Allied Bank Limited

PKR106.9 - BUY

Abdul Rehman Siddiqui Right mix of growth and stability

abdulrehman.siddiqui@alfalahsec.com
Multiple reasons to like ABL
+92-21-35645090-95 (Ext: 340)
We revisit our investment case for Allied Bank having incorporated latest macro
assumptions and revise up our Dec-19 price target to PKR126.7/sh (up from
PKR119/sh). Our liking for the scrip is premised upon: 1) healthy NIMs
expansion resulting in EPS accretion of 27/42% in CY19/20E respectively, 2)
excellent recoveries of bad loans where the bank has on average reversed an
impressive 9.6% of its NPL’s stock, only behind MCB at 14.6%, 3) strong capital
adequacy where the CAR of the bank stands at 22.4% (as of 3QCY18) against
industry average of 15.9% and 4) stable dividend pay-out.
31 December 2018
NIMs expansion to fuel earnings growth
Pakistan The policy rate hikes made in the outgoing calendar year will start to reflect in the
Banks bank’s financial statements from early next year. Overall, NIMs are expected to
expand by 110bps by CY20. As a result, we see the bank to deliver earnings
growth of 27/42% in CY19/20E to PKR13.73/19.44 per share respectively
Reuters ABL.KA
Bloomberg ABL PA (assuming CY18 earnings to close at PKR10.85/sh). We see the bank to post
4QCY18 EPS of PKR2.02 down 19.1/23.8% QoQ/YoY respectively. The QoQ
Priced on 28 December 2018
KSE100 @ 37,167.0 decline is primarily owed to higher admin expense expectation, whereas YoY
decline is owed to lower provision reversal expectation.
12M hi/lo PKR107.5/77.4

Dec-19 price target PKR126.7 Healthy capital adequacy footing provides us comfort over the longer term
±% potential +18.5% Furthermore, in an year where the banking sector has been marred by a number
Shares in issue 1,145.1 m of one-offs with large banks being particularly affected, ABL has managed a
Free float 15.0% stable income stream alongside an inerratic dividend pay-out of 75% (assuming a
Mkt. cap USD881.6m final dividend of PKR2/sh). Going forward, we expect the bank to continue a pay-
out of 64% in the upcoming years. It is also worth highlighting that the bank’s
3M ADV USD0.1m
exceptional capital adequacy footing provides us comfort that maintaining such a
pay-out does not seem farfetched given risk weighted CAR of the bank stands at
22.4% (as of 3QCY18) against industry average of 15.9% (as of 3QCY18).

A proven track record of excellent NPL recoveries

ABL has proven track record of excellent recoveries from bad loans where the
bank has on average (CY11-17) reversed an impressive 9.6% of its NPL’s stock,
only behind MCB at 14.6%. It is also worth highlighting that ABL has admirable
loan book quality; NPLs have seen a consistent downward trend declining from
PKR19.8bn in CY14 to PKR16.2bn as of 3QCY18. Although, we remain sceptic
that the new year will probably bring along fresh NPL’s however, ABL’s superior
reversals history provides a very potent upside risk to our valuations.

ABL vs KSE100 performance

Financials
Year to 31 Dec CY16 CY17 CY18F CY19F CY20F
EPS (PKR) 12.84 11.29 10.85 13.73 19.44
DPS (PKR) 7.00 7.00 8.00 9.00 12.50
BVPS (PKR) 88.92 94.37 91.20 95.71 103.25
P/Ex 8.33 9.47 9.86 7.79 5.50
P/BVx 1.20 1.13 1.17 1.12 1.04
Dividend Yield (%) 6.55 6.55 7.48 8.42 11.69
Earnings growth (%) -4.01 -12.07 -3.89 26.53 41.61
Source: PSX, Bloomberg ROA (%) 1.42 1.12 0.98 1.17 1.50
ROE (%) 15.32 12.32 11.69 14.69 19.54
www.alfalahsec.com Source: Company Accounts, Alfalah Research

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 Right mix of growth and stability ABL - BUY

Recommendation We revise up our Dec-19 price target by 6% to PKR126.7/sh. At our revised price
target ABL offers total return of 26.9% (18.5% upside and 8.4% dividend yield);
hence we reiterate our BUY call on the scrip.

Key valuation methodology Dec-19 TP; PKR126.7/sh using Two staged Gordon growth model.

Downside risks Lower than expected increase in interest rates can result in less than anticipated
NIMs expansion, we see interest rates to lift up to 12.0% by June-19.

In case of worsening of economic conditions delinquencies can spike. This can

impact our earnings and valuations to the downside.

Extension in super tax can also reduce our earnings and valuation forecasts. We
have built in super tax till 2020 in line with government recommendation.

Pakistan has yet to comply with IFRS9 and this could lead to larger than expected
rise in NPLs.

Upside risks On the contrary an above anticipated hike in interest rates can result in further
NIM expansion and earnings increase.

Continuation of reversals from the loan book.

31 December 2018 abdulrehman.siddiqui@alfalahsec.com 2

 Important disclosures ABL - BUY

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31 December 2018 abdulrehman.siddiqui@alfalahsec.com 3