-Bank Alfalah Limited (BAFL) reported 1Q2020 result today posting Profit after Tax (PAT) of PkR2.8bn or EPS of PkR1.59/sh, down 10%Y/Y and 18%Q/Q. As expected BAFL skipped cash dividend for March quarter. The result is below market consensus of PkR2.00/sh and KASB’s estimate of PkR1.8/sh by 20% and 11% respectively. We expect the stock to remain under pressure due to below expectations result driven by higher provision expense and operating cost.
-Net Interest Income grew 6%Y/Y and 2%Q/Q to PkR11.8bn. We believe NII would decline going forward due to 425bps cut in the policy rate, readjustment of interest rate corridor and early repricing of advances for SME, Agri and consumer.
-Non-interest income grew 18%Y/Y to PkR2.7bn. Within Non-Interest income, dividend income increased 15%Y/Y to PkR87mn, income from dealing in foreign currency grew 1.2xY/Y to PkR1.05bn. These gains were partially offset by loss on sales of securities, which came in at PkR46mn. We suspect this is due to underperformance of the equity market during the period. Moreover fee income also decline 2%Y/Y to PkR1.65bn.
-We think the two key risk factors for Bank Alfalah which the market is concerned about is operating costs and credit quality. Operating expenses increased 19% to PkR8.2 and consequently the bank reported a cost to income ratio of 57% in 1Q2020 compared to 51% in 1Q2019. The main reason of higher operating expenses is 50 new branches, increase in the IT & staff cost and higher regulatory and compliance cost.
-Provisioning expense also increased by 2.4xY/Y to PkR1.5bn. We suspect, higher provision is partially on account of impairment on equity portfolio. Moreover, we are modelling BAFL’s infection to increase form 4.2%in 2019 to 5.4% in 2020 due to higher ADR.
-We think the key questions to ask management are: 1) Outlook for credit quality 2) expected decline in fee income 3) Guidance on operating expenses.
-We have Outperform rating on BAFL with a target price of PkR43/share. The stock is currently trading at one year forward P/Bv of 0.62x
