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[Amin Khan]

MCB Limited
April 25, 2012
RECORDER REPORT

Having an asset base of Rs 653 billion on December 31, 2011, MCB Limited is the fourth largest commercial bank in the country.

The Bank was incorporated in 1947.

The Bank's deposit base registered a CAGR of 13.8 percent during the past five years (CY11-06).

With Rs 491 billion of deposit base as on December 31, 2011, the Bank is holding nearly 8.4 percent of the industry's (all scheduled banks) total deposit base.

MCB provides myriad banking facilities, with focus on four business segments such as corporate finance, retail and consumer banking, trading and sales and commercial banking.

The Bank runs its operations through a network of 1,165 branches including 22 Islamic banking branches within Pakistan and eight branches outside the country.

Profits Capitalising on its low cost deposit base amid considerable growth in its investment portfolio, the Bank witnessed 15 percent jump in its profits in CY11 compared to the previous year.

The combined net profit for the group of top-five banks registered a growth of 20 percent during the same period.

MCB's operating revenues improved to Rs 52.6 billion in CY11, marking a jump of 22 percent compared to the last year.

Mark-up revenues An outstanding growth in mark-up revenues is symptomatic of an expansion in its asset base.

On the growth front, the Bank outdid peer banks given that MCB's top line grew by 24 percent, when the combined mark-up revenues for the group of five large banks increased by 17 percents.

MCB's investment portfolio increased by 49 percent; to Rs 316.7 billion at the end of CY11, relative to the same period of last year, compared to the industry's investment portfolio growth of 41 percent.

This lifted the Bank's Investment to Deposit Ratio (IDR) by 15 percentage points to 64 percent as on December 31, 2011, relative to the same period of the year before.

MCB's advances' portfolio stood at Rs 226 billion at the end of December 2011, down by 11 percent relative to the same period of the year before.

The Bank's Advances to Deposit Ratio (ADR) stood at 46 percent at the end of December 2011, a notch below the industry's average ADR of 53 percent.

Income from investments accounted for nearly 49 percent of the total mark-up revenues in CY11, as opposed to the share of 37 percent in CY10.

Mark-up expenses In keeping with expansion in deposit base, the Bank's mark-up expenses registered growth.

The Bank managed to increase its deposit base by 14 percent during the year-close to the industry's average growth rate-to Rs 491 billion as on December 31, 2011.

The Bank kept CASA ratio unchanged at last year's level of around 79 percent at the end of December 2011.

MCB enjoys one of the highest CASA ratios in the industry.

The average CASA ratio for the group of five large banks stood at around 68 percent at the end of December 2011.

Net interest income The net interest income accrued a gain of 21 percent.

While the cumulative net interest income for the group of large banks increased by 15 percent during the period under review.

The Bank's gross spread ratio eased down by 185bps to 65.3 percent in CY11 compared to the year before.

Even at the current level, MCB enjoys the highest gross spread ratio among the group of five large banks, with the group's average gross spread ratio at around 55 percent in CY11.

Non mark-up income and other expenses Higher non-mark-up income also contributed towards the bottom line growth.

The Bank's non-mark-up income increased by 29 percent in CY11 compared to the year before, aided by higher fee, commission and brokerage income, dividend income, income from dealing in foreign currencies and gain on sale of securities.

The Bank's non-mark-up income accounted for 15 percent of the total operating income in CY11.

While on the heels of high inflationary pressures, coupled with expansion in infrastructure, MCB's administrative expenses grew by 28 percent to around Rs 15.5 billion in CY11 compared to the last year.

MCB's operating revenues to expense ratio eased down to 3.0 in CY11 from 3.25 in CY10.

The Bank's operating revenues to expense ratio is highest among the group of five large banks.

Non performing loans Toxic loans grew by 9 percent to Rs 26.6 as on December 31, 2011, relative to the same period of last year.

The growth in NPLs amid decline in advances lifted the Bank's infection ratio by 179bps to 10.75 percent at the end of CY11, relative to the same period of last year.

The average infection ratio for the group of five large banks stood at 12.3 percent at the end of CY11, when the group's combined NPLs grew by 6 percent during the period under consideration to around Rs 238 billion at the end of CY11.

Rating The Pakistan Credit Rating Agency Limited has maintained the long-term and short-term ratings of MCB at "AA+" and "A1+", respectively.

"The ratings reflect MCB's strong financial profile mainly emanating from its sound liquidity, solid capitalisation and robust profitability.

The Bank, while following a cautious lending strategy, has maintained good asset quality.

The ratings factor in the Bank's strong market position, characterised by its established brand, and extensive branch network equipped with requisite technology infrastructure.

This benefits the bank in maintaining a low cost deposit base as compared to its peers" according to the rating agency.

