mebl- initiation report (final draft)€¦ · company, al‐meezan investment management, at...

October 4, 2018 REP‐057

Pakistan Equity | Banks | Company Initiation

Prices as of Sep 28 2018Prices as of Sep 28, 2018

Meezan Bank (MEBL)Best Positioned to Leverage Growing Shariah Bankingg g g

Initiating coverage with a ‘Buy’

Best Local Brokerage HouseBrokers Poll 2011 14 2016 17

Syed Daniyal AdilACd i l@ li k

www.jamapunji.pk

Brokers Poll 2011-14, 2016-17

Best Local Brokerage House 2015-16

[email protected]: +9221‐35303330Topline Securities, Pakistan

Table of Contents

E i SExecutive Summary -------------------------------------- 4

Meezan Bank – Best Positioned to Leverage Growing Shariah Banking -------------------------------------- 8

Strong Brand Recognition Driving Growth -------------------------------------- 9

Pakistan’s Largest Islamic Franchise 10Pakistan s Largest Islamic Franchise -------------------------------------- 10

Quality Management is One of the Biggest Strengths -------------------------------------- 11

Faster Credit Growth & One of the Best Asset Quality -------------------------------------- 12

Favorable Deposit Mix to Limit Cost of Deposits -------------------------------------- 14p f p

Best Positioned to Benefit from Monetary Tightening Cycle -------------------------------------- 15

Higher NIMS to boost ROE and ROA -------------------------------------- 16

Expanding Branch Network Supporting Growth -------------------------------------- 17

Cost Efficiency to Kick in as Branch Expansion Normalizes -------------------------------------- 18

Al-Meezan Inv. Mgmt. – MEBL’s Subsidiary & Largest Pvt. Sector AMC -------------------------------------- 20

Good Prospects for Pakistan AMCs -------------------------------------- 21

Addressing SME and Consumer Segments -------------------------------------- 22

Digital Expansion the Way Forward -------------------------------------- 23

Fee Income to Continue Supporting Bottom-line -------------------------------------- 24

C i i D f d b MEBL’ B d & Si Competition Dwarfed by MEBL’s Brand & Size -------------------------------------- 25

Risks-Lack of Investment Avenues and CAR Limitation -------------------------------------- 26

Meezan Bank (MEBL) 2

Table of Contents

V l i Valuation ------------------------------------- 27

MEBL Rated ‘Buy’ -------------------------------------- 28

Al-Meezan Investment Management - Valuation -------------------------------------- 32

MEBL Financial Snapshot -------------------------------------- 33MEBL Financial Snapshot 33

Pakistan Banks Comp Sheet -------------------------------------- 34

Pakistan Islamic Banking Sector ------------------------------------- 35

Islamic Banking Sector – An Overview -------------------------------------- 36

Significant Pent-up Demand for Islamic Banking -------------------------------------- 37

About the Bank ------------------------------------- 38


Executive Summary


Executive Summary

I t t Th i W i iti t M B k (MEBL) P ki t ’KATS Code MEBL

Bloomberg Code MEBL PA

Reuters Code AMZN.KA

Market Price Rs89 18

Investment Thesis: We initiate coverage on Meezan Bank (MEBL), Pakistan’slargest Shariah Bank, with a ‘Buy’ call and target price of Rs123 offering 38%upside. MEBL is expected to outperform peers based on 1) strong brandrecognition and market leadership in islamic banking fueling robust deposit

h ) d ( ) d d Market Price Rs89.18

Market Cap Rs104.3bn/US$839.3mn

Free float Market Cap Rs20.9bn/US$167.8mn

1-Yr Avg. Daily Vol. (mn) 0.3

1-Yr Avg. Daily Val. (mn) Rs25.8/US$0.23

growth, 2) expanding Net Interest Margins (NIMs) and rapid Current Account(CA) growth, 3) biggest beneficiary of rising interest rates among peers, 4)faster credit growth and one of the lowest NPLs to loans ratio and 5) improvingcost efficiency.

1-Yr High/ Low Rs95.15/61.93

Estimated free float 20%

Share outstanding (mn) 1,169.19Index weight 1.08%

Strong brand fueling deposit growth: The Bank has managed to establish aunique brand for itself and is distinguished as the pioneer and leader indeveloping Islamic Banking industry of Pakistan. MEBL’s strong brandrecognition as a Shariah compliant bank with strong infrastructure will keep

MEBL vs KSE-100 Index

recognition as a Shariah compliant bank with strong infrastructure will keepgrowth trajectory intact, in our view. The Bank is expected to deliver robust 5‐Year (2018‐22) deposits CAGR of 17% aided by growing awareness of IslamicBanking as well as continued branch expansion. This is in comparison to ourforecasted banking sector deposits CAGR of 13% 10%

20%

30% MEBL KSE-100

forecasted banking sector deposits CAGR of 13%.

Expanding NIMs and high CA growth: NIMs of the Bank will expand to ~3.9%in 2022 compared to 3.3% during 2017, as we expect CA to grow at 5‐Year(2018‐22) CAGR of 19% along with anticipated increase in interest rates.

-20%

-10%

0%

10%

Sep

-17

Nov

-17

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep

-18

5Honda Atlas Cars (HCAR)

Source: Pakistan Stock Exchange (PSX)

Meezan Bank (MEBL)

Resultantly, Net Interest Income (NII) of the bank will grow at a 5‐Year (2018‐22) CAGR of 21% compared to previous 5‐Year (2013‐17) CAGR of 15%.

Executive Summary

f f f f ( )Major beneficiary of rising rates: MEBL has one of the highest proportion of Rate Sensitive Assets (RSA) asAdvances (above average ADR of 62%) are floating while more than 70% of its investments in Sukukcertificates/bonds (IDR 18%) do not have a re‐pricing risk as they are linked with Kibor (or average 6M T‐bill rate).C bi d ith l iti it f MEBL’ d it t i t t t ( i i d it t i t fCombined with low sensitivity of MEBL’s deposits to interest rates (no minimum deposit rate requirement forIslamic Banks), we believe that MEBL will gain the most due to rising interest rates.

Relatively faster credit growth and one of the lowest NPLs to Loans ratio: MEBL is also expected to deliverd h d h ( ) dstrong credit growth compared to its peers, wherein, we expect 5‐Year (2018‐22) advances CAGR at 15%

compared to Topline Banking Universe advances CAGR of 13%. This is because MEBL has increased its penetrationand is growing its foothold in consumer and SME segments. Further, MEBL’s asset quality is one of the best

t it d t d t l di ti It NPL t l ti t d t 1 5% hil it tiamongst its peers due to prudent lending practices. Its NPLs to loans ratio stands at 1.5% while its coverage ratiois at 134% compared to banking sector average of ~8% and ~92% respectively. Notably, the bank is one amongsttwo Pakistani listed banks to have NPLs to Loans ratio of below 2% and coverage ratio of more than 100%.

i ffi i d d f h dImproving cost efficiency: MEBL is expected to reduce its cost to income ratio to average 51% for the period2018‐22 compared to average of 59% for the period 2013‐17. We attribute decline in expenses growth to slowerpace of branch expansion. Moreover, rapid branch expansion (291 added in five years 2013‐17) in previous yearsill t ib t i ifi tl t th b tt li i f d Si il l i t t i ADC h ld dd t

Honda Atlas Cars (HCAR) 6Meezan Bank (MEBL)

will contribute significantly to the bottom‐line going forward. Similarly, investments in ADC should add toprofitability as well, along with higher interest rates.

