meezan bank ltd. (mebl) unmatched franchise value

Meezan Bank Ltd. (MEBL)

Unmatched franchise value 19th October 2020

REP-070

Arif [email protected]+92-21-35309113

mailto:[email protected]

Meezan Bank – Jun’21 Target Price: PKR 105.5/share | upside 26%

We initiate coverage on Meezan Bank Ltd (MEBL), the largest Islamic bank in Pakistan, with a Buy stance and assign a Jun’21 Target Price ofPKR 105.5/share. The bank has historically traded at a premium to its peer banks on account of its unique franchise value which hastranslated into higher-than-peer growth and low cost funding due to sticky nature of its client base (70% individuals and 27% privatesector). Recent sharp decline in SBP policy rates will put a temporary halt in profitability growth of the bank, however, we see this as anopportunity for long term investors to accumulate MEBL. With expected sustainable ROE of 23%, we believe at current levels (Jun’21E P/B:1.69x) the bank offers an upside of 26%.

Sustaining high growth: Meezan bank has been growing at almost twice the pace compared with the rest of the banking sector. Since 2013,it has almost quadrupled its lending book and its deposit base (lending up 3.9x and deposits up 3.6x). Lending book has delivered a 6yr(CY13-19) CAGR of 25.3% versus 12.3% for the banking sector whereas its deposit base has grown at a 6yr CAGR of 22% over this periodcompared with sector’s growth of 11.7%. We believe this higher-than-sector growth will continue in the foreseeable future, albeit at aslower rate, on account of its leadership position in Islamic banking space

Unmatched deposit franchise: Islamic banking model allows generation of low cost deposit due to non-applicability of Minimum DepositRate (MDR) on savings account (due to unavailability of short term shariah compliant T-bill equivalent). SBP set a floor on MDR in 2008 forconventional banks which ensures that depositors get a certain minimum return on their savings accounts. At present, MDR is set at 5.5%(50bps below SBP Repo Rate). MEBL, like other Islamic banks, is exempt from paying the MDR and thus generates low cost funding byoffering substantially less than the MDR on savings accounts

Growth in Islamic Investments: Issuance of Energy Sukuk 1 and 2 over the last couple of years has opened up investment options forIslamic banks to park liquidity in high quality government papers, albeit at floating rates. With fiscal deficits to continue, government is toremain a large net borrower in the foreseeable future. We believe SBP and Govt. will encourage development of Islamic capital market byissuing more govt. papers (sukuks) in the coming years and also benefit from relatively cheaper liquidity pool available with Islamic banks

Asset quality remains sublime: Infection level at 2.3% (vs 8.9% for the sector) and provisioning coverage at 130% talks highly of quality ofits balance sheet. Risks around NPL formation however remains elevated in these times as MEBL’s credit growth was sharp over the last5years (23% CAGR). Accordingly we have built in higher NPL formation and expect infection level to rise to 2.6%/3.2% in CY20/21 beforedeclining slightly to 2.9% by CY25. We have assumed coverage level to remain high at 125% over our forecast period

2

MEBL - Key Performance Indicators

290 380

472 564

673 785

933 1,045

3.8%4.6%

5.1% 5.0%5.4%

5.9%6.4%

6.4%

-1%

1%

3%

5%

7%

-

300

600

900

1,200

1,500

CY13 CY14 CY15 CY16 CY17 CY18 CY19 Jun'20

Market share of deposits

Deposits (PKRbn) Market share of deposits

128176

208

312

420

513494 478

3.1%

3.9%

4.3%

5.6%

6.4% 6.5%6.1% 5.8%

0%

2%

4%

6%

8%

0

200

400

600

800


Market share in loans

Loans (PKRbn) Market share of loans

351428

551 571 601660

760798


Branches

10.0%

20.0%

30.0%

40.0%

CY13 CY14 CY15 CY16 CY17 CY18 CY19

ROE (MEBL vs 8 largest banks)

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%


Share in sectors’* profitability

MEBL

8 largest

banks

30%

35%

40%

45%

50%

55%

60%

65%


Cost-Income

Sector MEBL

Fastest to reach PKR 1tn deposits Last 6yr CAGR of 22% vs 12.5% for the sector

Market share in loans has doubled over the last six years Loan book growth has slowed down over the last two

years as availability of govt. backed sukuks increased

Growth in branch network has allowed MEBL to capture retail deposits which remains one of the main drivers of profitable growth

