FABL;One offs, subdued 2QCY14 earnings, but healthy outlook still intact - BUY 2Q earnings drag 1HCY14, EPS to PKR 0.71/share, down by 2%YoY FABL posted an EPS of PKR 0.71/share (PAT: PKR 739.5mn) down by 2%YoY. During the 2QCY14, higher operating expense along with higher provisioning charge dragged the company’s bottom-line to PKR 307.6mn (or PKR 0.29/share). In addition, the bank booked in tax reversals owing to deferred taxation. 2QCY14 result is a mixed bag, thankfully carrying more positives. Financial Highlights PKRmn 2QCY14 2QCY13 YoY 1HCY14 1HCY13 YoY Interest Income 3,359 2,187 54% 6,680 4,478 49% Non-Interest Income 1,133 1,194 -5% 2,205 2,240 -2% Total Income 4,492 3,382 33% 8,884 6,718 32% Opex 3,419 2,756 24% 6,544 5,316 23% PPOP 1,074 626 72% 2,341 1,402 67% Provisions 833 21 3.9x 1,472 478 208% Pre-tax Profits 242 605 -60% 869 924 -6% Tax (66) 113 -158% 129 169 -23% Post-tax Profits 308 492 -37% 739 755 -2% EPS 0.29 0.47 0.71 0.72 Source: AHL Research, Company Accounts Higher Interest yield on earning assets, will e more reflective in subsequent quarters FABL’s interest income earned grew by +17%YoY to PKR 15.7bn during the 1HCY14. When compared to recent banking sector results, this is a slight let down. However, as per our understanding, the bank was late in taking up exposure in PIBs, at the very end of Jun-14. But what makes this exciting is that this was the time when yields were trading at high levels around ~13.26% (10YR). Therefore, the interest income impact of this action will be more visible in 3QCY14. Clever deposit strategy, keeping cost of funding low Also, the bank’s low interest expenses, all credits to the management’s aggressive strategy to pursue low cost deposits, was restricted to a mere ~1%YoY growth to PKR 9.0bn, the lowest we have seen in any of the major banking results during 1HCY14. As a result, net interest income increased by +49%YoY to PKR 6.7bn. Non-interest income of the bank reduced by 2%YoY to PKR 2.2bn and brought total income to PKR 8.9bn (+32%YoY). Coverage ratio up, pushing provisioning charge Bank’s provisioning charge increased to PKR 832mn, higher than what we had estimated (~PKR 640mn). We do not expect any major changes to bank’s infection ratio (~16% on average), rather this suggests bank’s increasing coverage ratio (est. at ~75%, by Dec-15), which by Dec-13 stood at 71.5%. One-off admin expenses A +27%YoY growth in administration expenses to PKR 6.6bn is indicative of one-off expense booked in relation to Voluntary Separation Scheme (VSS) given to employees in 2QCY14 (amount PKR ~450mn) and outgoing CEO severance pay in 1QCY14 (amount PKR ~400mn). Excluding these particular one-offs, administrative expenses were up by +11% in line with market trend. As per industry sources the bank with new CEO, has recently laid-off ~850(as we had earlier estimated) of its contractual and permanent staff. Admin. Expense and VSS expense PKRmn 1HCY14 1HCY13 YoY Administrative Expense 6,556 5,143 27% - CEO* 400 - - VSS* 450 - Admin. Expense (ex-one offs) 5,706 5,143 11% No. of Employees* 850 Avg. Per Employee VSS cost (PKR) 529,412 Source: AHL Research, Company Accounts, *estimates Recommendation In our view, 2QCY14 financial result should not be viewed negatively rather it should be taken as an opportunity. Firstly, since one-off expenses related to VSS and CEO remuneration was something known industry wide, henceforth both cost are incorporated in current price of scrip. Secondly, this means future outlook of the bank is rather promising, as it would lower administrative expenses and in tandem with refined asset strategy, the bank is definitely poised for upbeat earnings growth. Our Dec-14 target price for FABL remains intact at PKR 20.5/share, which at current price of PKR 15.9/share offers a good 29% return.
Posted on: Fri, 05 Sep 2014 10:14:38 +0000
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