tightening across a number
of other countries, especially the US. We expect rates in the US to rise in the range of 75-100bps till the
end of CY19. In order to avoid the consequent pressure on the USD/PKR exchange rate, we expect SBP
to follow suit and raise rates in Pakistan.
Fig 5: Due to the implications of yield differential, SBP is likely to raise rates in line with rise in US yields
US Govt. 10y Bond Yield Pak Govt. 10y Bond Yield
(%)
16
14
12
10
8
6
4
2
0
Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19
Source: Bloomberg, IIS Research
A number of other countries too are expected to see a rise in interest rates in the near future, as can be
seen in the table on the next page. Due to the rise in yields in a number of regions across the world, we
feel that SBP will feel pressured to raise rates in Pakistan too.
There are a number of countries that are expected to see a decline in interest rates too, the most promi-
nent of which being China. See table on the next page for consensus estimates of future interest rates.
Page 5
Commercial Banks
Forecasted Changes in Interest Rates (in bps)

Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Trend
Pakistan 0.25 0.40 0.35 0.25 0.10 0.05 0.05 - -
USA 0.21 0.18 0.20 0.19 0.15 0.11 - 0.04 (0.01)
Singapore 0.16 0.09 0.09 0.10 0.18 0.01 NA - -
Canada 0.15 0.20 0.20 0.15 0.15 0.10 0.35 0.15 0.05
Austria 0.11 0.12 0.14 0.09 0.17 0.03 0.40 0.12 NA
Netherlands 0.10 0.11 0.12 0.08 0.08 0.11 0.20 0.10 NA
Norway 0.10 0.10 0.20 0.05 (0.05) 0.20 NA NA NA
Indonesia 0.10 0.10 - 0.15 0.05 0.05 - (0.25) NA
Germany 0.07 0.09 0.13 0.08 0.18 0.12 0.62 0.10 0.10
UK 0.06 0.12 0.06 0.15 0.10 0.08 (0.07) - 0.15
France 0.05 0.06 0.15 0.15 0.28 0.20 0.20 0.10 0.13
Malaysia 0.05 0.05 0.05 - - 0.05 0.30 0.25 NA
Vietnam 0.05 - - - 0.10 0.25 NA NA NA
India 0.04 0.04 0.04 - 0.12 0.02 (0.05) 0.07 -
Australia 0.03 0.13 0.05 0.18 0.17 0.13 0.39 0.10 0.29
Italy 0.03 0.17 0.20 0.13 0.30 0.10 0.30 0.10 0.10
Spain - 0.03 0.07 0.12 0.18 0.07 0.19 0.17 0.17
Japan - 0.01 - - 0.02 - (0.01) (0.01) 0.02
Brazil - - 0.30 0.45 0.65 0.40 0.25 0.15 0.10
Colombia - - 0.15 0.15 0.15 - - - -
South Africa - - - - - (0.05) 0.10 0.10 -
Turkey - - (0.05) - - - (0.10) - (0.05)
Eurozone - - - 0.05 0.10 0.10 0.10 0.15 0.05
China (0.03) (0.11) (0.06) (0.02) (0.06) (0.02) (0.50) (0.02) (0.08)
Denmark (0.05) 0.05 0.05 0.60 - - (0.35) 0.35 -
Mexico (0.10) (0.20) (0.20) (0.30) (0.35) (0.25) 0.10 (0.10) -
Srilanka (0.10) (0.13) - (0.24) 0.05 0.04 0.06 0.04 -
Kenya (0.10) (0.35) 0.05 0.15 (0.30) - 0.25 - NA
Russia (0.15) (0.25) (0.05) (0.10) (0.15) (0.05) (0.05) - -
Nigeria (0.55) (0.05) - 0.05 0.85 (0.40) 0.40 - NA
Argentina (1.90) (2.00) (2.00) (1.50) (2.60) (1.50) (1.05) (1.05) (0.95)
Source: Consensus Forecasts Obtained from Bloomberg, IIS Research
Imported Inflation Remains a Threat

Our outlook on the external position raises the threat of imported inflation. We expect the State Bank to
proactively raise rates to counter the threat; hence, we are expecting inflation to be somewhat subdued
in the next three to four years. The graph below gives our inflation and discount rate (ceiling of interest
rate corridor) forecast.
Fig 6: Due to the implications of yield differential, SBP is likely to raise rates in line with rise in US yields
CPI (YoY) Discount Rate
10.0%
8.0%
6.0% 5.71%
5.19%
4.0% 5.56%
4.38%
2.0%
0.0%
Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20
Source: PBS, SBP, IIS Research
Page 6
Commercial Banks
We expect crude oil price to remain range-bound between USD 63-67 in the coming years because of
several factors that will keep the oil market in balance. The bull factors are listed below:
1. Possible ending of Iran’s nuclear deal could jeopardize the supply of around 3.8m bpd of
crude oil. USA is expected to announce its decision tonight (May 8, 2018).
2. Saudi oil ministry wants to see oil at USD 80/bbl or even USD 100/bbl, for which it may be
willing to extend the current oil output pact beyond December 2018
In addition, there are some bear factors that will constrain oil prices in the future, as given below:
1. Enhanced oil production in the US
2. Possibility of a trade war between USA and China that could affect other regions of the
world too due to a disruption in demand and supply dynamics.
Page 7
Commercial Banks
BAFL and BAHL to Benefit Most from Interest Rate Hike

According to our calculations Bank Alfalah (BAFL) and Bank Al Habib (BAHL) will benefit the most from
interest rate hike. BAFL will benefit because it has the best deposit mix and earnings asset mix within our
coverage universe. Meanwhile, we expect BAHL to benefit because it has the most favourable earnings
asset mix. The table below gives our estimated change in net interest margins (NIMs).
Expected Change in NIMs (bps)
Change in Average NIMs in
2017A 2018E 2019E 2020E
ABL (49.20) (13.86) 26.80 20.30
BAFL (16.11) 39.92 32.66 7.06
BAHL (37.33) 21.73 32.68 6.51
HBL (40.88) (7.54) 14.61 16.98
MCB (101.51) 6.69 21.57 5.19
NBP (64.05) 1.92 12.05 (9.46)
UBL (81.81) (17.52) 12.80 (11.55)
Banks with high Advances to Deposit Ratios (ADR) will benefit more than those with low ADR in a rising
interest rate scenario because in most cases their yield on advances will go up with the rising interest
rate in the country, but that is not so in the case of investments. The chart below shows that within our
coverage universe, BAFL and BAHL have the highest ADRs.
Fig 7: BAFL and BAHL had the highest ADRs at December 2017 end within our universe
100%
80%
60%
40%
20%
-
SILK SBL SNBL BIPL JSBL MEBL FABL BAFL SMBL BAHL BOK AKBL MCB UBL NBP HBL ABL SCBPL HMB
Source: Company Financial Statements
BAFL stands out by deposit mix too as it has the third highest proportion of current deposits in total de-
posits and fifth lowest proportion of fixed deposits in total deposits. The table below ranks all nineteen
banks (that have released their Dec 2018 statements) by their deposit mix.
Deposit Mix Ranked as of December 2017

Ranks Ranks Ranks
Avg Fixed Savings* Current Avg Fixed Savings* Current Avg Fixed Savings* Current
BAFL 6 7 8 2 ABL 10 8 13 8 AKBL 12 4 19 12
SCBPL 7 2 17 1 SMBL 10 9 10 11 SNBL 12 13 11 13
UBL 7 11 5 5 MEBL 10 12 12 7 NBP 13 6 15 18
BAHL 7 5 14 3 FABL 11 14 9 9 SBL 13 16 7 17
MCB 8 1 18 4 HMB 11 17 2 14 BOK 14 19 4 19
HBL 8 3 16 6 JSBL 11 18 1 15
BIPL 9 10 6 10 SILK 11 15 3 16
Source: Company Financials
Page 8
Commercial Banks
Fig 8: MCB and HBL had the lowest proportion of Fixed Deposits in Fig 9: UBL and BAFL had the lowest proportion of Savings (plus Remu-
Total Deposits as at December 31, 2017 nerative Current) Deposits in Total Deposits as at December 31, 2017
Fixed to Total Deposits Savings and Remunerative CA to Total Deposits

Best
Best
MCB JSBL
SCBPL HMB
HBL SILK
AKBL BOK
BAHL UBL
NBP BIPL
BAFL SBL
ABL BAFL
SMBL FABL
BIPL SMBL
UBL SNBL
MEBL MEBL
SNBL ABL
FABL BAHL
SILK NBP
SBL HBL
HMB SCBPL
JSBL MCB
BOK AKBL
Worst - 10.0% 20.0% 30.0% 40.0% 50.0% Worst - 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
Fig 10: BAFL and BAHL had the highest proportion of Current Deposits
among our coverage universe as at December 31, 2017
Non-Remunerative to Total Deposits

Best
SCBPL
BAFL
BAHL
MCB
UBL
HBL
MEBL
ABL
FABL
BIPL
SMBL
AKBL
SNBL
HMB
JSBL
SILK
SBL
NBP
BOK
Worst - 10.0% 20.0% 30.0% 40.0% 50.0%
Page 9
Commercial Banks
UBL’s Surplus on Revaluation of Investments Most Affected by

Interest Rate Hike
Banks with interest earning investments tilted towards longer tenors will suffer more from interest rate
hike than those with portfolio’s tilted towards the short end. According to Banks’ annual financial state-
Banks having investment
ments for CY17, UBL had the maturity profile that would be the worst affected by interest rate hike out
portfolios with longer maturi-
of all our covered banks because its proportion of long tenor investments was the highest among its ties will suffer more than
peers. On the other hand, BAHL had the best positioned investment portfolio (interest earning). Fig 11 others
shows how the Banks under our coverage stacked against each other in terms of their maturity profiles
as at end December 2017.
According to our rough estimates, a 50bps hike in interest rates could wipe off 0.33% of BAHL’s surplus
on revaluation of investments. Meanwhile, the same hike is estimated to reduce UBL’s surplus by 0.80%.
Our calculations are shown in the table below.
Fig 11: Out of all our seven covered banks, UBL has the highest proportion of interest earnings invest-
ments in the long-end, while BAHL has the highest proportion of short-end investments
ABL BAFL BAHL HBL MCB NBP UBL
50%
BAHL had the highest UBL had the highest