Consistently delivered superior ROE vis-à-vis other commercial banks

During high interest rate environment, MEBL delivers substantially higher ROEs than conventional banks due to no ‘minimum deposit rate’

MEBL’s increasing market share across all benchmarks has resulted in sharper rise in profitability compared to the overall sector

MEBL’s market share in profit of *top 8 banks has consistently risen over the last several years and currently stands at c.12%

Cost-Income ratio has fallen sharply over the last couple of years on account of positive jaws (faster income growth)

We expect long term cost-income ratio to stabilize between 50%-54%

3Source : Company Accounts, Fortune Research

Islamic Banking continues to capture market share

Islamic banks asset base has grown at 5yr CAGR of 22.2%

Source: SBP, Fortune Research

Islamic banking has continued to capture market share. Over the last

five years alone, Islamic banking’s market share (by asset base) has

grown from 9.8% to 15.3%

Islamic banks deposit base has grown at 5yr CAGR of 21.1%

Source: SBP, Fortune Research

Similarly, Islamic banking deposit base has also grown at a much

faster pace compared with overall banking sector (last 5yr CAGR of

21.1% vs 12.0% for the entire banking sector)

4

9.60%

15.30%

6.0%

9.0%

12.0%

15.0%

18.0%

21.0%

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Market share

10.40%

16.93%

6.0%

9.0%

12.0%

15.0%

18.0%

21.0%

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Market share

Pure play Islamic banks: A snapshot

MEBL has led the growth in Islamic banks

Source: Company Accounts, Fortune Research

Meezan Bank has been the leader in Islamic banking due to its first

mover advantage and has galloped its way to leadership status with

an unparalleled position

Other pure play Islamic banks have also shown healthy growth in

balance sheet and we expect these banks to continue to register

above average growth rate to sector, going forward

Snapshot financials of pure play Islamic banks

Source: Company Accounts, Fortune Research

BIPL is a distant second Islamic bank behind Meezan Bank. DIB with

similar asset base as BIPL has been generating sustainable ROE of

14-16%over the last two years.

MEBL has been generating ROE in excess of 20% over the last many

years….

5

CAGR (CY15-19) DIB Al Baraka MEBL BIPL

Assets +13.9% +16.8% +20.5% +12.9%

Investments +27.6% +8.7% +11.4% +11.4%

Loan book +14.1% +12.2% +24.2% +17.7%

Deposit +11.3% +16.0% +18.6% +10.6%

CY19 (PKRmn) DIB Al Baraka MEBL BIPL

Assets 264,639 161,982 1,121,258 283,096

Investments 49,157 24,195 225,646 55,194

Loans 177,922 75,444 493,775 131,775

Deposits 209,952 129,654 932,579 228,827

Equity 22,163 12,732 59,015 19,696

ROE 16.0% (1.5%) 30.7% 6.8%

Key Financials and Market Data

Financial Highlights (PKR'mn) CY18A CY19A CY20E CY21E CY22E CY23E CY24E CY25E

Net Interest Income 28,168 46,539 56,919 50,431 60,026 69,413 80,210 89,588

Fee Income (exc. gains) 7,455 9,738 8,650 8,639 9,531 10,393 11,335 12,365

Reversals / (Provisioning) (1,168) (4,186) (4,862) (5,019) (1,735) (1,641) (2,176) (1,883)

PAT 8,962 15,232 19,116 12,858 18,595 22,360 26,481 30,139

EPS (PKR) 6.97 11.84 13.51 9.09 13.14 15.80 18.72 21.30

DPS (PKR) 3.1 4.9 3.5 2.7 3.9 4.7 5.6 6.4

PER (x) 12.0 7.1 6.2 9.2 6.4 5.3 4.5 3.9

P/BV (x) 2.94 2.01 1.80 1.58 1.35 1.14 0.97 0.83

ROA 1.0% 1.5% 1.6% 0.9% 1.1% 1.2% 1.2% 1.2%

ROE 23.8% 30.7% 30.6% 18.3% 22.8% 23.3% 23.5% 22.7%

Tier 1 capital ratio 12.0% 12.9% 13.1% 12.5% 12.3% 12.5% 12.8% 13.4%

Total CAR 14.5% 16.6% 15.2% 13.4% 13.0% 13.7% 13.7% 14.2%

6Source: KSE

52 Weeks Relative Performance

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140

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MEBL KSE100

Source: Company Accounts

Shareholding Pattern (as of CY19)