Executive Summary

V l i W h ‘B ’ MEBL i h i f R 123/ h Th l f MEBL i b d S Of ThValuation:We have a ‘Buy’ stance on MEBL with a target price of Rs123/share. The value of MEBL is based on Sum Of TheParts (SOTP) method where we value MEBL (unconsolidated) at Rs119/share and MEBL’s share in its asset managementcompany, Al‐Meezan Investment Management, at Rs4/share. MEBL is trading at 2019E PE and PBV of 9.1x and 2.2x withROE of 26%. It offers the highest expected return (38%) in Topline Banking Universe and is cheaper than most of theg p ( ) p g pother Topline Universe Banks on the basis of 2022F ROE (adjusted for PBV). We believe, MEBL will also witness the phasewhere it will trade at high PE & PBV multiples just the way MCB traded at an average PBV/PE of 2.7x/9.8x with averageROE of 20%+ during 2001‐15 (high growth period).

Key Risks: Key risks for the bank include 1) lack of shariah compliant investment avenues, 2) lower than expected uptick

in interest rates, 3) faster uptick in NPLs due to economic slow down and 4) growth slowdown due to CAR concerns.

MEBL: Key Numbers2016A 2017A 2018E 2019F 2020F

EPS (Rs) 5.3 4.8 7.1 9.9 11.4 Earning Growth 11% 14% 32% 39% 16%Earning Growth 11% 14% 32% 39% 16%PE at Rs89.19 16.8 18.5 12.5 9.1 7.8 Dividend Yield 3% 3% 4% 6% 6%ROE 21% 20% 22% 26% 26%PBV 3 7x 3 0x 2 6x 2 2x 1 9x


PBV 3.7x 3.0x 2.6x 2.2x 1.9xSource: Company Accounts, Topline Research

Meezan Bank – Best Positioned to Leverage Growing Shariah BankingLeverage Growing Shariah Banking


Strong Brand Recognition Driving Growth

MEBL’s strong brand recognition and franchise value are key to its success Being the oldest Islamic Bank it has aMEBL’s strong brand recognition and franchise value are key to its success. Being the oldest Islamic Bank, it has alarge branch network (601 as of Dec 2017) and dependable customer base of about 1.8mn.

The Brand of MEBL is synonymous with Shariah compliant banking due to its emphasis on ensuring Shariahcompliance at all levels. The Bank’s Shariah Advisory board gives credence to this claim.p y g

The board consists of eminent and learned islamic scholars which include Justice (Retd.) Mufti Muhammad TaqiUsmani as the Chairman who has more than 50 years of experience in teaching various subjects on Islam. TheBoard functions to ensure that the Bank complies with Shariah principles.

The strength of its franchise value is also supported by the fact that more than 70% of its deposits are constitutedof individuals. This also gives MEBL higher competitive advantage.

Moreover, MEBL’s brand is not only about Riba free banking but also about customer satisfaction and strongh i l d di it l i f t t A th l t t SBP 39% f th d t th t i ht tphysical and digital infrastructure. As per the latest SBP survey, 39% of the respondents gave the most weight to

customer satisfaction for using islamic banking.

The Bank has established a good infrastructure as depicted by branch network of 601 and approximately 370,000(as of 2017) downloads of the Bank’s Mobile App (making it one of the most trending Apps in the category) to( ) pp ( g g pp g y)enhance customer convenience and experience. Similarly, on Google play store the App has more than 6Kreviews.

In addition to above, MEBL also has a strong network of around 1,000 agents. This workforce delivers variousMEBL fi i l d hi h h h l d i MEBL’ i d l l h


MEBL financial products to customers which has helped increase MEBL’s penetration and resultantly strengthenits franchise value.

MEBL is one of the fastest growing banks in Pakistan’s banking industry The bank has grown its deposit base at 5 Year

Pakistan’s Largest Islamic Franchise

MEBL is one of the fastest growing banks in Pakistan s banking industry. The bank has grown its deposit base at 5‐Year(2013‐17) CAGR of 24% compared to banking sector CAGR of 13% and islamic banking CAGR of 22%. As of Jun2018, MEBL is the 7th largest commercial bank in Pakistan with a market share of 5.4% and the largest islamic bank with amarket share of ~36%.I l 15 f i i h b k’ k h h d i h li d b k hi h d iIn last 15 years of its operations, the bank’s market share has surpassed eight listed banks which started operationsbefore MEBL including Bank of Punjab (BOP), Askari Bank (AKBL), Habib Metro (HMB) and Faysal Bank (FABL). The Bank isexpected to deliver robust 5‐Year (2018‐22) deposits CAGR of 17% aided by growing awareness of islamic banking as wellas continued branch expansion. This is in comparison to our forecasted banking sector deposits CAGR of 13%.Given the projected growth trajectory, we expect MEBL will surpass Rs1tn deposit mark and will become 6th largest bankby 2020, over taking Bank Al‐Habib (BAHL). At the same time, the bank will maintain its market share in islamic banking at~36% but will increase its market share in the banking sector to around 6.4%, in our view, owing to growing Islamicbanking industry.

MEBL Market ShareDeposits 5-Year (20013-17) growth CAGR23.9%

15.3%

20%

25%34.8% 35.5% 33.6% 32.6% 32.6% 33.4%

35.6% 34.3% 35.9% 35.7%

4.5%

6.0%

30%

40%IB Market share Banking Sector Market share*

13.8% 12.9% 12.6%11.4% 10.7% 10.5%

7.4%

0%

5%

10%

15%

0.0%

1.5%

3.0%

0%

10%

20%

08 09 10 11 12 13 14 15 16 17


Source: Company Accounts, Topline Research, *Islamic Banking Source: Company Accounts, Topline Research

0%MEBL BAHL BOP MCB UBL ABL NBP HBL BAFL 20

0

200

201

201

201

201

201

201

201

201

k l d d h k d ’ h

Quality Management is One of the Biggest Strengths

Management competence, knowledge and creativity are amongst the key ingredients to MEBL’s success. Themanagement has a proven track record and has guided the bank to become the 7th largest in Pakistan bankingspace in a span of 15 years.

MEBL’s management is led by one of the most senior and reputable banker, Mr. Irfan Siddqui, who is the foundingPresident and Chief Executive Officer (CEO) of the Bank. He is a qualified Chartered Accountant from the Instituteof Chartered Accountants in England and Wales (ICAEW). He has held several key management positions such asCEO at Al Meezan Investment Bank General Manager at Pakistan Kuwait Investment Company and Advisor to theCEO at Al‐Meezan Investment Bank, General Manager at Pakistan Kuwait Investment Company and Advisor to theManaging Director at Kuwait Investment Authority. He has been with the Bank from the start and has beeninstrumental in developing the Meezan brand.

