Dear Clients,

Bank Alfalah Limited (BAFL) held its conference call today to discuss financial performance of 1QCY21 and provide an outlook on the bank’s plans. BAFL posted PAT of PKR 3.5bn (EPS: PKR 2.0, up 23% YoY) as against PKR 2.8bn (EPS: PKR 1.6) in SPLY. The result was above street consensus on account of lower provisioning expense and higher than NFI.

Key takeaways

– Bank Alfalah registered a deposit growth of 21% YoY clocking in at PKR 913mn. Current account deposits rose 25% YoY and CASA mix of the bank arrived at 78.2% as opposed to 77.9% in the preceding quarter

– NFI increased by 41% YoY mainly on account of i) 13% YoY growth in fee income, ii) capital gains of PKR 1.1bn, and iii) 53% YoY jump in dividend income.

– To highlight, BAFL recorded lower provisioning expense of PKR 216mn that lent further support to the bottom-line as opposed to PKR 1.5bn SPLY

– BAFL’s ROE and ROA clocked in at to 17.6% and 1.0% in 1QCY21, respectively as opposed to 14.7% and 1.1% in corresponding period last year

– As of Mar-end, BAFL’s CAR stood at a healthy 15.6%

– BAFL recorded lower effective tax rate of 35% driven by deferred tax adjustment from the implementation of tax ordinance released in Feb’21, citing super tax as a going concern

– The advances grew by 16% YoY to PKR 583mn and the TERF drawdown for BAFL remained at PKR 55bn

– BAFL’s investment portfolio grew by 61% YoY driven by PIBs (PKR 120bn, up 64% YoY) and T-Bills (PKR 230bn, up 62% YoY). The average yield on PIBs is 10.15% with a duration of 3.24%

– During 1QCY21, the coverage ratio for the bank improved to 94.0% and infection ratio improved to 4.2% as opposed to 4.5% SPLY. The bank has an ample amount of PKR 4.25bn of General Provisioning from COVID19 first wave

– BAFL opened 34 new branches in the quarter (primarily Islamic) and cost to income ratio improved to 60%

– We have an Outperform rating on BAFL with a target price of PKR 37/sh. The stock offers a dividend yield of 13% and is currently trading at a one year forward PB of 0.6x.

Q&A

1. What is the growth target for advances?

The bank is expecting annual growth of 10% in its loan portfolio primarily fueled by TERF facility. To highlight, BAFL’s TERF limit amounts to PKR 55bn and makes it amongst top 3 banks.

2. When is the interest rate hike expected?

The management has revisited its interest rate outlook and does not foresee any hike in interest rate this year as opposed to earlier guidance of an increase of 50-100bps in 4QCY21.

3. How would the acquisition of SILK’s consumer portfolio add value?

The bank plans to enhance its consumer portfolio and sees it as an opportunity to grow. However, it is too early to comment on the value enhancement and it would be clear after due diligence.

4. Is there going to be a compression in NIMs going forward?

The bank expects NIMs to remain at the same level and it depends on interest rate. BAFL plans to offset the margin compression through volumetric growth.

5. Is the trend in capital gains sustainable?

The bank recognized capital gain on international portfolio as it has a sizeable portfolio in Bangladesh. This trend would not be seen in the subsequent quarters.

6. When would TSA and IFRS-9 be implemented?

There is no guidance on IFRS-9 and the bank expects something in writing by 2QCY21. With regards to TSA, the implementation of phase 2 would take time, however, the impact is negligible for BAFL.

7. What is the bank’s strategy on recognizing surplus revaluation?

BAFL has PKR 3.6bn MTM unrealized gain on government securities and equity portfolio as of Mar’21. The bank would assess interest rate outlook before recognizing this in coming quarters.

8. What is the dividend payout policy?

The bank is comfortable on CAR front and plans to keep its dividend policy consistent in the future.

9. What is the targeted cost to income ratio?

It would stay close to 60% and there would be an addition of 70 branches this year.

KASB Research