40%
proportion of its interest proportion of its
earning investments in interest earning
30% short term compared to its investments in the long
peers end compared to its
20% peers
10%
-
Upto 1 Over 1 to 3 Over 3 to 6 Over 6 Over 1 to 2 Over 2 to 3 Over 3 to 5 Over 5 to 10 Above 10
month months months months to 1 years years years years years
Source: Company Financials year
Estimated Sensitivity of Portfolio Value to Interest Rate Changes

Est. Duration Change in Portfolio Value (%) Change in Portfolio Value (PKR m)
(years) +50bps +100bps +150bps +50bps +100bps +150bps
BAHL 0.65 (0.33)% (0.65)% (0.82)% (1,533) (3,065) (3,831)
MCB 0.67 (0.33)% (0.67)% (0.84)% (2,089) (4,177) (5,222)
ABL 0.72 (0.36)% (0.72)% (0.90)% (2,392) (4,783) (5,979)
BAFL 0.87 (0.43)% (0.87)% (1.09)% (1,703) (3,406) (4,258)
HBL 1.14 (0.57)% (1.14)% (1.43)% (7,370) (14,739) (18,424)
NBP 1.14 (0.57)% (1.14)% (1.43)% (7,007) (14,014) (17,518)
UBL 1.61 (0.80)% (1.61)% (2.01)% (8,563) (17,126) (21,408)
Notes:
Macaulay Duration is the best estimate of the analyst based on disclosures in the annual financial statements related to
the mismatch between maturities of assets and liabilities
Convexity has been ignored to simplify calculations
Due to the lack of public information and the resultant uncertainty of interest earnings investments' value to interest rate
sensitivity, this working is not incorporated in our target prices. Our definition of equity excludes surplus on revaluation of
investments
Page 10
Commercial Banks
Floating Rate PIBs to Somewhat Improve Yields

Because Banks didn’t want to lock in low interest rates in a rising interest rate scenario, SBP had been
unable to meet targets in PIB auctions. In April SBP finally accepted bids after rejecting them for eight
consecutive auctions. Compared to the cut-off yield in July 2017 (the last time bids were accepted) yields
were up by 56-113bps, while the discount rate has seen a hike of 25bps in the same period.
To counter this issue, SBP has come up with a plan to issue floating rate PIBs. We expect these to have a Investing in floating rate PIBs
expected to get better yields
much better response than the current fixed coupon PIBs. As a result we expect Banks to start focusing
than investing in TBills
again on PIBs, which will carry better yields than if Banks had continued to roll over positions in TBills.
Page 11
Commercial Banks
Attention Shifts to Capital Adequacy Again

Through a circular issued in April, SBP has notified that certain systemically important banks (D-SIB) will
have to meet enhanced regulatory requirements. Names of selected banks will be notified by June end.
Under this framework the selected banks will have to meet additional CET1 ratio requirement in the
range of 1-2%. BAHL and AKBL are two big banks that have CET1 ratio close to the border; therefore they
may face some problems in case they are included in the D-SIB list. MEBL also has high regulatory risk In case the additional CET 1
requirement pushed up CAR
because its CET1 is close to the border and because there are chances it may be included as a D-SIB be-
requirement, more Banks will
cause it is the largest in its segment. Due to this additional CET1 requirement, banks may also have to be affected
meet enhanced capital adequacy ratio, CAR, (total capital plus capital conservation buffer, CCB) require-
ment too. As per our discussion with the management of a top tier bank, they have approached SBP for
clarification on the matter. A greater number of banks fall in the problem area when we consider CAR,
with BAHL, BAFL, MEBL, and AKBL all close to the border. However, CAR is no more of a problem than
CET1 as the issuance of ADT1 TFCs will probably clear BAHL and BAFL.
SBP announces enhanced regulatory requirements
Through BPRD Circular No 4 of 2018, SBP has notified that certain banks will be selected to meet en-
hanced regulatory requirements. The selection of these banks will be on the basis of their size relative to
GDP and certain qualitative criteria, like segment’s largest bank (Islamic Banks, etc). These banks will
have to meet additional CET1 ratio requirement in the range of 1-2% by end of March 2019.
The additional CET1 requirement may also enhance CAR (total capital plus capital conservation buffer,
CCB) because the circular notes “This additional CET1 requirement will be as an extension of capital con- ADT1 issuance can help with
servation buffer”. The matter is uncertain right now, and as per our discussion with the management of CAR
a top bank, that bank has sought clarification from SBP. Consequently the D-SIB banks may also face a
greater CAR requirement, which we feel is no more of a problem than CET1 because of additional tier 1,
ADT1, issuance (see figure 14).
Additional CET1 requirement may affect BAHL and AKBL
BAHL and AKBL were close to their December 2019 CET1 requirements as at the end of December 2017.
The graph below shows the CET1 ratios of the banks against (i) the December 2017 requirement, (ii) the
December 2019 requirement in case of no additional CET1, and (iii) the December 2019 requirement
with the additional CET1.
Fig 12: BAHL and AKBL had CET1 Ratios Close to the Border
BAHL and AKBL had CET1 Ratios Close to the Dec 2019 requirement
25.0%
20.0%
15.0%
10.0% 10.5% Max Req Dec'19

8.5% Curr. Req Dec'19
7.275% Required CET1- Dec 2017
5.0%
-
BOK SBL ABL HMB SCBPL MCB FABL HBL NBP UBL BAFL BIPL MEBL SNBL BAHL AKBL SILK JSBL SMBL
Source: Company Financials, IIS Research
Page 12
Commercial Banks
Issuance of ADT1 to help BAHL and BAFL meet Possible Enhanced CAR Requirement
Four of the Banks that may be troubled by the enhanced regulatory requirements are Meezan Bank
(MEBL), Bank Al Habib (BAHL), Bank Alfalah (BAFL) and Askari Bank (AKBL) as their CARs as at December
2017 were close to the December 2019 requirement. There are other banks too that are on the border,
but they are unlikely to be included in D-SIB because of their small size.
Fig 13: Banks' CARs for Dec 2017: A larger number of banks fall in the danger area when CAR is considered than when CET1 is
considered
25.0%
20.0%
15.0% 14.5% Max Possible Dec'19

12.5% Required- Dec 2019
11.275% Required- Dec 2017
10.0%
5.0%
-
ABL BOK SBL SCBPL HMB MCB HBL NBP FABL UBL BIPL BAHL BAFL MEBL JSBL SNBL AKBL SILK SMBL
Due to the ADT1 issuance, BAHL and BAFL will get further away from the danger zone. The chart below
gives the improvement in CAR of banks that will issue (or have already issued in 2018) perpetual TFCs to
boost their additional Tier 1 Capital.
Fig 14: Banks' CARs After Taking the Impact of ADT1 Issuance
25.0%
20.0%
15.0%
14.5% Max Dec 2019 Req
12.5% Min Dec 2019 Req.
10.0% 11.275% Required- Dec 2017
5.0%
-
ABL BOK SBL SCBPL HMB MCB HBL NBP FABL UBL BIPL BAHL BAFL MEBL JSBL SNBL AKBL SILK SMBL
Dividends may be curtailed for banks on the border
In the appendix to its circular SBP noted “The D-SIBs falling short of Additional CET1 and enhanced CAR
on the date of announcement shall withhold adequate earnings and submit BoD approved time bound
capital plan to meet the requirements to the SBP within 2 months from the date of designation.” Conse-
quently, the banks which are close to the future requirements may skip dividends.
Page 13
Commercial Banks
Regulatory Risks High for the Sector

Regulatory risks are high for the sector because of the D-SIB framework (covered in a previous section)
and the implementation of IFRS 9. Apart from these two upcoming regulations, banks also have meet
two new liquidity standards: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
Impact of IFRS 9 Still Unclear
IFRS 9 is a new standard that seeks to change the way loans are classified and provided for in Banks’
books. Currently the classification and provisioning of non-performing loans is backward-looking as loans
are provided for only after they default. Under IFRS 9 the provisioning will become forward-looking as an
expected loss model will be used. SBP has asked banks to analyze and report on the impact of the imple-
mentation if IFRS 9 by June, after which time SBP will be decide upon a time-frame for implementation
of the standard. The impact of the new standard is still unclear as it is in very early stages.
Banks Clear on New Liquidity Standards
Banks will have to meet two new liquidity standards under the Basel III framework: Liquidity Coverage
Ratio (LCR) and Net Stable Funding Ratio (NSFR). LCR’s purpose is to ensure that banks have adequate
unencumbered high quality liquid assets to survive a significant stress scenario. NSFR’s objective is to
reduce funding risk over a long time horizon by requiring Banks to fund their activities with sufficiently
stable sources of funding on an ongoing basis.
Banks were clear on these two liquidity standards as of December 2017, as shown in the charts below.
Fig 15: SILK was the only Bank that didn’t meet the Liquidity Coverage Ratio requirement at the end of December 2017
LCR for Dec 2017 Minimum Requirement
500%
400%
300%
200%
100%
0%
SCBPL BAHL HMB SBL JSBL FABL BOK MCB HBL AKBL NBP UBL SNBL BAFL ABL MEBL BIPL SMBL SILK
Fig 16: UBL, JSBL and SILK were on the border of meeting Net Stability Funding Ratio at the end of December 2017
NSFR for Dec 2017 Minimum Requirement