35.25%

30.00%

9.32%

25.43%

Noor FinanicialInvestment Co.Kuwait

Pakistan KuwaitInvestmentCompany (Pvt.)LtdIslamicDevelopmentBank Jeddah

Others

Valuation

Target PER valuation

Average EPS (CY21-24) 14.2

Target Multiple(x) 7.1x

Target Price (PKR/sh) 100.7

Exit multiple valuation

CY24E EPS 18.7

Exit PER 8.0x

Exit Value (Dec'24) 149.7

PV of dividends 12.4

PV of Exit value 91.8

TP based on Exit Multiple (PKR/sh) 104.2

P/B valuation

Sustainable ROE (Tier 1) 23%

Cost of Equity 15.3%

Long term growth rate 9.0%

Jun'21 BVPS (excl. surplus) 46.4

Implied P/B 2.25x

Surplus on revaluation / share 3.39

Target Price (PKR/sh) 108.0

Valuation Summary Multiple Target Price (PKR) Key assumptions

Implied P/B 2.3x 108.0 • ROE: 23%, Cost of Equity: 15.3%; growth rate: 9%

Target PER 7.1x 100.7 • Average next 4yr EPS : PKR14.2

Exit Multiple 8.0x 104.2 • 8.0x exit PER multiple

Residual income 109.1 • Terminal CoE : 16%; growth rate: 9%

Blended Target Price (PKR/sh) 105.5

Residual income (PKR mn) 2020E 2021E 2022E 2023E CY24E CY25E

PAT 19,116 12,858 18,595 22,360 26,481 30,139

Cost of capital 9,170 10,520 12,473 15,314 18,188 22,150

Excess return 9,946 2,338 6,123 7,045 8,293 7,989

PV of Excess return 9,946 2,180 4,965 4,914 5,008 4,097

PV of Terminal Value 67,488

PV of Excess Return 21,164

2021E (Jun) BV 65,634

PV of Equity 154,285

Equity value (PKR/sh) 109.1

Risk free rate : 9.3% Market risk premium : 6.0% Cost of Equity (over forecast period) : 15.3% Terminal cost of equity : 16.0% Long term growth rate: 9.0% Policy rate: 7.8%/8.5%/8.5% for CY21/22/23

Assumptions

7

Unique deposit franchise…

Aggressive branch network : Bank has added over 220 branches over the past 4 years andcontinues to strengthen its brick and mortar business model. During 1QCY20 it addedanother 14 branches and has planned to add a total of 150 branches during the currentyear (as per analyst briefing earlier in the year). However we believe network expansioncould be slightly lower than originally planned due to countrywide lockdown on account ofCOVID-19 – though we still expect the bank to add about 70 branches during the yearwhich will take total network to 830+ branches by year end (June’20: 798)

Lower cost of funding: Islamic banking model allows generation of low cost deposit due tonon-applicability of Minimum Deposit Rate (MDR) on savings account. At present, MDR isset at 5.5% (50bps below SBP Repo Rate). MEBL, like other Islamic banks, is exempt frompaying the MDR and thus generates low cost funding by paying substantially less than theMDR on savings accounts (currently we estimate MEBL to be paying c.3.25% on savingsaccounts)

Phenomenal growth in deposits: Over the last 5 years, MEBL’s deposit base has grown at aCAGR of 20%, almost double the pace compared to the rest of banking sector. It has alsobecome the fastest bank to record PKR 1tn in deposits, registering a phenomenal 36%CAGR since inception in 2002. More importantly the growth in deposit has not come at theexpense of cost of deposit, rather current account mix has continued to improve (from31.5% in 2015 to 36% in 2019) and savings accounts of Islamic banks are exempt from MDRregulation (in absence of govt. backed shariah compliant short term instruments like T-bills), which Islamic banks have been able to work for their advantage. At the same time,the relatively costlier term deposit mix had reduced from 28% to 26% over the last 4 yrs.

551 571 601 660

760 798

CY15 CY16 CY17 CY18 CY19 Jun'20

Branches

3.38% 2.37% 2.31%2.63%

5.23% 4.84%

7.18%5.85% 5.75%

7.12%

11.97% 10.87%


Funding cost remains a key advantage...Cost of funds SBP policy rate

472 564

673 785

933 1,045

856 988

1,120 1,190 1,227 1,310


Sharp deposit growth...