[Amin Khan]

MCB Analyst Briefing Notes
MCB recently held its 1QCY12 analyst briefing. To recall, MCB posted consolidated NPAT of PkR5,749mn (fully diluted EPS: PkR6.25) in 1QCY12, up 12%YoY/52%QoQ alongside a cash dividend of PkR3/share (payout ratio: 48%). Key profitability drivers included a sharp reduction in loan provisions and higher fees & dividend income. In this regard, MCB’s asset quality improvement is leading peers – NPL stock for the bank is down 1.5%QoQ (NPL ratio: 10.4%) while coverage is now at 85%. Management is now confident enough to shed the FSV benefit completely (benefit earlier being availed on mortgage finance portfolio). Should management so desire, it can raise general provisions back to 1% of advances but we do not expect a change in the immediate term. Further positives include maintenance of strong CAR (>20%). Potential M&A activity aside (within Pakistan or abroad), this could persuade MCB’s BoD to raise the payout ratio where the CY11 payout ratio of peers NBP and UBL was 71% and 62%, respectively. Risks remain however; management does not expect systemic private sector credit offtake to depict a material improvement despite the recent increase in floor on savings a/c, which keeps near-term regulatory risk high. At current levels, MCB trades at a CY12F P/B of 1.49x, P/E of 7.3x and D/Y of 7.8%. While our target price of PkR169/share implies a Neutral stance, we will look to revisit our investment case shortly.
(AKD)

[Amin Khan]

MCB : Analyst briefing takeaways
MCB Bank (MCB) recently held its analyst briefing recently to discuss its 1Q2012 result and future outlook of the bank. To recall, the bank posted PAT of Rs5.6bn (diluted EPS: Rs6.14) in 1Q2012 compared to a PAT of Rs5.0bn (diluted EPS: Rs5.46) in the corresponding period last year, a growth of 12%YoY. The growth was primarily led by higher non funded income and a sharp reduction in loan provisions. MCB also announced a first interim cash dividend of Rs3 per share. Post this above expected result and revision in provision for loans estimates we have slightly revised up our full year (2012E) earning estimates for the bank by 4% to Rs24.14. The bank currently trades at 2012E PE and PBV of 7.2x and 1.6x, respectively and we maintain our ‘Hold’ call on the stock with a revised up target price of Rs190 from Rs183 previously.

1Q2012 financial highlights
Although, MCB’s net interest income (NII) declined by 2%YoY in 1Q, support to the bottom line came from a sharp decline in provisions and write offs (down 92%YoY) and higher non funded income (up 20%YoY). Non funded income rose on account of higher fee and commission income (24%YoY) along with increased divided income (168%YoY).



Operating expenses were fairly contained at Rs4.4bn rising in line with the inflationary trend. Overall, the bank reported earnings of Rs5.6bn (diluted EPS: Rs5.46), a growth of 12%YoY.

Asset quality improves, infection ratio at 10.4%
As far as the balance sheet is concerned, MCB’s deposit base grew by 4%QoQ to Rs512bn in 1Q2012 - with CASA rising by 1ppt to 82%. Investments too grew by 3%QoQ to Rs328bn while advances also inched up by 2%QoQ. Asset quality of MCB, improved as the NPL stock increased meagerly by 1.5%QoQ with infection ratio coming down to 10.4% from 10.8% in December 2011. With this, the bank’s coverage ratio also increased to 85% from 83.8% in December 2011.



Acquisition of HSBC Pakistan operations
Recent news reports suggest, HSBC is planning to divest from its Pakistan operations and MCB is among the 5 Banks interested in the deal. MCB has officially written to the SECP and SBP for approval of due diligence process, however, they are yet to receive any reply from the two authorities. The management is of the view that this deal is likely to be concluded in the latter part of 2H2012 or early 2013. No details of the deal were shared by the management.

Outlook
As far as the bank’s near term future is concerned, the management was of the view that the recent hike in the savings deposit rate is likely to hit the NIMs of the bank.
However, any rise in the monetary policy rate in the upcoming MPS in June (management expects a 50bps rise in DR) is likely to offset any such impact. On account of NPLs, we do not see any new accretions coming in as the bank is continuing with its prudent lending policy. Furthermore, any decrease in tax rates in the upcoming budget is likely to be beneficial for the banking industry as a whole. At current levels we maintain our ‘Hold’ call on the stock with a target price of Rs190. The stock trades at 2012E PE and PBV of 7.2x and 1.6x, respectively.


(JS)

[Amin Khan]

SBP turns down ABL, HBL, MCB & UBL for acquiring HSBC
The State Bank of Pakistan (SBP) has turned down the request of ABL, HBL, MCB & UBL to conduct due diligence for the acquisition of HSBC as it has termed them “Too Big to Fail” owing to their large market share in the banking sector. After the removal of four big banks only Silk Bank and KASB Bank are left in the queue to acquire HSBC, where Silk Bank would be required to bring fresh capital to acquire HSBC while on the other hand KASB possesses enough capital to buy HSBC from its Chinese investors. We believe the acquisition of HSBC by Silk Bank or KASB bank would result in increased deposit base and create synergies for these financial institutions thus providing them enough space to earn better returns on advances and investments.
(AF)