The position of Executive Director and Deputy CEO is held by another senior banker Mr Ariful Islam who was theThe position of Executive Director and Deputy CEO is held by another senior banker, Mr. Ariful Islam, who was thefirst Chief Operating Officer of the Bank in 1999. He qualified as Chartered Accountant from Institute of CharteredAccountants in England and Wales (ICAEW) in 1982. He has more than 30 years of banking experience and hasheld senior management positions such as Vice President and Regional Manager South at Faysal bankheld senior management positions such as Vice President and Regional Manager South at Faysal bank.

Management continuity has ensured smooth policy framework and implementation which has helped MEBL toachieve success.

U lik t i l f il d fi MEBL’ di ifi d h h ld h i f ll th it t th t


Unlike a typical family owned firm, MEBL’s diversified shareholders have given full authority to the management.Resultantly, the performance of the Bank has outclassed other similar banks.

MEBL has had one of the fastest growing loan book where its 5 Year (2013 17) advances CAGR stands at 35% As the bank increases its

Faster Credit Growth & One of the Best Asset Quality

MEBL has had one of the fastest growing loan book where its 5‐Year (2013‐17) advances CAGR stands at 35%. As the bank increases itspenetration and also grows its foothold in consumer and SME segments, we expect MEBL’s 5‐Year (2018‐22) advances CAGR at 15%compared to Topline Universe advances CAGR (2018‐22) of 13%.

The bank’s asset quality is one of the best amongst its peers due to prudent lending practices. As of Dec 2017, its NPLs to loans ratio standsat 1.5% while its coverage ratio stands at 133% compared to banking sector average of ~8% and ~92% respectively.at 5% e ts co e age at o sta ds at 33% co pa ed to ba g secto a e age o 8% a d 9 % espect e y

Notably, the bank is one amongst two Pakistani listed banks to have NPLs to loans ratio of below 2% and coverage ratio of more than 100%.In absolute terms, in the last 5 years the bank’s NPL stock has increased by a meager Rs1.6bn compared to Rs331bn added in advances.

With likely slowdown in economy, wherein we expect GDP growth in FY19 to clock in at 4.7% (5.8% in FY18), we foresee banking sector toagain start accreting NPLs. Accordingly we expect MEBL’s NPLs to loans ratio to increase to 2.3% by 2022. However, strong coverage ratiog g g y p y , g gwill keep provision charge in check, in our view.

We attribute the expected low growth in NPLs to loans ratio to proven track record of the bank as well as the recent shift in composition ofbanks advances where the bank has reduced its proportion of lending in high NPLs to loans ratio sectors to lower ones. For example, thebank has reduced its exposure in textile sector by 2.7ppts where it had NPLs to loans ratio of ~6% and has increased its exposure to Agrisector by 12.8ppts where it has NPLs to loans ratio of ~0.1% as at Dec 2017.

MEBL’s NPLs to loans ratio of 1.5% is one of the lowest in banking sector (average of ~8% as of Dec 2017). Hence, despite rising interestrates we do not expect MEBL’s asset quality to significantly hurt profitability.

MEBL Advances Composition by SectorAd NPL t L R tiAdvances NPLs to Loans Ratio

Advances 2016A 2017A 2017AAgri food forestry & fishing 12% 25% 0.10%Individuals 8% 8% 0.90%Power Oil Gas and Water 22% 17% 0.00%


Textile 20% 17% 5.90%Others 38% 33% 1.40%Source: Company Accounts, Topline Research

Advances, NPLs to Loans ratio & Coverage Ratio

MEBL’s NPLs to Loans RatioMEBL’s Advances and ADR

70%

500

600

700 Rsbn Advances ADR

3.3%3.2%

4.0%

50%

60%

100

200

300

400

500 2.1%

1.5% 1.5%1.7%

2.0%

0.8%

1.6%

2.4%

Source: Company Accounts, Topline Research Source: Company Accounts, Topline Research

40%-2015A 2016A 2017A 2018E 2019F 2020F

0.0%2015A 2016A 2017A 2018E 2019F 2020F

MEBL ADR vs. Topline Banking Universe (2017) MEBL NPLs to Loans Ratio vs. Topline Banking Universe (2017)

62.4% 61.3% 60.8%

50.0% 49.1% 47.0%42.9% 42.6% 42.1%50%

60%

70%

8 9%

14.3% 14.4%

10%

12%

14%

16%

0%

10%

20%

30%

40%

1.5% 1.5%

4.2% 4.6%

7.7% 8.3% 8.9%

2%

4%

6%

8%

10%

Source: Company Accounts, Topline Research



0%MEBL BAFL BOP MCB BAHL UBL NBP HBL ABL

0%BAHL MEBL BAFL ABL UBL HBL MCB NBP BOP

Bank’s low cost of deposit is a result of its high Current Account Savings Account (CASA) ratio and more importantly its non remunerative

Favorable Deposit Mix to Limit Cost of Deposits

Bank s low cost of deposit is a result of its high Current Account Savings Account (CASA) ratio, and more importantly its non remunerativeCA ratio that stand at ~75% and ~35% (as of Dec 2017) of deposits, respectively.CASA of the Bank has grown at a 5‐Year (2013‐17) CAGR of 27% compared to banking sector average of 19%. Similarly, MEBL’s CA depositshave grown at a 5‐Year (2013‐17) CAGR of 32% compared to banking sector average of 18%. Notably, the growth in CASA and CA is alsofaster than MEBL’s total deposit growth CAGR of 24% in the same period.We forecast CASA to increase to ~77% by 2022 (~75% as of Dec 2017), as we expect the bank to keep its focus on growing CA and increasethem to ~39% of total deposits by 2022. MEBL has increased its CA ratio on average by 190bps per year in the period 2013‐17 while for theperiod 2018‐22, we expect MEBL to increase CA ratio by 80bps per year on average in order to maintain its low cost of deposit and boostNet Interest Margins (NIMs).Moreover non‐applicability of MDR regulation on islamic banking also supports MEBL to maintain a low cost of deposit This is becauseMoreover, non‐applicability of MDR regulation on islamic banking also supports MEBL to maintain a low cost of deposit. This is becauseislamic banks are not required to increase rates offered on savings account proportionate to the change in policy rates, which conventionalbanks are required to do.Capitalizing on this, MEBL has managed to maintain the lowest cost of deposit in the industry and as interest rates rise, MEBL has thepotential to further increase the gap on cost of deposits with other conventional banks. During 2017, MEBLs average cost of deposit was~2% compared to banking sector average of ~3.5%.