500%
400%
300%
200%
100%
0%
SBL NBP SCBPL HMB AKBL BAHL ABL FABL HBL BIPL BAFL SNBL MEBL MCB SMBL BOK SILK JSBL UBL
Page 14
Commercial Banks
Low Earnings to Shield from Super Tax Implications in CY18

Theoretically Banks should take a larger hit from Super Tax in CY18 than prior years because of prospec-
tive as well as retrospective imposition of the tax this year. Not only has the Super Tax been levied again
in Federal Budget for TY18, a phasing out plan has been announced wherein Super Tax will continue up
to FY20. Theoretically, Banks should take a bigger hit from Super Tax this year than they have in the past
because they will not only take the retrospective impact in the June ending quarter (like they’ve done in
the past three years) but they will also book the Super Tax in the September ending and December end-
ing quarters. In other words, their effective tax rate in 2018 should theoretically be much higher than it
has been in the past three years.
However, according to our calculations, the implication of prospective and retrospective impact is not
significantly larger in CY18 than in prior years. This is because Banks have posted low earnings in the past
two to three quarters, which will depress tax liability. According to our calculations, the effective tax
rates for our covered Banks turns out to be roughly the same in CY18 as in prior years.
The table below gives effective tax rates for all Banks under our coverage.
Effective Tax Rates in Effective Tax Rates in
2QCY15 2QCY16 2QCY17 2QCY18E CY15 CY16 CY17 CY18E
ABL 55.7% 48.0% 49.8% 52.0% 40.7% 39.5% 39.0% 41.2%
BAFL 51.3% 50.3% 49.9% 50.6% 40.3% 39.3% 40.4% 40.4%
BAHL 35.9% 39.3% 38.4% 52.6% 36.5% 32.7% 36.7% 40.5%
HBL 49.8% 52.1% 49.3% 50.0% 38.2% 39.1% 73.7% 40.8%
MCB 52.8% 52.2% 8.6% 47.0% 39.6% 39.3% 27.6% 39.9%
NBP 57.9% 47.8% 37.5% NM 42.1% 38.7% 35.3% NM
UBL 50.1% 48.2% 49.3% 50.2% 39.0% 39.7% 36.7% 42.8%
The table below shows the impact of Super Tax on earnings of the Banks under our coverage.
EPS (PKR) for CY18 Impact (in PKR/share) of Impact (in PKR/share) of
without with only with retrospective Retrosp Total Retrosp Total
any Super retrospective and prospective ective Prospec ective Prospect
Tax at all Super Tax Super Tax Tax tive Tax Tax ive Tax
ABL 11.75 11.03 10.77 (0.72) (0.26) (0.98) (6.1)% (2.2)% (8.3)%
BAFL 5.91 5.55 5.44 (0.36) (0.11) (0.47) (6.0)% (1.9)% (7.9)%
BAHL 8.73 8.27 8.04 (0.46) (0.24) (0.69) (5.2)% (2.7)% (7.9)%
HBL 19.20 18.05 17.52 (1.15) (0.53) (1.68) (6.0)% (2.8)% (8.7)%
MCB 20.05 19.00 18.53 (1.04) (0.48) (1.52) (5.2)% (2.4)% (7.6)%
NBP (5.65) (5.44) (5.65) 0.21 (0.21) 0.00 (3.7)% 3.7% (0.0)%
UBL 16.09 15.15 14.62 (0.94) (0.53) (1.47) (5.9)% (3.3)% (9.1)%
Page 15
Commercial Banks
Top Picks
The table below gives our top picks from the sector, which include Habib Bank Limited (HBL), Allied Bank
(ABL) and United Bank (UBL). Our recommendation is based on the upside to our target prices. National
Bank (NBP) has a 23.5% upside too, but we are not including it as a top pick because of the high risk re-
lated to its pension case.
Valuation Summary
EPS DPS BVPS
TP TP Closing Upside P/E D/Y P/B FY17/ FY18/ FY19/ FY17/ FY18/ FY19/ FY17/ FY18/ FY19/
Dec-18 Jun-19 Price Jun-19 Stance FY19 FY19 FY19 CY17 CY18 CY19 CY17 CY18 CY19 CY17 CY18 CY19
(PKR) (PKR) (PKR) (%) (PKR) (PKR) (PKR) (PKR) (PKR) (PKR) (PKR) (PKR) (PKR)
HBL 217.80 230.80 181.8 27.0% Positive 8.1x 6.6% 1.4x 4.82 17.52 22.32 8.00 4.00 12.00 103.36 118.06 130.88
NBP 57.20 61.60 49.88 23.5% Positive 5.0x 16.0% 0.8x 10.82 (5.65) 9.89 - - 8.00 59.08 53.46 63.35
ABL 119.50 122.90 100 22.9% Positive 7.9x 7.0% 1.3x 11.12 10.77 12.64 7.00 7.25 7.00 68.68 72.38 78.02
UBL 214.00 223.50 186.1 20.1% Positive 7.3x 7.0% 1.6x 20.77 14.62 25.42 13.00 13.00 13.00 103.94 107.29 119.71
BAHL 83.60 87.20 74.06 17.7% Positive 6.8x 6.8% 1.5x 7.78 8.04 10.91 3.00 3.00 5.00 36.72 41.60 49.63
MCB 225.30 231.10 205.8 12.3% Positive 8.9x 7.8% 1.6x 18.95 18.53 23.09 16.00 16.00 16.00 115.18 117.85 124.93
BAFL 51.90 54.90 51.5 6.6% Neutral 7.2x 3.9% 1.1x 5.20 5.44 7.20 1.50 1.50 2.00 36.42 40.54 46.24
Page 16
Commercial Banks
HABIB BANK LIMITED

Recovering from Hits
We have updated our target price on Habib Bank (HBL) to PKR 230.80 for June 2019, from Habib Bank Ltd
our previous target price of PKR 220.00 for December 2018. Our target price offers a X% Target Price 230.8
Current Price 181.75
upside from HBL’s market price; hence, we are adopting a positive stance on the stock. We
Upside 27%
expect HBL’s CY18 bottom line to take a hit from its pension case, which the company has
booked at PKR 2.2bn in 1QCY18. We expect dividends to remain low in the coming year as Key Stats
the Bank is looking to further build its CAR, which has already substantially improved since KATS Code HBL
52 Week High (PKR) 308.57
the penalty imposed on it by New York State’s Department of Financial Services.
52 Week Low (PKR) 152.41
HBL looking to further improve its ADR Avg. daily volume ('000) 1,471.24
Market Cap (PKR Bln) 266.60
HBL was able to improve its advances to deposit ratio by 244bps in CY17, taking its ADR up Market Cap (USD, mln) 2,539.05
to 42.15%. ADR was almost unchanged in 1QCY18. The ratio is still lower than its peers, O/S Shares (Mln) 1,466.85
Technical
which puts the Bank at a disadvantage compared to others. The management is targeting RSI 23.34
to grow its advances by 13-14% in CY18, which will help improve its ADR. Moreover, ac- 1 Month moving average 203.23
cording to the management, credit off-take related to CPEC projects will also pick up this 3 Month moving average 204.36
year. 1 Year moving average 204.86
Performance
Management Looking to Further Improve CAR 1M 3M 1 Yr
Absolute (13.3)% -7.06% -37.76%
HBL’s CAR has already recovered from the impact of the penalty imposed on it by New York *Relative -9.88% -7.74% -25.28%
State’s Department of Financial Services. The Bank’s CAR improved to 15.79% by end 2017, * KSE-100 Index
from 13.60% at the end of September 2017. However, the management still wants to im-
Key Metrics CY16A CY17A CY18F CY19F
prove its CAR in order to be comfortable, and is targeting a CAR of at least 16%. In the ana- EPS 21.69 4.82 17.52 22.32
lyst briefing for 4QCY17 the management declined to comment on whether or not they are DPS 14.00 8.00 4.00 12.00
looking to issue ADT-1 capital to support their capital requirements like their peers. How- BVPS 108.6 103.4 118.1 130.9
P/Ex 8.38 37.74 10.38 8.14
ever, the management also said that the market for ADT-1 is very limited, which gives us P/BVx 1.67 1.76 1.54 1.39
the impression that HBL may not jump onto the bandwagon. Dividend Yield 8% 4% 2% 7%
Earnings growth -10% -78% 264% 27%
Effective Tax Rate Almost the Same as in 2016 ROE 20% 5% 16% 18%
ROA 1% 0% 1% 1%
According to our calculations, HBL’s effective tax rate in CY18 will be 40.8%, which is almost
ADR 40% 42% 44% 44%
the same as that reported in CY16 (39.1%). Consequently, HBL, like its peers is not expected
to have an extraordinary impact in CY18 from the prospective as well as retrospective im- One year historical price performance
Rs.
position of Super Tax. Comparison with CY17 is not reasonable because of the penalty Volume HBL Rel KSE-100
charge booked that year which was not tax adjustable. 350 18
300 16
Million Shares
14
Updating target price to PKR 230.80 250 12
200 10
We have updated and rolled over our target price for HBL from PKR 220.00 (Dec 2018) to 150 8
100 6
PKR 230.80 (June 2019). Our price is based on a justified price-to-book multiple of 1.85x 4
50 2
and June 2019 BVPS of PKR 125.10. Our new target price offers a % upside to HBL’s May 4, 0 0
2018 closing price; hence we are adopting a neutral stance on the stock. May-17 Aug-17 Nov-17 Feb-18
Page 17
Commercial Banks
HBL (Unconsolidated) 2013A 2014A 2015F 2016A 2017A 2018F 2019F 2020F 2021F
Income Statement Items (PKR mln)
Mark-up/ Return/ Interest Earned 118,181 135,929 142,491 137,808 142,510 152,852 185,815 218,381 243,719
Mark-up/ Return/ Interest Expensed 64,744 68,498 65,730 58,490 63,646 72,506 93,349 107,744 119,373
Net Mark-up/ Interest Income 53,437 67,430 76,761 79,318 78,864 80,346 92,467 110,637 124,346
Total Provisions 1,044 734 4,335 666 (399) 20 1,998 2,350 2,594
Total Non-Markup/ Interest Income 15,122 19,675 32,266 25,486 29,726 22,884 22,743 25,385 28,127
Total Non-Markup/ Interest Expense 33,800 39,496 47,291 51,891 58,458 59,819 60,875 64,018 71,122
Profit Before Taxation 33,715 46,875 57,402 52,246 26,815 43,392 52,336 69,655 78,757
Profit After Taxation 21,910 31,113 35,470 31,820 7,064 25,695 32,735 44,579 51,192
Balance Sheet Items (PKR mln)
Investments 794,986 897,574 1,210,479 1,304,723 1,335,783 1,315,642 1,465,570 1,629,217 1,811,211
Advances 523,859 555,395 601,635 712,133 800,689 914,561 1,023,932 1,145,392 1,280,743
Total Assets 1,612,658 1,769,196 2,124,900 2,393,783 2,563,059 2,663,075 2,961,698 3,280,011 3,648,157
Borrowings from financial 105,290 99,631 314,485 335,083 395,486 262,382 292,233 325,071 361,621
Deposits and other 1,316,991 1,447,215 1,558,311 1,793,370 1,899,511 2,087,984 2,325,526 2,586,850 2,877,704
Total Liabilities 1,483,369 1,611,329 1,953,048 2,211,716 2,390,355 2,469,656 2,749,479 3,057,317 3,399,942
Share Capital 13,335 14,669 14,669 14,669 14,669 14,669 14,669 14,669 14,669
Total Equity 129,289 157,868 171,852 182,067 172,704 193,418 212,218 222,693 248,215
Key Ratios
Earnings Per Share (PKR) 14.94 21.21 24.18 21.69 4.82 17.52 22.32 30.39 34.90
DPS (PKR) 8.00 12.00 14.00 14.00 8.00 4.00 12.00 15.25 17.50
Book Value Per Share (PKR) 90.19 93.45 101.68 108.57 103.36 118.06 130.88 138.02 155.42
Dividend Yield 4.4% 6.6% 7.7% 7.7% 4.4% 2.2% 6.6% 8.4% 9.6%
Price/Earning 12.17 8.57 7.52 8.38 37.74 10.38 8.14 5.98 5.21
Price/Book 2.02 1.94 1.79 1.67 1.76 1.54 1.39 1.32 1.17
Interest Earnings Yield 9.1% 9.7% 8.4% 7.1% 6.6% 6.8% 7.5% 7.7% 7.7%
Cost of Funds 4.8% 4.7% 3.8% 3.0% 2.8% 3.2% 3.8% 3.9% 3.9%
Net Interest Margin 4.1% 4.8% 4.5% 4.1% 3.7% 3.6% 3.7% 3.9% 3.9%
Return on Equity 19.0% 24.1% 24.7% 20.5% 4.5% 15.7% 17.7% 22.6% 23.8%
Return on Assets 1.4% 1.9% 1.8% 1.4% 0.3% 1.0% 1.2% 1.4% 1.5%
ADR 39.8% 38.4% 38.6% 39.71% 42.15% 43.8% 44.0% 44.3% 44.5%
NPLs/G.Advances 8.0% 11.1% 10.4% 8.8% 7.8% 7.4% 7.0% 6.5% 6.0%
Provisions/NPLs 82.6% 88.8% 92.3% 93.0% 94.8% 87.5% 85.5% 85.5% 86.2%
Source: Company Reports, IIS Research
Page 18
Commercial Banks
ALLIED BANK LIMITED