Deposits (PKRbn) Deposit / branch (PKRmn)

8Source for charts : Company Accounts, Fortune Research

Asset mix to continue to improve…

Historically high ADR due to lack of investments options…things to change: Over the pastseveral years, due to a lack of Islamic investment options, MEBL has relied on aggressiveloan growth to deploy liquidity. Loan growth over the past 5 years has averaged 23%p.acompared with 12.8% for the banking sector. These phenomenal numbers have beenachieved despite a slowdown in CY19 where loan book actually recorded a decline of 3.7%YoY (banking sector loan book +3.5% YoY).

Investments options to grow going forward: Unlike its conventional banking peers, MEBLcannot park its liquidity in PIBs or T-Bills and has to rely on either government sukuks orshort term placements with other banks which carries floating rate. Investment optionshave started to open up with the launch of Pakistan Energy Sukuk (PES) 1 and 2. Last year,the bank was the lead participant with PKR 85bn ticket in the PKR 200bn PES 1. We expectmore such issuances to continue as it benefits both the government (by tapping relativelycheaper liquidity pool available with Islamic banks) and the Islamic banks which will happilydeploy liquidity in government backed papers

This would allow credit growth to be more selective: With more options available now forMEBL to park its liquidity, the bank can look at being more selective on its loan bookexpansion. Given the lower RWA associated with government backed papers vs loans toprivate sector, we believe need to raise fresh capital will be limited (we have incorporated anew ADT1 issuance of PKR 5bn in 4Q’21). MEBL, in order to maintain its capital ratios whileat the same time growing at rapid pace has had to issue 6% rights in 2017 followed by aPKR 7bn ADT1 in 2018

44.0%

55.2%

62.4%65.3%

52.9%

45.8%


ADR

146 130 119 124

226

306


Investments (PKRbn)

0%

5%

10%

15%

20%

25%


Capital Ratios have continued to strengthen...

Tier 1 Ratio Total CAR


Asset quality remains sublime….CY21 to test loan book

Known for its low infection level : MEBL is well known in the industry for its low NPL ratio(1.8% as of Dec’19 versus c.9% for the sector). Provisioning coverage has also been abovepar at 140% (last 5yr average 129%) which demonstrates management’s prudent approachtowards building buffer for rainy days (at the expense of penalizing true profitability).

2021 to test loan book quality: Sharp loan book growth over the last many years will betested over the next 12-24 months as the country undergoes sharp economic slowdown onaccount of COVID. We incorporate infection level to rise to 2.6% by Dec’20 and furtherincrease to 3.0% by Dec’21 before receding gradually to 2.8% by 2024. Accordingly we havebuilt in higher credit cost for CY21/22 at PKR 4.8bn/5.0bn. Given that the bank hasremained prudent in its provisioning practices and has maintained coverage of 130% (last5yr avg), we expect a slight drop in coverage levels in CY20/21 to support the bottom line

Consumer book amongst the largest in the industry and relatively secure : Meezan hasbeen amongst the most aggressive banks in consumer banking with a total consumerportfolio exceeding PKR 50bn (c.11% of total loan book vs c. 5% for the banking sector).Bulk of the consumer lending is in car financing (approx. PKR 37bn) which is relatively lowrisk given collateral value keeps rising in PKR terms (car prices have gone up 35%-40% onaverage over the last 2 years). Other main category is home financing which makes upabout PKR 14bn (secured exposure). We do not expect any material delinquencies inconsumer book (unlike other banks where unsecured exposure like credit cards / personalloans make up sizeable portion of consumer book)

0.0%

2.0%

4.0%

0.0%

50.0%

100.0%

150.0%


Infection (RHS) and NPL coverage (LHS)

NPL coverage Infection ratio

1.50%

2.50%

3.50%

CY20E CY21E CY22E CY23E CY24E CY25E

Infection ratio expected to increase mildly..

72%17%

11%

Financing mix (Dec'19)

Corporate mix SME Consumer


Margins to decline….organic growth to compensate...

SBP action: Aggressive rate cuts by SBP over the last few months (625bps since Mar’20)will result in sharp margin contraction for MEBL during 2HCY20. We expect blendedmargins to drop to 4.7% in CY20 (-60bps vs CY19) and further, based on our assumptionsfor policy rate outlook (7.8%/8.50% for CY21/22), we estimate margins to decline to 3.9%and 4.0% for CY21 and CY22 respectively.

