MCB Bank Limited (MCB) reported 1Q2020 result today posting consolidated Profit after Tax (PAT) of PkR 6.6bn or EPS of PkR 5.59/sh, up 33%Y/Y. Along with this, MCB paid out PkR 5.00/sh as dividend. The result is above market consensus of PkR 5.04/sh by 11%. KASB’s estimate was PkR 5.62/sh. We expect the stock to perform on the back of above expectations result driven by lower provision and higher non-core income.
Earnings growth was driven by growth in Net Interest Income, which was up 21% Y/Y to PkR17.3bn. 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 for SME, Agri and consumers will negatively impact the core income of the banking sector.
Non-interest income also increased 12%Y/Y to PkR4.4bn.The surge in the non-interest income was on account of increase in income from dealing in foreign currency which was up 81%Y/Y to PkR835mn (To recall PkR depreciated by approx. 7.5% in last 15days of the quarter). Moreover, share of profit from associates increased 66%Y/Y to PkR261mn.
We think the key factor that market was concerned about was the credit quality. Provisioning expense came in at PkR780mn against a reversal of PkR 448mn in 1Q2019. We are modelling MCB’s infection ratio to increase from 8.4% in 2019 to 8.9% in 2020. The management will provide more detail on the numbers ahead on its conference call.
Operating expenses increased by 1%Y/Y to PkR9.8bn. Consequently, the C/I ratio for 1Q2020 came in at 45% compared to 53% in 1Q2019.
We think the key questions to ask management are: 1) quality of the loan book 2) expected decline in fee income due to lockdown and 3) quantum of gains on PIB portfolio.
MCB is currently trading at one year forward P/Bv of 1.1 along with ROE and dividend yield of 14.2% and 12% respectively. We have “Outperform” rating on the stock with TP of PkR215/sh providing an upside of 30.3%.