Earnings to Decline Only Slightly in CY18
We have updated our target price on Allied Bank (ABL) to PKR 122.90 for June 2019, from Allied Bank Ltd
our previous target price of PKR 105.90 for December 2018. Our target price offers a 23% Target Price 122.90
upside from ABL’s market price; hence, we are adopting a positive stance on the stock. We
Upside 23%
expect ABL’s bottom line to decline in CY18 compared to CY17 due mostly to a dip in rever- Positive
sals of provisions. The effect of Super Tax is likely to be slightly higher too, which will fur- Key Stats
ther depress earnings. On the other hand, beyond 2018 earnings are expected to receive a KATS Code ABL
boost from a rise in NIMs, growth in earning assets and an improvement in earning asset
mix. Avg. daily volume ('000) 140.96
Super Tax to Slightly Depress the Bottom Line
Market Cap (USD, mln) 1,090.54
Because of the retrospective and prospective effect of Super Tax as laid out in Budget 2018- O/S Shares (Mln) 1,145.07
Technical
19, we expect ABL’s bottom line to take a slight hit. We expect ABL’s effective tax rate in
RSI 50.72
CY18 to be around 41.2%, compared to 39.0% in CY17. ABL’s peers stand to gain from the 1 Month moving average 97.58
large amounts of one-off pension expenses they have booked in 1Q as that will reduce the 3 Month moving average 95.04
tax liability of the retrospective Super Tax. ABL, on the other hand, will not benefit as much 1 Year moving average 89.83
because it booked pension expense of PKR 265m only. Performance
1M 3M 1 Yr
Net Reversals of Provisions for NPLs to Taper-off Absolute 4.4% 6.59% 3.20%
*Relative 1.97% 0.89% 11.11%
We expect ABL’s net reversals of provisions for NPLs to decline to PKR 486m in CY18 from
* KSE-100 Index
PKR 1,967m in CY17. ABL has booked net reversals every year since 2015; however, now we
Key Metrics CY17A CY18F CY19F CY20F
expect the reversals to start tapering off. We do not expect provisions charge to be too
EPS 11.12 10.77 12.64 16.22
detrimental to the bottom-line, only that the benefit from reversals will decline. DPS 7.00 7.25 7.00 10.00
BVPS 68.68 72.38 78.02 84.49
Room for Improvement in Earnings Assets Mix Remains
P/Ex 8.99 9.29 7.91 6.17
ABL currently has a low advances to deposit ratio compared to its peers, which gives the P/BVx 1.46 1.38 1.28 1.18
Dividend Yield 7% 7% 7% 10%
bank a less favourable position than others in a rising interest rate environment. ABL had
Earnings growth -12% -3% 17% 28%
an ADR of only 42.7% in December 2017, which is 61bps below that in the corresponding ROE 16% 15% 17% 20%
period last year. We expect ABL’s ADR to improve steadily in the coming years as shown in ROA 1% 1% 1% 1%
the table on the next page. ADR 42% 43% 44% 44%
Updating value to PKR 122.9 One year historical price performance

Rs. Volume ABL Rel KSE-100
We have updated and rolled over our target price for ABL from PKR 105.90 (Dec 2018) to 120 2.5
PKR 122.90 (June 2019). Our price is based on a justified price-to-book multiple of 1.65x 100
Million Shares
2
and June 2019 BVPS of PKR 74.45. Our new target price offers a 23% upside to ABL’s May 4, 80
1.5
2018 closing price; hence we are adopting a neutral stance on the stock. 60
1
40
20 0.5
0 0
Apr-17 Jul-17 Oct-17 Jan-18
Page 19
Commercial Banks
ABL - Unconsolidated 2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F 2021F
Income Statement Items (PKR mn)
Total Provisions 565 1,609 1,524 (260) (1,958) (834) 654 1,164 1,944
Balance Sheet Items (PKR mn)
Investments 363,379 428,791 544,077 589,865 698,082 604,028 666,601 733,633 807,491
Advances 267,001 306,014 321,605 330,231 372,038 421,508 475,131 535,486 602,759
Total Assets 734,196 842,269 991,666 1,069,614 1,245,712 1,208,189 1,338,608 1,482,381 1,642,629
Borrowings from financial 32,952 66,096 137,960 126,369 223,556 71,666 79,820 88,789 98,772
Deposits and other 608,412 667,878 734,596 805,111 883,741 978,206 1,089,493 1,211,921 1,348,184
Total Liabilities 667,998 761,379 902,409 968,941 1,138,996 1,096,731 1,220,687 1,357,054 1,508,830
Share Capital 10,410 11,451 11,451 11,451 11,451 11,451 11,451 11,451 11,451
Total Equity 66,198 80,890 89,256 100,674 106,716 111,458 117,920 125,327 133,799
Key Ratios
DPS (PKR) 5.25 6.50 7.00 7.25 7.00 7.25 7.00 10.00 11.00
Dividend Yield 5.3% 6.5% 7.0% 7.3% 7.0% 7.3% 7.0% 10.0% 11.0%
Price/Earning 7.82 7.63 7.57 7.94 8.99 9.29 7.91 6.17 5.44
Price/Book 1.94 1.85 1.68 1.54 1.46 1.38 1.28 1.18 1.09
Yield on Earning Assets 9.5% 10.1% 9.2% 7.4% 6.9% 6.4% 7.3% 7.5% 7.5%
Cost of Funds 5.5% 5.6% 4.5% 3.5% 3.4% 3.2% 3.8% 3.9% 3.9%
Return on Equity 30.0% 25.6% 23.0% 19.9% 16.5% 15.1% 16.8% 20.0% 20.9%
Return on Assets 2.1% 1.9% 1.6% 1.4% 1.1% 1.0% 1.1% 1.3% 1.3%
ADR 43.9% 45.8% 43.8% 41.02% 42.10% 43.1% 43.6% 44.2% 44.7%
NPLs/G.Advances 6.8% 7.0% 6.4% 5.9% 4.6% 4.0% 3.8% 3.7% 3.6%
Provisions/NPLs 94.6% 86.4% 87.5% 91.9% 92.6% 93.0% 90.0% 87.0% 87.0%
Page 20
Commercial Banks
UNITED BANK LIMITED