Higher CASA to provide some relief: Meezan’s higher current account mix (c. 35.5%currently) will provide some cushioning to margin compression, though it is to be notedthat cost relief from savings account (in a declining rate environment) will be relativelymuted for the bank. This is owing to the fact that MEBL’s rate on savings account ismeaningfully lower vs conventional banks due to non-applicability of minimum depositrule on saving accounts for Islamic banks.

Growth in earning assets to mitigate decline in spreads : Compared to 20% CAGR inearnings assets of the bank over the last five years, we expect MEBL to register c. 15%CAGR over CY19-25 with growth skewed towards investments. We expect loan book togrow at c.10% p.a over CY21-23 whereas investment book and lending to FIs/balanceswith other banks is likely to register a higher growth of c.17% p.a

Increased focus on quality of deposit over the next 12-18months: We believe that withrelatively slowdown in credit offtake and the prevailing environment where banks wouldgenerally become more cautions towards writing cheques, Meezan will focus on re-profiling its deposit mix further. It targets to grow its current account base by 14% in CY20on the back of major network rollout during CY19 (added 100 branches). It has alreadybecome the fastest bank to hit PKR 1tn in deposits driven by overall liquidity in the systemand the incomparable franchise value created by the ‘Meezan’ brand

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

2QC

Y17

4QC

Y18

2QC

Y19

4QC

Y19

2QC

Y20

4QC

Y20

E

2QC

Y21

E

4QC

Y21

E

2QC

Y22

E

SBP Policy Rates vs NIMsSBP Policy Rate NIMs

35.7%

38.2%

26.1%

Deposit Mix (Jun'20)Current Accounts Savings Accounts Fixed deposits

18.1%

50.1%

34.8%

22.0%

-3.7% 1.8%

10.4% 10.4% 9.3%

CY15 CY16 CY17 CY18 CY19 CY20E CY21E CY22E CY23E

Loan book growth


Financials

Income Statement (PKR mn) CY18A CY19A CY20E CY21E CY22E CY23E CY24E CY25E

Net interest income 28,168 46,539 56,919 50,431 60,026 69,413 80,210 89,588

Non interest income (excl. gains) 7,455 9,738 8,650 8,639 9,531 10,393 11,335 12,365

Capital gains 8 (418) 1,239 1,000 600 600 600 600

Total income 35,630 55,860 66,808 60,070 70,157 80,406 92,144 102,553

Operating expenses (19,290) (24,831) (29,645) (33,432) (37,157) (41,170) (45,444) (49,996)

Operating income 16,340 31,029 37,163 26,638 33,000 39,236 46,701 52,557

(Provisioning) / Reversals (1,168) (4,186) (4,862) (5,019) (1,735) (1,641) (2,176) (1,883)

Profit before tax 14,792 26,151 31,532 21,078 30,484 36,655 43,411 49,408

Taxes (5,830) (10,919) (12,416) (8,221) (11,889) (14,295) (16,930) (19,269)

Profit after tax 8,962 15,232 19,116 12,858 18,595 22,360 26,481 30,139

EPS (PKR) 6.33 10.77 13.51 9.09 13.14 15.80 18.72 21.30

Balance Sheet (PKR mn) CY18A CY19A CY20E CY21E CY22E CY23E CY24E CY25E

Investments 123,743 225,646 306,102 351,259 403,077 462,541 529,494 588,746

Loans 512,565 493,775 502,663 554,846 612,446 669,454 731,769 792,091

Cash with SBP, deposits with Fis 65,022 92,193 108,736 122,384 137,744 155,032 174,490 196,390

Lending to Fis 193,070 239,061 330,394 408,362 500,577 616,005 747,859 852,161

Others 43,515 70,583 82,982 90,362 98,667 108,015 118,536 130,377

Total Assets 937,915 1,121,258 1,330,877 1,527,212 1,752,511 2,011,046 2,302,148 2,559,764

RWA 388,401 431,865 519,042 656,701 771,105 884,860 1,012,945 1,126,296

Deposits 785,477 932,579 1,117,507 1,272,029 1,441,307 1,626,570 1,829,143 2,050,453

Borrowings 36,408 42,047 46,711 67,703 103,325 152,954 214,297 220,144

Sub ordinated debt 14,000 14,000 18,000 23,000 23,000 23,000 23,000 23,000

Others 61,698 73,617 82,737 89,557 96,939 104,930 113,580 122,942

Total Liabilities 897,583 1,062,243 1,264,954 1,452,289 1,664,571 1,907,455 2,180,020 2,416,539