CASA 5-Year (2013-17) CAGR vs Topline Banking Universe CA 5-Year (2013-17) CAGR vs Topline Banking Universe

27.3%

21.4%25%

30% 31.8%

23 2%30%

35%

18.5%16.9% 16.0% 15.7% 15.5% 14.7%

10.6%

5%

10%

15%

20%23.2%

18.7%16.9% 15.5% 14.6%

12.0% 11.0%

7.0%

5%

10%

15%

20%

25%

Meezan Bank (MEBL) 14Source: Company Accounts, Topline Research Source: Company Accounts, Topline Research

0%MEBL BOP BAHL NBP UBL HBL MCB ABL BAFL

0%MEBL BOP HBL UBL MCB BAHL NBP BAFL ABL

Interest rates in Pakistan have risen by 275bps since the beginning of calendar year 2018 and as external sector and fiscal woes

Best Positioned to Benefit from Monetary Tightening Cycle

Interest rates in Pakistan have risen by 275bps since the beginning of calendar year 2018 and as external sector and fiscal woescontinue, we expect the regulator to go ahead with further monetary tightening. As per our forecasts, we see a further 125bps hike by Dec2019, taking the policy rate to 9.75%.In this rising interest rate environment, banks with high Rate Sensitive Assets (RSA) and low Rate Sensitive Liabilities (RSL), along with lesslong term bonds (to reduce repricing risk) will benefit most . However in case of falling interest rates, the inverse is true, that is, banks withg ( p g ) gless RSA and high RSL will be the winners.As of Dec 2017, MEBL has one of the highest proportion of RSA as its asset mix consists of high proportion of Advances (ADR of ~62%;mostly variable) and Bai Muajjal (~22% of deposits as of Dec 2017; an instrument yielding slightly less than T‐bills and used mostly inlending to FI). While significant proportion (~70%) of its investments in Sukuk certificates/bonds do not have a repricing risk as they areli k d i h Kib ( 6M T bill ) B i M jj l i fi i l i i hi h b k ll S kk k h fi i l i i ilinked with Kibor (or average 6M T‐bill rate). Bai Muajjal, is a financial instrument in which bank sell Sukkuks to other financial institution atan agreed credit price at the time of sale and such proceeds are received at the end of credit period.Combined with lowest cost of deposit and low sensitivity of MEBL’s deposits to interest rates, we believe that the Bank is well protectedfrom downside of monetary tightening. The said features make MEBL stand out in terms potential NIMs expansion (82bps during 2017‐20)when compared with peer banks (average 52bps during 2018‐20).when compared with peer banks (average 52bps during 2018 20).

MEBL’s Net Interest Margins (NIMs)

3 5% 3 5%

4.1% 4.1%

4.0%

4.5%

3.5%3.3%

3.5%

2 0%

2.5%

3.0%

3.5%



2.0%2016A 2017A 2018E 2019F 2020F

h ( ) f h b k ll d d

Higher NIMs to Boost ROE and ROA

Given monetary tightening, Net Interest Margins (NIMs) of the bank will expand to ~4.1% in 2020 compared to3.3% during 2017, in our view.Resultantly, Net Interest Income (NII) of the Bank will grow at a 5‐Year (2018‐22) CAGR of 21% compared toprevious 5 Year (2013 17) CAGR of 15% To recall interest rates in Pakistan have been on a declining trend for theprevious 5‐Year (2013‐17) CAGR of 15%. To recall, interest rates in Pakistan have been on a declining trend for thelast three years, up until 2017.Rising NII of the Bank will boost Return on Equity (ROE) as well as Return on Assets (ROA). We expect ROE toaverage 25% during 2018‐22 compared to average 21% during 2013‐17 Similarly ROA is expected to averageaverage 25% during 2018 22 compared to average 21% during 2013 17. Similarly, ROA is expected to average1.12% during 2018‐22 compared to average 1.07% in period 2013‐17.However, in case interest rates do not increase, we expect MEBL’s ROE to average 23% (2018‐22) assuming thepolicy rate stays at 8.5%.

MEBL Return on Equity vs Topline Banking Universe (Avg. 2018-20)

p y y

MEBL Return on Assets vs Topline Banking Universe (Avg. 2018-20)

1.9%

1.4%2%

2%24.7%

21.1%

17 8%20%

25%

30%

1.2% 1.1% 1.1% 1.1%0.9%

0.7%

0.5%

0%

1%

1%17.8% 16.7% 16.6% 16.3% 15.2%

12.2%

7.0%

5%

10%

15%

20%


0%MCB ABL BAFL MEBL UBL BAHL HBL BOP NBP

0%MEBL BAHL MCB ABL BAFL BOP UBL HBL NBP

Expanding Branch Network Supporting Growth

We believe continuous investment in branch network plays an important role in supporting MEBLs expanding depositWe believe continuous investment in branch network plays an important role in supporting MEBLs expanding depositbase. MEBL has added 291 branches in the last 5 years which translates into 58 branches per year on average – thirdhighest rate of increment among all the listed banks. As of Dec 2017, MEBL has the 8th largest branch network among thelisted banks, totaling 601 (~5% share in the banking sector), while we expect the bank to add close to 200 branches in thenext 5 yearsnext 5 years.In percentage terms, branch network of MEBL has grown at a 5‐Year (2013‐17) CAGR of 14% compared to islamic bankingand banking sector branch growth CAGR of 19% and 6% respectively. The faster growth in branches of islamic banking asa whole has been led by islamic banking branches of conventional banks which have depicted a 5‐Year (2013‐17) growthCAGR of 26%CAGR of 26%.We believe, going forward the emphasis of the bank will remain on branch network expansion because one of theimpediments to growth in islamic banking is the lack of extensive branch network to cater to needs of customers, as per aState Bank of Pakistan (SBP) survey. Henceforth, MEBL is expected to add close to 200 branches in the next 5 years, togrow its network to approximately 800 branches by 2022

Deposits per Branch in Topline Banking Universe ( as of Jun, 2018) MEBL Number of Branches

grow its network to approximately 800 branches by 2022.

560

700

1 200

1,500 Rsmn

0

140

280

420

300

600

900

1,200


0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017 -

NBP MEBL BAHL HBL BOP BAFL UBL MCB ABL

k l b k h h b d d h ( ) h

Cost Efficiencies to Kick in as Branch Expansion Normalizes

Like similar growing banks, MEBL has exhibited rapid growth in expenses. 5‐Year (2013‐18) expense growth CAGRstands at 18% compared to industry average of 12%. Banks of a similar size, namely, BAHL, BAFL and AKBL have anexpense growth CAGR (2013‐17) of 18%, 10% and 10% respectively.

Th hi h th i b tt ib t d t b k’ ti b h i (291 dd d i l t fiThe high growth in expenses can be attributed to bank’s continuous branch expansion (291 added in last fiveyears) as well as investments in Alternative Delivery Channels (ADC). However, despite being one of the fastestgrowing banks, MEBL’s cost to income ratio of 59% is just slightly above industry average of 56% in 2017.

A t i il i d b k BAFL BAHL d AKBL h t t i ti f 64% 58% d 67% ti lAmongst similar sized banks, BAFL, BAHL and AKBL have cost to income ratios of 64%, 58% and 67%, respectively.