Federal Budget FY19 to Affect Earnings
We have updated our target price on United Bank (ABL) to PKR 223.50 for June 2019, from United Bank Ltd
our previous target price of PKR 219.40 for December 2018. Our target price offers a 20.1% Target Price 223.50
Current Price 186.1
upside from UBL’s market price; hence, we are adopting a positive stance on the stock. We Upside 20%
expect UBL’s bottom line to decline in CY18 due mostly to a one-time impact of its pension Positive
case of PKR 6.4bn. Even after excluding the non-recurring charge, we expect the Bank’s Key Stats
earnings to decline on a YoY basis due to lower NIMs and higher provisions charge com- KATS Code UBL
pared to CY17. UBL is also expected to take a hit from measures taken in the recently an- 52 Week Low (PKR) 163.40
nounced Federal Budget. Beyond CY18, however, we expect earnings to improve. Avg. daily volume ('000) 1,426.58
Disallowance of adjustment of foreign loan losses from income for tax purposes to raise Market Cap (USD, mln) 2,169.71
effective tax rate by ~1% O/S Shares (Mln) 1,224.18
Technical
Federal Budget FY19 seeks to disallow adjustment of foreign loan losses from income for RSI 56.92
tax purposes. The notes issued by FBR on the Finance Bill note that “ . This measure is likely 1 Month moving average 201.17
to affect UBL because it books a substantial amount of provisions for NPLs from its foreign 3 Month moving average 200.30
loan book. According to our calculations, this disallowance will result in a rise in UBL’s ef- 1 Year moving average 203.27
fective tax rate by ~ 1%. Performance
1M 3M 1 Yr
ADT-1 Issue to Help Raise UBL’s CAR Absolute 7.3% -4.02% -16.09%
*Relative 0.20% -11.85% -9.46%
UBL will soon be issuing a TFC for the purpose of increasing its Tier I Capital and thereby * KSE-100 Index
giving a boost to its capital adequacy ratio. According to UBL’s PSX filings, the Bank plans on
issuing ADT1 capital of around PKR 10bn. As other details are not yet available, we are as- Key Metrics CY16A CY17A CY18F CY19F
EPS 22.65 20.77 14.62 25.42
suming that it will pay a rate of KIBOR+1.50% on the issue, same as what BAFL is paying.
DPS 13.00 13.00 13.00 13.00
We expect the issue to increase UBL’s CAR by 90bps, from 15.4% as of December 31, 2018 BVPS 95.53 103.9 107.3 119.71
to 16.4%. P/Ex 4.59 5.01 7.11 4.09
P/BVx 1.09 1.00 0.97 0.87
Lower NIMs and Higher Provisions Cost to Limit Earnings Dividend Yield 13% 13% 13% 13%
Earnings growth 8% -8% -30% 74%
Even after excluding the effect of the pension expense, we expect UBL’s earnings to decline ROE 25% 21% 14% 22%
by 5.1% YoY. This is partly due to lower NIMs as the effect from our expected rise in inter- ROA 2% 1% 1% 1%
est rates is not enough to counter the fall in NIMs UBL has encountered through CY17. An- ADR 43% 47% 48% 49%
other reason for the expected dip in earnings is higher provisions charge, as the large
One year historical price performance
amount of overseas NPLs age.
Rs. Volume UBL
Updating value to PKR 223.50 300 25
250
Million Shares
We have updated and rolled over our target price for UBL from PKR 219.40 (Dec 2018) to 20
200
PKR 223.50 (June 2019). Our price is based on a justified price-to-book multiple of 2.0x and 15
150
June 2019 BVPS of PKR 112.07. Our new target price offers a 20.1% upside to UBL’s May 4, 10
100
2018 closing price; hence we are adopting a neutral stance on the stock. 50 5
0 0
May-17 Aug-17 Nov-17 Feb-18
Page 21
Commercial Banks
UBL- Unconsolidated 2013A 2014A 2015A 2016A 2017F 2018F 2019F 2020F 2021F
Total Provisions 1,303 882 3,632 1,479 2,597 6,736 1,938 1,722 2,595
Investments 423,777 497,334 714,127 806,531 1,091,787 1,043,800 1,177,775 1,302,825 1,440,941
Advances 390,813 434,264 454,631 510,111 604,562 688,204 791,925 891,532 1,002,886
Total Assets 1,009,739 1,111,414 1,400,651 1,577,551 2,007,381 2,087,046 2,361,082 2,623,343 2,914,935
Borrowings from Fis 40,574 53,065 163,132 201,550 512,650 445,550 505,689 562,514 625,761
Deposits 827,848 895,083 1,051,235 1,179,887 1,289,247 1,425,760 1,618,205 1,800,045 2,002,434
Total Liabilities 908,825 985,898 1,258,515 1,425,764 1,848,074 1,927,648 2,186,485 2,431,061 2,703,274
Share Capital 12,242 12,242 12,242 12,242 12,242 12,242 12,242 12,242 12,242
Total Equity 100,914 125,516 142,135 151,787 159,307 159,398 174,597 192,282 211,660
Key Ratios
DPS (PKR) 10.00 11.50 13.00 13.00 13.00 13.00 13.00 16.50 19.25
BVPS (PKR) 72.34 77.27 86.48 95.53 103.94 107.29 119.71 134.16 149.99
Earnings Yield 14.6% 17.2% 20.2% 21.8% 20.0% 14.1% 24.5% 28.8% 33.8%
Dividend Yield 9.6% 11.1% 12.5% 12.5% 12.5% 12.5% 12.5% 15.9% 18.5%
Price/Earning (x) 6.84 5.80 4.95 4.59 5.01 7.11 4.09 3.47 2.96
Price/Book (x) 1.44 1.35 1.20 1.09 1.00 0.97 0.87 0.77 0.69
Cost of Funds 4.3% 4.2% 3.5% 3.1% 3.2% 3.6% 4.1% 4.2% 4.2%
Return on Equity 22.3% 24.1% 25.5% 24.7% 20.7% 13.9% 22.3% 23.6% 24.7%
Return on Assets 1.9% 2.1% 2.0% 1.8% 1.4% 0.9% 1.4% 1.5% 1.6%
ADR 47.2% 48.5% 43.2% 43.2% 46.9% 48.3% 48.9% 49.5% 50.1%
NPLs/G.Advances 12.1% 11.2% 9.4% 8.1% 7.9% 7.6% 7.2% 6.8% 6.4%
Provisions/NPLs 87.3% 84.9% 89.0% 90.9% 82.2% 88.0% 85.0% 84.0% 84.0%
Page 22
Commercial Banks
BANK AL HABIB LIMITED

Favourable Earnings Asset Mix to Boost Earnings
After incorporating our new interest rate assumption and Bank Al Habib’s (BAHL) CY17 Bank Al-Habib Ltd.
earnings, we have updated our target price on the Bank to PKR 87.20 for June 2019, from Target Price 87.20
Current Price 74.1
our previous TP of PKR 87.20 for December 2018. Our new TP offers a 18% upside to
Upside 18%
BAHL’s market price; hence we are adopting a positive stance on the stock. BAHL’s funda- Positive
mentals have recently improved even further, with its infection ratio down to only 1.41%. Key Stats
Further it has improved its ADR by 430bps to 49.1%, which will help it in a rising interest KATS Code BAHL
rate environment. We expect BAHL’s earnings to grow by 3% in CY18 due to rising interest
rates, whose effect will especially be felt by BAHL because it has one of the highest ADRs in Avg. daily volume ('000) 452.61
the industry. On the other hand we expect earning’s growth to be restrained by normaliza- Market Cap (PKR Bln) 82.31
tion of capital gains and provisions charge. Market Cap (USD, mln) 783.93
O/S Shares (Mln) 1,111.43
Infection ratio dips to 1.41% Technical
RSI 52.99
BAHL was able to improve its already low infection ratio in CY17 and 1QCY18. The infection 1 Month moving average 74.91
of its loan book stood at only 1.41% as at March 31, 2018, compared to 2.12% in December 3 Month moving average 69.65
2016. Due to the admirable asset quality we expect provisions charge to remain low in the 1 Year moving average 60.62
coming years; however, we do not expect further posting of net reversals. Performance
1M 3M 1 Yr
BAHL raises its ADR to 49.1% Absolute 11.9% 14.78% 42.86%
*Relative 5.80% 9.19% 49.75%
In order to benefit from a rise in interest rates, BAHL has increased its advances to deposit
* KSE-100 Index
ratio, ADR, by 430bps. BAHL’s ADR now stands at 49.1%, which is one of the highest in the
industry. The relatively high ADR is partly the reason why BAHL is in one of the best posi- Key Metrics CY16A CY17A CY18F CY19F
EPS 7.31 7.78 8.04 10.91
tions among its peers to gain from a rising interest rate environment.
DPS 3.50 3.00 3.00 5.00
Normalization of capital gains to restrict the bottom line BVPS 32.32 36.72 41.60 49.63
P/Ex 10.14 9.52 9.22 6.79
Like other banks, we expect BAHL to not post any significant capital gains in the coming P/BVx 2.29 2.02 1.78 1.49
years because the rising interest rate scenario will not give banks that opportunity. BAHL Dividend Yield 5% 4% 4% 7%
Earnings growth 10% 7% 3% 36%
had posted significant gains on sale of securities in 2017, of PKR 2.7bn; however, for 2018
ROE 25% 23% 21% 24%
we expect the Bank to post gains of only PKR 52m. The reduction will restrain the growth of ROA 1% 1% 1% 1%
the Bank’s bottom line in 2018. ADR 45% 49% 49% 49%
Updating value to PKR 87.20 One year historical price performance