Shareholders equity 40,379 49,614 61,133 70,134 83,150 98,802 117,339 138,436

Surplus on revaluation (46) 9,401 4,789 4,789 4,789 4,789 4,789 4,789

Total shareholders equity 40,333 59,015 65,923 74,923 87,940 103,591 122,128 143,225

Source: Fortune Research

12

Financials

Key Ratios CY18A CY19A CY20E CY21E CY22E CY23E CY24E CY25E

P / BV (x) 2.9x 2.0x 1.8x 1.6x 1.3x 1.1x 1.0x 0.8x

EPS (PKR) 6.97 11.84 13.51 9.09 13.14 15.80 18.72 21.30

DPS (PKR) 3.1 4.9 3.5 2.7 3.9 4.7 5.6 6.4

Dividend Yield (%) 3.7% 5.9% 4.2% 3.3% 4.7% 5.7% 6.7% 7.6%

ROA 1.0% 1.5% 1.6% 0.9% 1.1% 1.2% 1.2% 1.2%

ROE 23.8% 30.7% 30.6% 18.3% 22.8% 23.3% 23.5% 22.7%

Asset Quality

NPL ratio 1.3% 1.8% 2.6% 3.0% 2.9% 2.9% 2.8% 2.8%

NPL coverage - specific 138.9% 141.6% 130.0% 130.0% 130.0% 128.0% 128.0% 125.0%

Capital Ratios

Tier 1 ratio 12.0% 12.9% 13.1% 12.5% 12.3% 12.5% 12.8% 13.4%

Capital adequacy ratio (CAR) 14.5% 16.6% 15.2% 13.4% 13.0% 13.7% 13.7% 14.2%

Leverage (Asset / Equity) 23.3 19.0 20.2 20.4 19.9 19.4 18.9 17.9

Spreads

Yield on earning assets 6.39% 10.55% 9.72% 8.16% 8.69% 8.69% 8.70% 8.65%

Cost on interest bearing liabilities 2.63% 5.23% 4.15% 3.91% 4.29% 4.29% 4.30% 4.31%

NIM 3.76% 5.31% 5.57% 4.26% 4.39% 4.39% 4.40% 4.34%

Operational metrics

Advances to deposits (ADR) 65.3% 52.9% 45.0% 43.6% 42.5% 41.2% 40.0% 38.6%

Investments to deposits (IDR) 15.8% 24.2% 27.4% 27.6% 28.0% 28.4% 28.9% 28.7%

Net interest income growth 35.3% 65.2% 22.3% -11.4% 19.0% 15.6% 15.6% 11.7%

Fee income growth (ex cap gains) 26.2% 17.5% -11.6% 5.0% 12.0% 10.0% 10.0% 10.0%

Admin exp growth 16.3% 28.7% 19.4% 12.8% 11.1% 10.8% 10.4% 10.0%

Cost / Income 54.1% 44.5% 44.4% 55.7% 53.0% 51.2% 49.3% 48.8%

CASA mix 73.0% 73.8% 73.9% 73.6% 73.8% 73.8% 73.7% 73.7%

CA mix 36.2% 35.8% 35.7% 35.9% 35.8% 35.8% 35.8% 35.8%

13

Risks

Key risks to our investment case:

o Higher than expected NPL formation

o Slower than anticipated credit growth

o Lesser issuances of Sukuks by government and corporates

o Regulatory fallouts and resulting penalties/fines

14

15

Analyst Certification

The research analyst on the cover of this report certifies that: 1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subjectsecurities or issuers; 2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by theresearch analyst(s) in this report; 3) he/she does not have a financial interest in any and all of the subject securities or issuers aggregating more than 1% of the value of the company(s); 4)he/she or its close relative has not served as a director/officer/associate in the past three years in any and all of the subject securities or issuers; 5) he/she or its close relative hasreceived any compensation from any and all of the subject securities or issuers in the previous 12 months; and 6) he/she has not traded in the subject security(ies) or issuer(s) in the past7 trading days and will not trade in the next 5 trading days of issuing a coverage initiation or a material Target Price revision report.

Valuation Methodology

To arrive at period-end Target Price(s), FSL uses different valuation methodologies:‒ Discounted Cash Flow (DCF, DDM)‒ Relative Valuation (PE, PB, PS, PCF)‒ Equity and Asset return based methodologies (EVA, RI, etc.)

