Allied Bank Limited (ABL) reported 1Q2020 result today posting Profit after Tax (PAT) of PkR4.02bn or EPS of PkR3.51/sh, up/down 35%Y/Y. Along with the result, ABL announced PkR 2/sh as dividend. However, SBP in its notification today advised Banks/DFI/MFB to suspend dividend for quarters ending March and June 2020. The result was above market consensus and KASB estimates of PkR 3.47/sh and PkR 3.38/sh, by 1% and 4%, respectively.
Earnings growth was driven by growth in Net Interest Income, which was up 21% Y/Y to PkR11.6bn. We expect NII to decline and NIMs to shrink going forward as SBP has cut 425bps in the last one month, the impact of which will be seen in the next few quarters. Moreover, the readjustment of interest rate corridor and early repricing of advances to SME, Agri and consumer will negatively impact the core income of the bank.
Non-interest income also increased by 12%Y/Y to PkR2.8bn. The increase in the non-interest income was on account of PkR1.1bn gain sales of securities booked in 1Q2020 as compared to a loss of PkR4mn recorded in 1Q2019. Moreover, fee income also increased 11%Y/Y to PkR1.5bn. The gains are partially offset by decline in dividend income by 12%Y/Y to PkR378mn and loss of PkR188mn from dealing in foreign currency.
Provisioning expense came in at PkR681mn against a reversal of PkR203mn in 1Q2019. We are modelling ABL’s infection ratio to increase from 3.2% in 2019 to 3.8% in 2020. The management will provide more detail on the numbers ahead on its conference call.
Operating expenses increased 19%Y/Y to PkR7.2bn. Consequently, the C/I ratio for 1Q2020 came in at 50% compared to 46% in 4Q2019.
We think the key questions to ask management are: 1) reason for increasing operating expenses 2) and FX losses 3) and credit quality of the loan book.
ABL is currently trading at one year forward P/Bv of 0.72x. We have “Outperform” rating on the stock with TP of PkR110/sh providing an upside of 35%.
