ABL remains one of our top picks in the Pak Banking space: We reiterate Allied Bank Limited (ABL) as one of our top picks in the Pak Banking space, offering a potential upside of 42% to our Target Price of Rs148 along with a 2015E dividend yield of 7%. With a 2015E Tier-1 ROE of 25% (one of the highest ROE in the industry) vis-à-vis sector’s 2015E Tier-1 ROE of 21%, we believe ABL should trade at a premium to industry’s multiples whereas it trades at a 2015E P/B of 1.3x compared to sector’s P/B of 1.3x and our justified P/B of 1.9x. We expect ABL to be a major beneficiary of any uptick in private credit off-take and consumer lending growth due to the prevailing low interest rates given its high CAR ratio.
Portfolio to keep ABL shielded from declining interest rates: The current asset hpw allocation keeps ABL largely shielded from declining interest rates in 2015E, as 67% of the bank’s investments (highest in our coverage) remain unaffected. ABL boasts a strong investment portfolio including (1) 62% of total investments in high-yielding PIBs and (2) largest equity investment portfolio amongst private banks. The bank’s equity portfolio of Rs20bn yields a dividend income greater than the discount rate, while ~Rs11bn capital gains remain unrealized. However, likely shift from high yielding PIBs to lower returning assets coupled with low savings deposit mix exposes ABL to interest rate risk from 2016F onwards.
Improvement in IDR key highlight of 2014: In 2014, ABL reported 3% YoY higher earnings of Rs13.11/share, led by (1) growth in Net Interest Income (NII), (2) realized capital gains and (3) subdued operating costs. Meanwhile, ABL maintained its market share at 8% with primary focus on CASA improvement.