Morning Call about Bank Alfalah Limited Banks – Arif Habib Limited

Morning Call about Bank Alfalah Limited Banks – Arif Habib Limited

Karachi, August 31, 2012 (PPI-OT): Lower provisioning drives the bottom line growth

Profitability up by 22% YoY in 1HCY12

Bank Alfalah Limited (BAFL) posted net earnings growth of 21.9% YoY in 1HCY12 as provisioning against non-performing loans dropped by 41% YoY.

According to Arif Habib Limited, however, the net income of the bank in 2QCY12 stood at PKR 1,124 million (EPS: PKR 0.83) down by 6.5% QoQ compared to PKR 1,202 million (EPS: PKR 0.89). This decline in earnings on quarterly basis is primarily on account of a 12.8% and 9.6% rise in administrative and interest expenses, respectively.

Net interest income rises by 3.2%YoY

BAFL’s net interest income grew by 3.2% YoY in 1HCY12 as the bank’s average earning assets in 2QCY12 augmented by 2.9% QoQ. Net advances increased by 5% YoY to PKR 216 billion whereas interest earning investments have jumped by 26% YoY to PKR 165 billion. However, 8.6% YoY rise in interest expense resulted in muting overall growth of net interest income to PKR 9.1 billion. The bank’s deposits in 2QCY12 rose by 4.4% YoY to PKR 422 billion. This led bank’s Advances-Deposits Ratio (ADR) to rise from 52.8% (1QCY12) to 54.3% in 2QCY12 while funds allocation remained skewed towards investments with IDR, growing to 39.3% in 2QCY12 from 41% (1QCY12).

Non-interest Income rise by 12% YoY

Non-interest income of the bank has augmented by 12% YoY to PKR 3.1 billion in 1HCY12. This rise is primarily due to 2.3x YoY jump in income from dividend income followed by 11.5% YoY increase in fee and commission income.

Financial Highlights            
PKR million 2QCY12 1QCY12 QoQ 1HCY12 1HCY11 YoY
Interest income

11,599

11,145

4%

22,743

21,377

6%

Interest expense

7,124

6,500

10%

13,624

12,540

9%

Net Interest income

4,474

4,645

-4%

9,119

8,837

3%

Total provisioning

262

718

-64%

980

1,664

-41%

Non Interest income

1,616

1,463

10%

3,079

2,749

12%

Administrative expenses

3,983

3,532

13%

7,515

6,772

11%

Profit before tax

1,755

1,824

-4%

3,579

3,074

16%

Net income

1,124

1,202

-7%

2,327

1,908

22%

EPS

0.83

0.89

-7%

1.72

1.41

22%

Source: Company Accounts and AHL Research

Classified advances rise by 5% YoY

The bank’s Non-performing Loans (NPLs) have increased from PKR 421 billion in 1HCY11 to PKR 443 billion, a rise of 5% YoY while on QoQ basis it has augmented by 7% QoQ. However, Gross Infection Ratio declined from 9.56% in 1QCY12 to 9.07% by end of 2QCY12 due to 8% QoQ rise in Advances. The bank’s coverage ratio stands at 59.5% in 2QCY12 (compared with 60.7% of 1QCY12) on account of 81% YoY increase in provisions against NPLs 1HCY12.

Recommendation

At yesterday’s closing price of PKR 17.3/share, the scrip is offering an upside potential of 27.5% to Arif Habib Limited’s Dec-12 target price of PKR 22.1/share and is trading at CY12E P/BV and P/E of 0.9x and 5.6x, respectively.

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