With branch expansion estimated to slow down, we expect MEBL’s admin expenses to grow at a 5‐Year (2018‐22)CAGR of 15%, slower than 18% witnessed in period 2013‐17.Similarly, we expect cost to income ratio for thesame period to go down to average 51% during 2018 22 compared to average of 59% in the period 2013same period to go down to average 51% during 2018‐22 compared to average of 59% in the period 2013‐17, despite our forecasts of higher inflation in the said period (Average ~7.8% compared to 5.2% in period 2013‐17).

Considering it takes around two years for a new branch to breakeven we expect rapid branch expansion (291Considering it takes around two years for a new branch to breakeven, we expect rapid branch expansion (291added in five years 2013‐17) in previous years to contribute significantly to the bottom‐line going forward.Similarly, investments in ADC should add to profitability as well.

Notably MEBL’s admin cost per branch of ~Rs28mn is also less than the banking sector average of ~Rs36mn


Notably, MEBLs admin cost per branch of Rs28mn is also less than the banking sector average of Rs36mnmaking MEBL one of the most cost efficient banks in operating a branch.

Admin Expenses per Branch & Cost to Income Ratio

MEBL’s Cost to Income Ratio MEBL Admin Exp. per Branch vs Topline Banking Universe (2017)

35

42 Rsmn

62.3%

58.4%56.1%

55%

60%

65%

7

14

21

28 50.1% 49.7%

35%

40%

45%

50%

55%

Source: Company Accounts, Topline Research Source: Company Accounts, Topline Research

-BAFL HBL BAHL NBP MEBL UBL BOP MCB ABL

30%2016A 2017A 2018E 2019F 2020F

Cost to Income Ratio of MEBL vs Topline Banking Universe (2017) Inflation Expectation

64.1%58.4% 58.2% 57.4%

53.4% 53.0%48.8% 48.0% 46.7%50%

60%

70%7.0%

7.5%

5 0%6.0%7.0%8.0%

10%

20%

30%

40%

2.9%

4.2% 4.0%

1.0%2.0%3.0%4.0%5.0%



Source: Topline Research

0%BAFL MEBL BAHL NBP HBL ABL BOP MCB UBL

0.0%FY16A FY17A 2018A 2019E 2020F

MEBL h ld 65% f Al M I M hi h i P ki ’ l i A M C i h

Al‐Meezan Inv. Mgmt. – MEBL’s Subsidiary & Largest Pvt. Sector AMC

MEBL holds ~65% of Al‐Meezan Investment Management, which is Pakistan’s largest private Asset Management Company withtotal assets under management of Rs93bn as of Jun 2018. It has the distinction of being the only AMC in Pakistan offeringdedicated shariah compliant investment solutions with one of the largest investor base of around 80,000 investors.

It also manages the largest Open End Equity Fund and Voluntary Pension Fund (VPS) in the private sector with Asset Underg g p q y y ( ) pManagement (AUMs) of Rs39bn and Rs9bn respectively.

AUMs of Al‐Meezan have grown at a 5‐Year (2014‐18) CAGR of 16%. Moreover, just like its parent MEBL itself, Al‐Meezan also hasa distinguished place in Pakistan's AMC with an exclusive mandate of providing shariah compliant investment solutions to itsli f h d k h f % f l i dclients. As of Jun 2018, AL‐Meezan had a market share of 15.4% of total industry AUMs.

Based on DCF, we value Al‐Meezan Investment Management at around ~Rs7.4bn against which MEBL has a share of 65%(~Rs4.1/share). This is significantly higher than the carrying value of Rs63mn on MEBL’s books.

Al M I t t M t AUMAl-Meezan Investment Management AUMs

88

110Rsbn

0

22

44

66

Meezan Bank (MEBL) 20Source: Topline Research

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

P ki l f d i d i i idl I d ’ A U d M (AUM ) h 5 Y (2014 18)

Good prospects for Pakistan AMCs

Pakistan mutual funds industry is growing rapidly. Industry’s Assets Under Management (AUMs) have grown at a 5‐Year (2014‐18)CAGR of 11% to reach Rs604bn as of FY18.

The industry’s growth has been riding on favorable macro economic tailwinds, as GDP growth increased from 3.7% in FY13 to5.8% in FY18. Similarly, rising awareness of benefits of professional fund management has encouraged investments in mutualy, g p g gfunds units offering superior return.

As, we expect GDP growth to slow down to 4.7% in FY19 and expect a further 125bps hike in interest rates in 2019 combined withdull market sentiment, we expect AUMs growth to slow down to 10% which is slightly below our M2 growth assumption of 12%.

Industry Assets Under Management (AUMs)

Resultantly, we also forecast Al‐Meezan’s AUMs growth at 5‐Year CAGR (2018‐22) of 10% during 2018‐22, compared to previous5‐Year (2014‐18) CAGR of 16% as high base effect and industry dynamics normalize the high growth trajectory witnessed in prioryears.

Industry Assets Under Management (AUMs)

500

600

700Rsbn

0

100

200

300

400


Source: Topline Research

0FY14 FY15 FY16 FY17 FY18

Addressing SME and Consumer Segments

h b h f f f f l lf h f dMEBL has been at the forefront of consumer financing, placing itself amongst top three in Auto financing andleader in Mortgage Financing. During 2017, active contracts in Auto financing increased by 5000 to 23000, withthe portfolio growing by 45.6% to ~Rs27bn (~6% of Advances). Similarly, during 2017, the Bank grew its Mortgagefinancing portfolio by 28% to ~Rs12bn (~3% of Advances) the largest increase in absolute disbursementfinancing portfolio by 28% to Rs12bn ( 3% of Advances), the largest increase in absolute disbursement(~Rs2.6bn) for a single year.

The Bank has also been striving to develop and grow its Small and Medium Enterprises (SME) portfolio. As of2017 end the Bank’s outstanding SME portfolio amounted to Rs14 2bn depicting a 35% growth since last year2017 end, the Bank s outstanding SME portfolio amounted to Rs14.2bn depicting a 35% growth since last year.The Bank has sought advisory services from International Finance Corporation (IFC) to help MEBL revamp itsexisting SME financing segment into a robust business model.