Acronyms

bps basis points LCY Local Currency

BVPS Book Value per share MRP Market risk premium

CAGR Compounded Annual Growth Rate NAV Net Asset Value

CAPM Capital Asset Pricing Model NPV Net Present Value

DCF Discounted Cash Flow PB Price-to-Book Value

DDM Discounted Dividend Model PCF Price-to-cash flow

DE Debt-to-Equity PE Price-to-Earnings

DPS Dividend per share PKR Pakistani Rupee

DY Dividend yield ppt percentage point

EPS Earnings per share PS Price-to-Sales

EUR Euro PV Present Value

EV Enterprise Value RFR Risk-free rate

EVA Economic Value Added RI Residual Income

FCF Free Cash Flow ROA Return on Assets

FCFE Free Cash Flow to Equity ROE Return on Equity

FCFF Free Cash Flow to Firm SOTP Sum of the Parts

FCY Foreign Currency TP Target Price

g Growth TSR Total Stock Return

IRR Internal Rate of Return USD US Dollars

JPBV Justified Price-to-Book Value WACC Weighted average cost of capital

Rating

BUY TSR > 15%

HOLD -10% > TSR > 15%

SELL TSR < -10%

NR Not Rated

TSR = Capital gain + DY

Old Rating

Overweight TSR > 15%

Marketweight 0% > TSR > 15%

Underweight TSR < 0%

Key risks

‒ Higher than expected NPL formation‒ Slower than anticipated credit growth‒ Lesser issuances of Sukuks by government and corporates‒ Regulatory fallouts and resulting penalties/fines

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Disclosure

The investment recommendation(s) take into account both risk and expected return. FSL based the long-term Target Price estimate on fundamental analysis of thesubject security(ies)’s future prospects, after having taken perceived risks into consideration. FSL have conducted extensive research to arrive at the investmentrecommendation(s) and target price(s) for the subject security (ies). Readers should understand that financial projection(s), target price estimate(s) and statement(s)regarding future prospects may or may not be realized. Forward looking statement(s), opinion(s) and estimate(s) included in this report constitute FSL’s judgment as ofthis date and are subject to change without prior notice. The target price(s) stated in reports on company update(s), initiation(s) and corporate action adjustment(s) ofstocks listed on the PSX are on a 12-month basis. All other reports on PSX-listed securities, such as scoops, sector or company commentaries, do not include, denote, orimply any changes to target price(s).

Disclaimer

The research report prepared by Fortune Securities Limited (hereinafter referred as FSL) are based on public information and the report is for information purposesonly and does not constitute nor it is intended as an offer or solicitation for the purchase or sale of security(ies) or other financial instruments. FSL makes every effortto use reliable, comprehensive information, but it makes no representation that the information contained herein is accurate or complete. Facts and views presentedin this report have not been reviewed by and may not reflect information known to professionals in other business areas of FSL or any of its associated entities. FSL hasestablished information barriers between business groups and associations maintaining complete independence of this research report. This report is not intended toprovide personal investment advice nor does it provide individually tailored investment advice. This report does not take into account the specific investmentobjectives, financial situation/financial circumstances and the particular needs of any specific person. Investors should seek financial advice regarding theappropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand thatstatements regarding future prospects may not be realized. FSL recommends that investors independently evaluate particular investments and strategies and itencourages investors to seek the advice of a financial advisor.

FSL has taken all reasonable care to ensure that the information contained herein is accurate, up to date, and complies with all Pakistani legislations. However, noliability can be accepted for any errors or omissions, or for any loss resulting from the use of the information provided as any data and research material providedahead of an investment decision are for information purposes only. We shall not be liable for any errors in the provision of this information, or for any actions taken inreliance thereon.

Copyright and confidentiality

No part of this document may be reproduced without the written permission of FSL. The information within this research report must not be disclosed to any otherperson if and until FSL has made the information publicly available.

Research Team

Research Team

Syed Arif ur Rehman

Director Research & Business Development

+92 213 5309113

[email protected]

Arvind Anand

Deputy Head of Research

+92 213 5309119

[email protected]

Hasnain Murtaza

Research Analyst

+92 213 5309119

[email protected].

Wajid Rizvi

Head of Research

+92 213 5309086

[email protected]

Muqeet Naeem

Research Analyst

+92 213 5309119

[email protected]

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Kishan Sidi

Database Manager

+92 213 5309119

[email protected]

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