Volume BAHL Rel KSE-100
We have updated and rolled over our target price for BAHL from PKR 81.40 (Dec 2018) to Rs.
90 4.5
PKR 87.20 (June 2019). Our target price is based on a justified price-to-book multiple of 80 4.0
Million Shares
2.01x and June 2019 BVPS of PKR 43.36. Our new target price offers a 18% upside to BAHL’s 70 3.5
60 3.0
May 4, 2018 closing price; hence we are adopting a positive stance on the stock. 50 2.5
40 2.0
30 1.5
20 1.0
10 0.5
0 0.0
May-17Jul-17 Oct-17 Dec-17 Feb-18
Page 23
Commercial Banks
Bank Al Habib Financial Summary (Uncons.) 2013A 2014A 2015F 2016F 2017F 2018F 2019F 2020F 2021F
Total Provisions 480 553 1,960 (638) (115) 538 712 845 1,013
Investments 239,753 331,423 354,824 405,028 476,125 454,317 505,900 562,648 625,808
Advances 167,579 181,357 205,859 261,440 339,833 380,473 424,099 472,019 525,265
Total Assets 460,727 578,919 639,712 751,396 919,052 935,667 1,043,637 1,162,255 1,294,777
Deposits 386,161 446,409 516,213 584,172 692,576 775,664 863,908 960,987 1,069,037
Total Liabilities 435,445 546,290 601,856 708,882 873,176 884,183 983,263 1,092,254 1,213,552
Share Capital 10,104 11,114 11,114 11,114 11,114 11,114 11,114 11,114 11,114
Total Equity 25,282 32,628 37,857 42,514 45,876 51,483 60,374 70,000 81,225
Key Ratios
DPS (PKR) 2.00 3.00 3.50 3.50 3.00 3.00 5.00 6.00 7.00
Dividend Yield 2.7% 4.1% 4.7% 4.7% 4.1% 4.1% 6.8% 8.1% 9.5%
Price/Earning (x) 15.97 12.96 11.12 10.14 9.52 9.22 6.79 5.46 4.63
Price/Book (x) 3.22 2.99 2.60 2.29 2.02 1.78 1.49 1.27 1.08
Cost of Funds 5.5% 5.4% 4.5% 3.5% 3.2% 3.3% 3.8% 3.9% 3.9%
Return on Equity 23.9% 25.3% 25.5% 24.5% 22.9% 20.9% 24.1% 25.1% 25.3%
Return on Assets 1.1% 1.2% 1.2% 1.1% 1.0% 1.0% 1.2% 1.4% 1.4%
Loan-to-Deposit 43.4% 40.6% 39.9% 44.8% 49.1% 49.1% 49.1% 49.1% 49.1%
NPLs/Gross Advances 2.1% 2.7% 2.7% 2.1% 1.5% 1.5% 1.5% 1.5% 1.5%
Provisions/NPLs 164.4% 131.7% 143.2% 136.9% 144.3% 137.2% 132.0% 128.5% 126.3%
Page 24
Commercial Banks
NATIONAL BANK LIMITED

Pension Case Raises Uncertainties
We have updated our target price on National Bank (NBP) to PKR 61.60 (for June 2019), National Bank of Pakistan
which provides a 23.5% upside to the Bank’s last closing price. Although our target price Target Price 61.6
Current Price 49.88
implies a substantial upside, we would like to warn investors that NBP carries high risk. Its
Upside 23%
pension case is still sub judice, and could result in a negative surprise. Moreover, the Bank Positive
has historically had very volatile asset quality, which increases the risk of investing in it. We Key Stats
expect the Bank to post a loss in CY18 due to the hit from its Pension Case, which the man- KATS Code NBP
agement expects to be around PKR 47.7bn.
Pension Case to Result in a One-Off Charge of PKR 47.7bn Avg. daily volume ('000) 1,034.19
We expect NBP to post a loss of PKR 5.65/share in CY18 due to the one-off hit from its pen- Market Cap (USD, mln) 1,010.67
sion case, which the management estimates to be around PKR 47.7bn. The matter is still O/S Shares (Mln) 2,127.51
Technical
sub judice, but we have assumed that NBP will take the hit by the second quarter of this 48.52
RSI
year. Booking in 2QCY18 will help NBP reduce its tax liability under Super Tax too. 1 Month moving average 50.76
3 Month moving average 49.33
In addition to the non-recurring charge, NBP will also have to pay a recurring charge. Ac-
1 Year moving average 53.35
cording to the management, this charge could be in the range of PKR 2-3bn. In our base
Performance
case we have assumed a charge of around PKR 2.5bn every year. 1M 3M 1 Yr
Absolute 1.1% 6.36% -22.66%
NBP posts surprisingly high reversal of provisions in 4QCY17
*Relative -1.28% 0.66% -14.76%
NBP surprised us in 4QCY17 by posting an unusually high reversal for provisions of NPLs. * KSE-100 Index
Going forward we expect provisions to normalize, and for the bank to post provisions
Key Metrics CY17A CY18F CY19F CY20F
charge of PKR 2.0bn in CY18. The Bank was able to substantially improve its asset quality in EPS 10.82 (5.65) 9.89 10.53
the last quarter of 2017, taking its infection ratio down to 14.1% from 16.2% as at end Sep- DPS - - 8.00 8.50
tember 2017. It slipped slightly in 1QCY18 to 14.7%. Going forward we are expecting a slow BVPS 59.1 53.5 63.4 65.9
P/Ex 4.09 (7.84) 4.48 4.21
improvement in infection ratio and consequently high provisions charge because NBP’s
P/BVx 0.75 0.83 0.70 0.67
asset quality has been rather volatile in the past. Dividend Yield - - 18% 19%
Earnings growth 1% -152% -275% 6%
Updating value to PKR 61.60
ROE 19% -10% 17% 16%
We have updated and rolled over our target price for NBP from PKR 64.40 (Dec 2018) to ROA 1% -1% 1% 1%
ADR 43% 45% 46% 46%
PKR 61.60 (June 2019). Our price is based on a justified price-to-book multiple of 1.07x and
June 2019 BVPS of PKR 57.56. Our new target price offers a 23.5% upside to NBP’s May 4, One year historical price performance
2018 closing price; hence we are adopting a neutral stance on the stock. Rs. Volume NBP
80 10
70
60 8 Million Shares
50 6
40
30 4
20 2
10
0 0
May-17 Aug-17 Nov-17 Feb-18
Page 25
Commercial Banks
NBP Financial Summary (Unconsolidated) 2013A 2014A 2015A 2016A 2017F 2018E 2019F 2020F 2021F
Total Provisions 19,491 11,077 11,821 (701) (675) 1,846 3,310 3,362 4,679
Profit Before Taxation 7,078 22,001 33,216 37,141 35,599 (18,458) 33,621 34,998 41,104
Profit After Taxation 5,500 15,028 19,219 22,752 23,028 (12,018) 21,040 22,398 26,718
Investments 397,959 561,764 826,302 897,131 1,295,720 1,068,514 1,187,165 1,318,027 1,463,174
Advances 615,420 626,704 577,893 667,389 739,772 818,340 921,874 1,035,720 1,161,997
Total Assets 1,364,341 1,543,054 1,706,361 1,975,706 2,369,885 2,332,892 2,600,644 2,877,434 3,188,149
Deposits 1,101,139 1,233,525 1,431,037 1,657,312 1,727,102 1,801,897 2,006,892 2,232,410 2,483,412
Total Liabilities 1,208,055 1,364,725 1,538,010 1,798,973 2,194,503 2,168,594 2,415,306 2,686,717 2,988,798
Share Capital 21,275 21,275 21,275 21,275 21,275 21,275 21,275 21,275 21,275
Total Equity 156,287 178,329 168,351 176,733 175,382 164,298 185,339 190,717 199,351
Key Ratios
Earnings Per Share (PKR) 2.59 7.06 9.03 10.69 10.82 (5.65) 9.89 10.53 12.56
DPS (PKR) 2.00 5.50 7.50 7.50 - - 8.00 8.50 10.00
Earnings Yield 5.8% 15.9% 20.4% 24.1% 24.4% (12.8)% 22.3% 23.8% 28.4%
Dividend Yield 4.5% 12.4% 16.9% 16.9% 0.0% 0.0% 18.1% 19.2% 22.6%
Price/Earning 17.13 6.27 4.90 4.14 4.09 (7.84) 4.48 4.21 3.53
Price/Book 0.93 0.85 0.81 0.79 0.75 0.83 0.70 0.67 0.63
Cost of Funds 5.6% 6.0% 4.6% 3.8% 3.7% 3.7% 4.3% 4.4% 4.4%
Return on Equity 5.4% 14.3% 17.4% 19.9% 19.4% (10.3)% 16.8% 16.3% 18.5%
Return on Assets 0.4% 1.0% 1.2% 1.2% 1.0% (0.5)% 0.8% 0.8% 0.9%
ADR 55.9% 50.8% 40.4% 40.3% 42.8% 45.4% 45.9% 46.4% 46.8%
NPLs/G.Advances 16.3% 16.6% 18.4% 15.3% 14.1% 14.4% 14.0% 13.8% 13.6%
Provisions/NPLs 77.6% 81.2% 87.0% 91.8% 91.6% 84.5% 80.0% 75.0% 70.5%
Page 26
Commercial Banks
MCB BANK LIMITED