Mortgage, SME, and Auto Financing PortfolioMEBL Mortgage and Auto Portfolio as a % of Industry o tgage, S , a d uto a c g o t o o

20 0

25.0

30.0

Rsbn Mortgage Financing SME Auto Loans

o tgage a d uto o t o o as a % o dust y

18%

14%

16% 16%

12%

16%

20% 2016 2017

0 0

5.0

10.0

15.0

20.0

0%

4%

8%

12%



0.02015 2016 2017


0%Mortgage Auto Loans

Digital Expansion the Way Forward

B hl B ki (BB) d Al i Di ib i Ch l (ADC) h k f d lBranchless Banking (BB) and Alternative Distribution Channels (ADC) are amongst the key areas of developmentthat the bank is looking towards for potential growth opportunities.Apart from traditional branches, the bank also provides banking services via ADC which include ATM, InternetBanking Mobile App SMS Banking etc During 2017 the bank added 35 new ATMs taking the total to 580Banking, Mobile App, SMS Banking, etc. During 2017, the bank added 35 new ATMs taking the total to 580.Simultaneously, bank’s internet and Mobile App subscribers doubled during the said year while with over 270,000downloads MEBL’s Mobile App is also one of the most trending apps in the category.Approximately 79% of Pakistan's adult population is unbanked due to reasons that may include lack of physicalpp y p p y p ybranches and stringent KYC. Hence, providing banking service to the said segment offers significant growthpotential. Therefore, being one of the twelve banks to have a branchless banking license enables MEBL to offerbranchless banking services.MEBL intends to launch Branchless Banking proposition by 1Q2019. The Bank also intends to increase agentfootprint via strategic partnerships and believes that Branchless Banking platform will enable onboarding of walletaccounts instantaneously.Th B k i l d ith l di Fi t h l f P ki t d h i d b ki l tf tThe Bank is also engaged with leading Fintech players of Pakistan and has acquired open banking platform toonboard new Fintechs. Bank has already provided complete incubation to two Fintechs, namely Fonepay andForeepay. Other Fintechs that the Bank is working with include Batwa, Creditfix and Easypay.MEBL has already launched NetConnect Keenu an e‐commerce payments gateway directly connected with


MEBL has already launched NetConnect Keenu, an e commerce payments gateway directly connected withMeezan Bank accounts via Internet Banking.

MEBL h b i i d l i di i l i f h F I f h b k 5 Y

Fee Income to Continue Supporting Bottom‐Line

MEBL has been striving to develop its digital infrastructure, hence, we expect Fee Income of the bank to grow at a 5‐Year(2018‐22) CAGR of 12.5% as investments into Digital Banking front start to pay off.Within Fee Income, bank’s ATM cards/other cards, Trade Commission and General banking/Transactions contributeapproximately 31%, 19% and 17%, respectively.pp y , , p yWe expect income from ATM cards/other cards and income from general banking/transactions to increase in line withdeposit growth as greater market share fuels growth in supplementary products.The bank had also taken several measures, such as imposing fee on Check Book issuance, which had boosted MEBL’s feeincome in prior years. With the high base effect from previous years, fee income growth will slow down to a 5‐Year(2018‐22) CAGR of 12.5% as against last 5‐year (2013‐18) CAGR of 34% .

Fee Income Breakup (2017)

17%22%General Banking

ATM/Other Cards

31%

19%

11%

Trade Commisions

Commisions from FI

Meezan Bank (MEBL) 24Source: Topline Research, Company Accounts

Others

MEBL leads islamic banking by a big margin with its closest competitor within fully fledged islamic banks (Bank Islami

Competition Dwarfed by MEBL’s Brand & Size

MEBL leads islamic banking by a big margin, with its closest competitor, within fully fledged islamic banks (Bank IslamiPakistan ), having a market share of ~8.5% compared to MEBL’s share of ~35%. In fact, the remaining four fully fledgedIslamic Banks combined (Dubai Islamic, Bank Islami, Al‐Baraka, MCB Islamic Bank), occupy a meager ~24% market share.Similarly, with 602 branches as compared to 764 branches for the rest of the four fully fledged Islamic Banks, MEBLcommands a ~44% share in total branch network of fully fledged Islamic Bankscommands a ~44% share in total branch network of fully fledged Islamic Banks.Furthermore, MEBL also commands an above average deposit per branch, wherein, MEBL has a deposit per branch ofRs1,175mn in Jun 2018 compared to average of Rs889mn in full fledged islamic banks and Rs688mn in islamic bankingoperations of conventional banks. In fact the bank has the third highest deposit per branch in Pakistan’s banking sector.Additi ll di d li MEBL h t bli h d b d f it lf h i it i t l id d th iAdditionally, as discussed earlier, MEBL has established a brand for itself wherein it is not only considered the primaryshariah compliant bank of Pakistan. It caters to niche segment of society (giving it a competitive advantage over Islamicbanking branches of conventional banks and Conventional banks as a whole). It is perceived as a bank providing greatcustomer satisfaction through its robust physical and digital infrastructure giving it an edge over other fully fledgedislamic banks which are much smallerislamic banks which are much smaller.

Branch Network of Full Fledge Islamic Banks (as of Jun 2018)Branches Market share

MEBL 602 41%

Deposits of Full Fledge Islamic Bank (as of Jun 2018)Rsbn Deposits Market ShareMEBL 707 59%

BIPL 330 22%DIB 200 13%Al‐Baraka* 188 13%MIB 166 11%

DIB 176 15%BIPL 172 14%Al‐Baraka* 97 9%MIB 52 4%


MIB 166 11%Total 1,486 Source: Company Accounts, Topline Research, *1Q2018

MIB 52 4%Total 1,204

Source: Company Accounts, Topline Research, *1Q2018

Being an islamic bank comes with its own risks Islamic banks can not invest in regular risk free investment avenues (T bills Govt

Risks ‐ Lack of Investment Avenues and CAR Limitation

Being an islamic bank comes with its own risks. Islamic banks can not invest in regular risk free investment avenues (T‐bills, Govt.Bonds etc) which are not shariah complaint. This limits the investment vehicles available to islamic banks and is a significantdrawback.Pakistan’s government has been unable to offer considerable shariah compliant Ijarah Sukuk issues to support the growth inislamic banking. Resultantly, MEBL’s Investment to Deposit Ratio (IDR) has fallen to 18% as opposed to commercial banks’ averageof 67%. Going forward we do not expect any large issue of GOP Ijarah Sukuk and hence forecast IDR to average 20% in the next 5years.Moreover, due to lack of avenues of risk free investments and rapid growth the bank has been experiencing, we flag regulationsregarding Capital Adequacy Ratio (CAR) to be of particular concern. As of Dec 2017, CAR of the bank stands at 12.9% as againstminimum required ratio of 11 28 (as at Dec 2017) However the bank recently issued a Tier 1 Capital and raised Rs7bn in order tominimum required ratio of 11.28 (as at Dec 2017). However, the bank recently issued a Tier‐1 Capital and raised Rs7bn in order tostrengthen its capital which is estimated to add up to 1.75ppts to CAR. Yet, given our growth projections, we believe that the bankwill have to either arrange for more capital and/or curtail dividends in order for it to maintain its growth trajectory.Other key risks include 1) lower than expected interest rate hikes, 2) faster than expected NPL accretion and 3) greater thenexpected slow down in economy.

MEBL IDR vs. Topline Banking Universe (2017)MEBL CAR vs. Topline Banking Universe (2017)

p y

22.4%

16.5% 16.3% 16.0% 15 1%

20%

25%82.3% 79.1% 75.1%

68.8% 68.8% 65.9%61.3%

75%

90%

15.1%13.9% 13.8% 12.9%

5%

10%

15% 47.8%

17.7%15%

30%

45%

60%


0%ABL NBP MCB HBL UBL BAHL BAFL MEBL

0%UBL ABL NBP HBL BAHL MCB BAFL BOP MEBL

Valuation


/

MEBL Rated Buy with a Price Target of Rs123/share

We have a ‘Buy’ stance on MEBL with a target price of Rs123/share. We have used a blend of Justified PBV and PE ratio to arrive

at our target price for valuing the unconsolidated bank at Rs119/share. On the other hand, we have used Discounted Cash Flow

(DCF) to value AL‐Meezan Investment Management which adds Rs4/share to our valuation. This implies a consolidated value of

Rs123/share for MEBLRs123/share for MEBL.

For Justified PBV we have used Gordon Growth Model (ROE‐g/K‐g), whereas for Justified PE ratio we have taken projected market

PE and applied 17% premium (last 5‐year historical premium over the market). For cost of equity, we have assumed a risk free

rate of 10% equivalent to 10‐year Pakistan Investment Bond (PIB) rate and a market risk premium of 7%.

MEBL is growing at a robust trajectory, where we expect the bank to exhibit 3‐Year (2018‐20) profitability CAGR of 28% compared

to Topline Banking Universe average CAGR of 14% for the period. Similar sized banks such as BAHL and BAFL also have a lower

profitability CAGR of 20% for the period 2018‐20, highlighting superior performance of MEBL.

MEBL 3-Yr (2018-20) Prof. CAGR vs Topline Banking UniverseMEBL 2019E ROE vs Topline Banking universe

26.0%

22.5%

18 2%20%

25%

30% 28.0%

21.8% 20.4% 19.6%20%

25%

30%

18.2% 17.3% 17.1% 16.6% 16.3%

12.7% 12.5%

0%

5%

10%

15%

20%15.9% 15.5%

11.3%8.8%

2.2%

0%

5%

10%

15%

20%


0%MEBL BAHL MCB BAFL ABL UBL BOP HBL NBP

0%MEBL ABL BAHL BAFL MCB NBP BOP HBL UBL

MEBL Rated Buy with a Price Target of Rs123/share

Valuation Assumption for Meezan Bank (Unconsolidated)Fair Value Weightage Rupees

P/B* 127 75% 96 P/E** 92 25% 23Target Price (Excluding Al‐Meezan Inv.) 119 Assumptions

bl ( )Sustainable ROE (Average 5 year; 2018‐22) 25%Growth rate (Retention Ratio x ROE) 12%Cost of Equity (k; Using CAPM) 17%Average Book Value (Rs/share; 2018‐22) 48.3Average Book Value (Rs/share; 2018 22) 48.3 Justified PBV (R0E‐g/K‐g) 2.6xAverage Market PE (2018‐22) 7.0xAverage Premium to Market (5‐Year historical) 17%Justified PE (Average 2018‐22) 8.2xAverage Earnings (Rs/share; 2018‐22) 11.3Source: Topline Research *Justified Price to book


Justified Price to book**Based on 5‐year historical Premium to market PE

MEBL’ ROE i i d 25% f h i d 2018 20 I i ROE f T li B ki

Premium Multiples Justified by Growth and Superior Returns

MEBL’s ROE is estimated to average 25% for the period 2018‐20. In comparison, average ROE of Topline BankingUniverse during 2018‐20 is estimated to be considerably lower at 15%. In the same period, comparably sizedbanks, which include BAHL and BAFL, are also expected to generate average ROE of 21% and 17%, respectively,lower than MEBL’s average ROE.lower than MEBLs average ROE.

MEBL is amongst the cheapest banks in Topline Banking Universe (ex‐ State Owned banks) on the basis of 2022FROE adjusted for PBV.

2022F ROE Adjusted for PBV of Topline Universe (ex‐ State Owned Banks)2022F ROE Adjusted for PBV of Topline Universe (ex‐ State Owned Banks)ROE 2022F PBV 2022F Adjusted ROE

BAFL 15.0% 0.8 19.5%ABL 16.9% 0.9 19.3%MEBL 25.1% 1.3 18.7%BAHL 20.3% 1.1 18.2%UBL 15.1% 1.0 14.6%MCB 18.8% 1.4 13.3%

Notably, MCBs PBV/PE was on average 2.7x/9.8x during 2001‐15 with average ROE of 20%+, which was

MCB 18.8% 1.4 13.3%HBL 11.5% 0.9 13.0%Source: Company Accounts, Topline Research, PSX


considered to be a high growth period. We believe MEBL will also pass through the same phase where it willgenerate 20%+ ROE and will trade at high PE & PBV.

MEBL Provides Highest Upside in Topline Banking Universe

MEBL offers a potential upside of ~38%, highest expected return in the Topline Banking Universe. In addition toMEBL’s unconsolidated value, we also include Al‐Meezan Investment Management and use sum of the partsvaluation to value MEBL.

MEBL Upside vs Topline Banking Universe

Target Price UpsideTarget Price Upside

MEBL 123 38%BAFL 65 31%ABL 119 17%BAHL 95 18%MCB 240 19%BOP 12 1%UBL 156 1%HBL 152 0%NBP 47 ‐10%

Source: Company Accounts PSX Topline Research


Source: Company Accounts, PSX, Topline Research

h l d l b d l d h f l ’

Al‐Meezan Investment Management‐ Valuation

We have valued Al‐Meezan based on DCF. Our assumptions include a growth rate of 10% in Al‐Meezan’sAUMs which is slightly below our assumption of M2 growth. We have also used a discount rate of 17%.

Valuation of Al‐Meezan Investment management is at around ~Rs7.4bn which includes Rs3.2bn in Cash andInvestments.

MEBL has a share of 65% in Al‐Meezan which implies a value of Rs4.8bn for the Bank. This is significantlyhigher than the carrying value of Rs63mn on MEBL’s books.

Thus, Al‐Meezan adds Rs4/share in SOTP value of MEBL which is around ~3% of its consolidated value.

Al‐Meezan DCF Based ValuationKey Assumptions

Key Financial information of Al‐Meezan Investment ManagementRsmn 2013 2014 2015 2016 2017

AUMs growth 10%Management Fee Growth 10%Discount Rate 17%Terminal Growth 2%

Assets 2,057 2,449 3,163 4,191 3,728

Liabilities 589 437 464 699 848

N t A t 1 468 2 012 2 699 3 491 2 880DCF Value (Rsmn) 4,172Investments (Rsmn) 3,159Cash (Rsmn) 52Total Value (Rsmn) 7 383

Net Assets 1,468 2,012 2,699 3,491 2,880

Revenue 1,115 1,347 1,415 2,346 1,646

Profit/Loss 490 673 600 1,201 461


Total Value (Rsmn) 7,383Value per share for MEBL (Rs) 4.1 Source: Topline Research