Earnings to Receive Support from NPL Recoveries
We have updated our target price on MCB Bank (MCB) to PKR 231.10 for June 2019, from MCB Bank Limited
our previous target price of PKR 234.60 for December 2018. Our target price offers a 12.3% Target Price 231.1
upside from MCB’s market price; hence, we are adopting a positive stance on the stock. We
Upside 12%
expect MCB’s bottom line to receive a boost in 2018 and 2019 through recoveries from Positive
NIB’s loan portfolio. Earning’s growth is likely to also be helped by MCB’s favourable earn- Key Stats
ings asset position (high ADR) in a rising interest rate scenario. On the other hand earning’s KATS Code MCB
growth is likely to be restrained by the Bank’s deposit mix, which is not very conducive in a
rising interest rate scenario due to high proportion of savings deposits. Avg. daily volume ('000) 833.23
Recoveries from NIB’s book to support earning’s growth
Market Cap (USD, mln) 2,322.27
MCB’s management expects to recover 40-45% of NIB’s non-performing loans, worth O/S Shares (Mln) 1,185.06
Technical
around PKR 30bn, in the next three to four years. To be prudent, we have assumed a lower 39.33
RSI
benefit for MCB than the guidance given by the management. According to our estimates, 1 Month moving average 218.41
MCB will post a net reversal of provisions charge worth PKR 3.1bn in 2018 and PKR 1.6bn in 3 Month moving average 220.11
2019. This will be one of the biggest drivers of MCB’s bottom line growth in the coming two 1 Year moving average 213.52
Performance
years.
1M 3M 1 Yr
ADR to Improve Even Further Absolute (3.5)% -6.24% -3.96%
*Relative -5.98% -11.94% 3.94%
In anticipation of a rate hike, MCB increased its advances to deposits ratio by 393bps in * KSE-100 Index
CY17. Its ADR stood at 48.46% as at December 31, 2017, one of the highest within our cov- Key Metrics CY16A CY17A CY18F CY19F
erage universe. Going forward we expect ADR to increase further to 48.5% by CY20. Be- EPS 18.47 18.95 18.53 23.09
cause of its high ADR, MCB is in a better position to benefit from the rising interest rate DPS 16.00 16.00 16.00 16.00
BVPS 106.0 115.2 117.8 124.9
environment than some of its peers.
P/Ex 11.55 11.26 11.52 9.24
Room for improvement in deposit mix remains P/BVx 2.01 1.85 1.81 1.71
Dividend Yield 7% 7% 7% 7%
Unlike the earnings asset front, MCB is not very favourably placed in the deposit mix front Earnings growth -14% 3% -2% 25%
because of the high proportion of savings accounts in its deposits mix. As the minimum ROE 19% 17% 16% 19%
ROA 2% 2% 2% 2%
deposit rate moves in tandem with the policy rate, cost of savings deposits is likely to move
ADR 45% 48% 47% 48%
to the same extent as the yield on advances; thereby diminishing gains from a rate hike.
MCB has reduced the proportion of savings deposits in total deposits from 54.7% as of end One year historical price performance
Rs.
2016 to 52.5 as of end March 2018; however, the proportion is still very high compared to Volume MCB Rel KSE-100
peers. MCB’s deposit mix places the Bank in a less favourable position than its peers. 300 14
250 12
Million Shares
Updating value to PKR 231.10 200 10
8
150
We have updated and rolled over our target price for MCB from PKR 234.60 (Dec 2018) to 6
100 4
PKR 231.10 (June 2019). Our price is based on a justified price-to-book multiple of 1.91x
50 2
and June 2019 BVPS of PKR 120.88. Our new target price offers a 12.3% upside to MCB’s 0 0
May 4, 2018 closing price; hence we are adopting a neutral stance on the stock. May-17 Aug-17 Nov-17 Feb-18
Page 27
Commercial Banks
MCB Bank - Unconsolidated 2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F 2021F
Total Provisions (2,836) (1,450) 543 654 673 (3,453) (1,121) 916 1,872
Investments 449,006 511,137 568,803 555,929 656,964 639,243 711,446 791,133 879,693
Advances 248,243 303,559 314,125 347,980 469,356 512,359 577,101 645,920 721,794
Total Assets 815,508 934,631 1,016,630 1,051,814 1,327,311 1,383,799 1,530,983 1,696,693 1,881,440
Deposits 632,330 688,330 708,091 781,430 968,483 1,085,350 1,208,826 1,344,664 1,495,852
Total Liabilities 705,277 804,527 878,829 910,187 1,173,745 1,227,880 1,366,665 1,519,347 1,689,282
Share Capital 10,118 11,130 11,130 11,130 11,851 11,851 11,851 11,851 11,851
Total Equity 110,231 130,104 137,800 141,627 153,566 155,919 164,317 177,346 192,158
Key Ratios
DPS (PKR) 14.00 14.00 16.00 16.00 16.00 16.00 16.00 19.00 22.00
Earnings Yield 8.5% 9.6% 10.1% 8.7% 8.9% 8.7% 10.8% 12.7% 14.8%
Dividend Yield 6.6% 6.6% 7.5% 7.5% 7.5% 7.5% 7.5% 8.9% 10.3%
Price/Earning (x) 11.76 10.39 9.90 11.55 11.26 11.52 9.24 7.90 6.77
Price/Book (x) 2.22 2.22 2.10 2.01 1.85 1.81 1.71 1.57 1.44
Cost of Funds 4.3% 4.8% 3.8% 2.8% 3.0% 2.9% 3.5% 3.6% 3.6%
Return on Equity 22.8% 23.7% 23.0% 18.9% 17.5% 15.9% 18.9% 20.7% 22.2%
Return on Assets 2.8% 2.8% 2.5% 2.1% 1.8% 1.6% 1.9% 2.0% 2.1%
ADR 39.3% 44.1% 44.4% 44.53% 48.46% 47.2% 47.7% 48.0% 48.3%
NPLs/G.Advances 8.7% 6.8% 6.1% 5.9% 9.5% 8.8% 7.6% 7.1% 6.6%
Provisions/NPLs 85.7% 85.6% 90.8% 90.8% 93.7% 87.0% 87.0% 85.0% 85.0%
Page 28
Commercial Banks
BANK Al FALAH LIMITED

Strong Fundamentals Remain Priced-in
We have updated our target price on BAFL to PKR 54.90 for June 2019, from our previous Bank Alfalah Ltd.
target price of PKR 50.80. Our new target price offers only a % upside to BAFL’s market Target Price 54.9
price; hence, we are adopting a neutral stance on the stock. We expect BAFL’s earnings to Current Price 51.50
Upside 7%
grow by 7% in 2018 due to (i) uptick in target policy rate, (ii) normalization of administra-
Neutral
tive expenses, and (iii) growth in deposits and consequently earnings assets. Earnings Key Stats
growth is expected to be limited by normalization of provisions charge for NPLs. Retrospec- KATS Code BAFL
tive and prospective impact of Super Tax is likely to be at the same level as that last year, 52 Week High (PKR) 54.73
which is why it is not expected to affect earnings growth.
Avg. daily volume ('000) 1,909.40
Deposit Mix to Remain Stable Market Cap (PKR Bln) 82.79
Market Cap (USD, mln) 788.47
BAFL’s CA/Deposits ratio has worsened from 45.8% in March 2017 to 43.2% in March 2018. O/S Shares (Mln) 1,607.57
Technical
According to the management, one of the reasons for the decline was their plans to exit
RSI 53.58
from Afghanistan. The decline is also attributable to management’s stance to balance 1 Month moving average 51.75
growth in deposits with the cost of deposits. The management had previously focused on 3 Month moving average 48.98
the cost, and had therefore aggressively improved their deposit mix at the expense of vol- 1 Year moving average 43.35
ume of deposits during the years 2015 and 2016. We expect deposit mix to remain stable at Performance
1M 3M 1 Yr
the current levels from CY18 through CY23. Absolute 4.7% 16.24% 32.64%
*Relative -1.49% 8.02% 39.66%
Provisions Charge Expected to Normalize
* KSE-100 Index
BAFL finally started following the trend of its peer banks in 2017 by posting net reversals of
Key Metrics CY16A CY17A CY18F CY19F
provisions charge worth PKR 434m. BAFL has been late to the party, as its peer banks have EPS 4.91 5.20 5.44 7.20
been posting net reversals of provisions charge for the past couple of years, and MCB in DPS - 1.50 1.50 2.00
fact has been enjoying net reversals since 2013, with 2016 the only exception. We expect BVPS 30.83 36.42 40.54 46.24
P/Ex 10.48 9.89 9.46 7.15
net reversals to be short lived and going forward we expect provisions charge to overcome P/BVx 1.67 1.41 1.27 1.11
reversals. Dividend Yield 7% 7% 7% 8%
Earnings growth 5% 6% 5% 32%
Admin Expenses too to Normalize ROE 17% 15% 14% 16%
ROA 1% 1% 1% 1%
Along with provisions charge, we expect administrative expenses to also normalize in 2018.
ADR 59% 61% 65% 66%
These expenses had been bloated in 4QCY17 due to one-off ex-gratia payments of ~PKR
700m to outgoing executives. Moreover, the Bank had paid for some consultancies in the One year historical price performance
quarter, which will subside in the future. Another reason why we are anticipating growth in Rs. Volume BAFL
admin expenses to be subdued is that we are expecting no new brick and mortar branches 60 14
50 12
Million Shares
in 2018 and 2019 in line with BAFL’s strategy to consolidate its branch network. 10
40
8
Super Tax to have no Effect on Growth of Earnings 30
6
20 4
According to our calculations, BAFL will have an effective tax rate of 40.4% in CY18, which is 10 2
the same as the effective tax rate in CY17. The reason why Super Tax is not expected to 0 0
have a greater impact this year, even with the prospective announcement, is that BAFL had May-17Jul-17 Oct-17 Dec-17 Feb-18
very low earnings in 4QCY17, which will constrain the tax liability when the Super Tax is
booked for TY18.
Page 29
Commercial Banks
Updating value to PKR 54.90
We have updated and rolled over our target price for BAFL from PKR 50.8 (Dec 2018) to
PKR 54.90 (June 2019). Our price is based on a justified price-to-book multiple of 1.28x and
June 2019 BVPS of PKR 42.90. Our new target price offers a % upside to BAFL’s May 4, 2018
closing price; hence we are adopting a neutral stance on the stock.
Page 30
Commercial Banks
BAFL - Financial Summary 2013A 2014A 2015A 2016A 2017F 2018F 2019F 2020F 2021F
Total Provisions 1,054 1,534 2,287 1,183 (260) 526 1,246 2,348 2,614
Investments 219,690 324,319 397,097 389,093 400,733 315,301 350,773 389,797 433,230
Advances 260,780 290,597 327,298 378,720 400,655 451,870 509,948 570,569 638,426
Total Assets 610,614 743,128 902,608 917,457 988,829 933,861 1,040,462 1,156,306 1,281,449
Deposits 525,526 605,963 640,189 640,944 653,406 696,021 775,205 862,316 959,271
Total Liabilities 578,713 698,309 849,254 857,332 923,029 861,723 959,161 1,065,913 1,179,820
Share Capital 13,492 15,872 15,898 15,952 16,076 16,076 16,076 16,076 16,076
Total Equity 31,902 44,819 53,353 60,125 65,800 72,138 81,300 90,393 101,629
Key Ratios
DPS (PKR) 2.00 2.00 1.00 - 1.50 1.50 2.00 2.50 4.00
Dividend Yield 3.9% 3.9% 1.9% 0.0% 2.9% 2.9% 3.9% 4.9% 7.8%
Price/Earning 17.71 14.68 11.01 10.48 9.89 9.46 7.15 6.73 5.43
Price/Book 2.46 2.16 1.93 1.67 1.41 1.27 1.11 0.99 0.87
Cost of Funds 5.3% 5.6% 4.6% 3.6% 3.3% 3.4% 4.0% 4.1% 4.1%
Return on Equity 17.8% 18.1% 18.9% 17.1% 15.3% 14.0% 16.5% 15.6% 17.1%
Return on Assets 0.8% 0.8% 0.9% 0.9% 0.9% 1.0% 1.2% 1.1% 1.3%
ADR 49.6% 48.0% 51.1% 59.1% 61.3% 64.9% 65.8% 66.2% 66.6%
NPLs/G.Advances 6.6% 6.4% 5.4% 4.8% 4.2% 4.0% 4.0% 4.0% 4.0%
Provisions/NPLs 72.7% 73.4% 87.7% 90.1% 94.0% 90.0% 85.0% 86.0% 86.0%
Page 31
Commercial Banks
Disclaimer
Ismail Iqbal Securities (Pvt.) Limited does not warrant the timeliness, sequence, accuracy or completeness of this information. In no event
will Ismail Iqbal Securities (Pvt.) Limited be liable for any special, indirect, incidental, or consequential damages without limitation which
includes lost revenues, lost profits, or loss of prospective economic advantage resulting from the use of the information or for any omission
or inaccuracies resulting from the use of information from this market report.
Disclosures
Ismail Iqbal Securities (Pvt) Limited, hereinafter referred to as IISPL, acts as a market maker in the security(ies) mentioned in this report.
IISPL, its officers, directors, associates or their close relatives might have financial interests in the security(ies) mentioned in this report,
including a significant financial interest (1% of the value of the securities of the subject company). IISPL is doing business, or seeking to do
business, with the company(ies) mentioned in this report, and therefore receives/has received/intending to receive compensation from
these company(ies) in a non-research capacity. IISPL has previously or might in the future trade or deal in the subject company in a manner
contrary to the recommendation in this report, due to differences of opinion between the research department and sales desk or traders,
and investment time period differences. The analyst associated with the writing of this report either reports directly to the research
department head or is the department head. The department head in turn reports directly to the Chief Executive Officer of IISPL. The
analyst's compensation is not determined by nor based on other business activities of IISPL. Research reports are disseminated through
email or mail/courier to all clients at the same time. No class of client or internal trading person gets this report in advance of other
clients. Due to factors outside of IISPL's control, including speed of the internet, some clients may receive the report before others.
Monetary compensation of research analysts is neither determined nor based on any other service(s) that IISPL offers, and the
compensatory evaluation is not influenced nor controlled by anyone belonging to a non-research department. Further, the research
analysts are headed by the Head of Research, who reports directly to the CEO.
Recommendations are based on the following conditions:

Rating criteria Stance
(Target Price/Current Price - 1) > 10% Positive
(Target Price/Current Price - 1) < -10% Negative
9% > (Target Price/Current Price -1) > -9% Neutral
Investors should carefully read the definitions of all rating used within every research report. In addition, research reports carry an
analyst’s independent view and investors should ensure careful reading of the entire research report(s) and not infer its contents from the
rating ascribed by the analyst. Ratings should not be used or relied upon as investment advice. An investor’s decision to buy, hold or sell a
stock should depend on said individual’s circumstances and other considerations.
Valuation Methodology
To arrive at period end target prices, IISPL uses different valuation methadologies including
Discounted cash flow (DCF, DDM)
Relative Valuation (P/E, P/B, P/S etc.)
Equity & Asset return based methodologies (EVA, Residual Income etc.)
Analyst Disclaimer
The author(s) of this report hereby certifies(y) that this report accurately reflects her/his/their own independent opinions and views as of
the time this report went into publication and that no part of her/his/their compensation was, is or will be affected by the
recommendation(s) in this report. The research analyst or any of her/his/their close relatives do not have a financial interest in the
securities of the subject company aggregating more than 1% of the value of the company and the research analyst or their close relatives
have neither served as a director/officer in the past 3 years nor received any compensation from the subject company in the past 12
months. The Research analyst or her/his/their close relatives have not traded in the subject security in the past 7 days and will not trade
for 5 days post publication of the report.
Page 32
Commercial Banks
Contact Us
Branch Office:
C-132 (B), Miran Mohammed Shah Road,
KDA Scheme 1, Karachi, Pakistan
Stock Exchange Office:

407 Karachi Stock Exchange Building
Stock Exchange Road, Karachi, Pakistan
Executives
Ahfaz Mustafa Chief Executive Officer (92-21) 3430 2182-4 Ext: 101 ahfaz.mustafa@ismailiqbal.com
Equity Research Team

Shumaila Badar, CFA Head of Research Strategy and Banks (92-21) 3432 0375 s.badar@ismailiqbal.com
Kunal Lohana Senior Research Analyst Oil and Gas, Engineering (92-21) 3430 2184 Ext: 405 klohana@ismailiqbal.com
Ajay Kumar Research Analyst Construction Material (92-21) 3430 2184 Ext: 403 ajay.kumar@ismailiqbal.com
Deepak Kumar Research Analyst Fertilizer (92-21) 3430 2184 Ext: 406 deepak.kumar@ismailiqbal.com
Muhammad Junaid Research Analyst Autos, Power (92-21) 3430 2184 Ext: 404 m.junaid@ismailiqbal.com
Equity Sales Team

Azfar Bin Aman Head of Institutional Sales (92-21) 3430 2173-9 azfar@ismailiqbal.com
Fakhar Z. Khan VP Sales (92-21) 3246 1659 fzkhan@ismailiqbal.com
Muhammad Umair VP Sales (92-21) 3430 2173-9 m.umair@ismailiqbal.com
Adnan Hussain Equity Dealer (92-21) 3430 2173-9 adnan.hussain@ismailiqbal.com
Kamlesh Kumar Head of Business Development (92-21) 3430 2173-9 kamlesh@ismailiqbal.com
Corporate Finance Team

Talha Idrees Analyst-Corporate Finance (92-21) 3430 2184 Ext: 403 talha.idrees@ismailiqbal.com
Page 33

Implications of Budget and Regulations More Than Priced-In: Detailed Sector Report

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Implications of Budget and Regulations More Than Priced-In: Detailed Sector Report

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Commercial Banks

Detailed Sector Report

Further Rate Hikes to Boost Banks’ Earnings

Fig 1: 100-150bps hike in policy rate foreseen

4.0% May 2019

Source: SBP, IIS Research

External Position Warrants Further Rate Hike

Source: IIS Research

100% Actual Debt to GDP IIS Estimates IMF's Estimates

Fig 4: Foreign Exchange Reserves Expected to Stabilize in CY19

(all amounts in USD Fresh Goods

Source: Research Department

Monetary Tightening Across the Globe to Keep SBP on its Toes

Forecasted Changes in Interest Rates (in bps)

Imported Inflation Remains a Threat

1. Enhanced oil production in the US

BAFL and BAHL to Benefit Most from Interest Rate Hike

Deposit Mix Ranked as of December 2017

Fixed to Total Deposits Savings and Remunerative CA to Total Deposits

Non-Remunerative to Total Deposits

Source: Company Financial Statements

UBL’s Surplus on Revaluation of Investments Most Affected by

ABL BAFL BAHL HBL MCB NBP UBL

BAHL had the highest UBL had the highest

Estimated Sensitivity of Portfolio Value to Interest Rate Changes

Floating Rate PIBs to Somewhat Improve Yields

Attention Shifts to Capital Adequacy Again

SBP announces enhanced regulatory requirements

Additional CET1 requirement may affect BAHL and AKBL

10.0% 10.5% Max Req Dec'19

15.0% 14.5% Max Possible Dec'19

Dividends may be curtailed for banks on the border

Regulatory Risks High for the Sector

Impact of IFRS 9 Still Unclear

Banks Clear on New Liquidity Standards

LCR for Dec 2017 Minimum Requirement

NSFR for Dec 2017 Minimum Requirement

Low Earnings to Shield from Super Tax Implications in CY18

HABIB BANK LIMITED

ALLIED BANK LIMITED

Updating value to PKR 122.9 One year historical price performance

UNITED BANK LIMITED

BANK AL HABIB LIMITED

Updating value to PKR 87.20 One year historical price performance

NATIONAL BANK LIMITED

MCB BANK LIMITED

BANK Al FALAH LIMITED

Updating value to PKR 54.90

Recommendations are based on the following conditions:

Stock Exchange Office:

Equity Research Team

Equity Sales Team

Corporate Finance Team

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