Source: Company Accounts

MEBL: Financial Snapshot

U lid t d I St t t A tiUnconsolidated Income Statement Assumptions Rsbn 2016A 2017A 2018E 2019F 2020F 2016A 2017A 2018E 2019F 2020FInterest Earned 30.76 36.09 52.94 79.94 93.48 Discount Rate (year end) 5.75% 5.75% 8.50% 9.75% 9.75%Interest Expensed 12.87 15.27 26.45 44.28 51.28 Deposit Growth 20.0% 19.0% 18.0% 18.0% 18.0%Net Interest Earned 17.89 20.81 26.49 35.67 42.20 Advances Growth 48.0% 34.0% 11.0% 18.0% 18.0%Non Interest Income 5 66 7 58 7 27 8 59 9 84 NIMs 3 5% 3 3% 3 6% 4 1% 4 1%Non‐Interest Income 5.66 7.58 7.27 8.59 9.84 NIMs 3.5% 3.3% 3.6% 4.1% 4.1%Gross Income 23.55 28.39 33.76 44.26 52.03Operating Expenses 14.79 16.82 19.18 22.42 26.12 Key RatioPBT Before Prov. & Taxes 8.76 11.57 14.58 21.84 25.92 2016A 2017A 2018E 2019F 2020FProvisions/Reversals (0.18) 1.32 0.94 3.25 4.68 Return on Loans 5.8% 5.9% 7.3% 9.4% 9.4%Profit Before Taxation 8 94 10 25 13 63 18 58 21 23 Cost of Deposits 3 4% 3 3% 4 8% 7 1% 7 1%Profit Before Taxation 8.94 10.25 13.63 18.58 21.23 Cost of Deposits 3.4% 3.3% 4.8% 7.1% 7.1%Profit After Taxation 5.56 6.31 8.32 11.52 13.38 Net Interest Margin (NIM) 3.5% 3.3% 3.6% 4.1% 4.1%EPS (Rs) 4.8 5.4 7.1 9.9 11.4 NII/ Gross Income 76.0% 73.3% 78.5% 80.6% 81.1%Source: Company Account, Topline Research Cost / Income Ratio 62.3% 58.4% 56.1% 50.1% 49.7%

Deposit Growth 19.5% 19.4% 18.2% 18.0% 17.8%Credit Growth 48 1% 34 2% 10 8% 18 0% 17 8%Credit Growth 48.1% 34.2% 10.8% 18.0% 17.8%Investment Growth 69.2% ‐8.4% 11.5% 32.1% 24.0%Return on Equity (ROE) 20.7% 20.2% 22.2% 26.0% 25.8%

Unconsolidated Balance Sheet Return on Assets (ROA) 0.9% 0.9% 1.0% 1.2% 1.2%Rsbn 2016A 2017A 2018E 2019F 2020F Advances‐to‐Deposit (ADR) 56.7% 63.7% 59.7% 59.7% 59.7%Paid‐up Capital 10 03 10 63 11 69 11 69 11 69 Investment‐to‐Deposit (IDR) 23 1% 17 7% 16 7% 18 7% 19 7%Paid up Capital 10.03 10.63 11.69 11.69 11.69 Investment to Deposit (IDR) 23.1% 17.7% 16.7% 18.7% 19.7%Shareholders' Equity 28.15 34.34 40.64 48.00 55.61 Due from FI as a % of Deposits 22.9% 21.9% 25.5% 23.0% 22.0%Total Equity 30.47 35.08 41.01 48.33 55.91 CASA 74.9% 75.0% 76.1% 76.6% 77.1%Deposits 564.02 673.19 795.62 938.52 1,105.11 Gross Infection Ratio 2.1% 1.5% 1.5% 1.7% 2.0%Total Liabilities 627.29 746.62 867.80 1,017.07 1,191.12 Net Infection Ratio ‐0.4% ‐0.5% ‐0.5% ‐0.4% ‐0.4%Net Advances 311.53 420.03 465.72 548.38 643.90 CAR Tier 1 9.41% 9.94% 11.7% 11.5% 11.2%


Net Advances 311.53 420.03 465.72 548.38 643.90 CAR Tier 1 9.41% 9.94% 11.7% 11.5% 11.2%Net Investments 130.16 119.24 132.97 175.62 217.85 CAR 12.9% 12.9% 14.2% 13.7% 13.2%Total Assets 657.77 781.70 908.80 1,065.41 1,247.03 Number of Branches 571 601 641 691 741Source: Company Account, Topline Research Source: Company Account, Topline Research

Pakistan Banks: Comp Sheet

Name Symbol

Share Price (Rs) Sep 28, 2018

Market Cap.

(US$mn)

2018E Quarter Ended Jun 2018

PE PBV Div. Yield ROAE* ROAA CA to Deposits NIMs**

Total Coverage Ratio

NPL to

LoansCARⱶ

Cost to

Income

Loan Growth

Deposit Growth ADR IDR

NII/total

incomeBranches Deposits

(Rsbn)Advances (Rsbn)

Investment (Rsbn)

MCB Bank MCB 201 1 919 10 7 1 5 8% 16% 1 5% 38% 4 0% 94% 8% 16% 52% 36% 17% 53% 65% 74% 1 360 1 070 564 694MCB Bank MCB 201 1,919 10.7 1.5 8% 16% 1.5% 38% 4.0% 94% 8% 16% 52% 36% 17% 53% 65% 74% 1,360 1,070 564 694

Habib Bank HBL 151 1,787 12.1 1.1 4% 10% 0.7% 37% 3.6% 92% 8% 16% 71% 12% 1% 46% 67% 78% 1,751 2,014 935 1355

United Bank UBL 154 1,517 11.4 1.2 5% 12% 0.8% 40% 3.7% 88% 8% 15% 49% 19% 5% 51% 60% 67% 1,381 1,396 716 840

Allied Bank ABL 102 939 8.0 1.1 8% 18% 1.1% 38% 2.8% 98% 4% 22% 52% 9% 9% 46% 93% 69% 1,254 927 424 862

National Bank NBP 52 889 NM 0.6 0% NM NM 39% 3.2% 100% 14% 16% 52% 10% 10% 41% 71% 62% 1,523 1,911 791 1363

Meezan Bank MEBL 89 839 12.5 2.6 4% 22% 1.0% 37% 3.8% 133% 2% 13% 55% 20% 19% 57% 18% 77% 602 707 405 124

Bank AL Habib BAHL 81 722 10.1 1.8 4% 21% 0.9% 41% 3.8% 146% 1% 14% 59% 43% 15% 59% 59% 81% 644 749 445 440

Bank AL Falah BAFL 50 709 8.0 1.1 4% 18% 1.1% 46% 4.0% 96% 3% 14% 59% 17% 2% 72% 53% 71% 641 668 480 357

Stan. Chartered SCBPL 23 701 7.8 1.4 10% 19% 2.1% 46% 4.2% 101% 11% 19% 41% 7% 6% 38% 70% 67% 89 403 154 284

Habib Metro Bank HMB 47 392 7.1 1.0 7% 14% 0.9% 27% 2.9% 93% 8% 17% 51% 14% 15% 38% 73% 72% 289 523 199 383

Faysal Bank FABL 27 328 8.1 0.9 0% 15% 1.0% 33% 3.4% 89% 8% 16% 64% 38% 11% 75% 46% 69% 405 394 294 181

Bank of Punjab BOP 12 252 5.3 1.1 7% 19% 0.9% 25% 3.1% 90% 12% 14% 58% 19% 12% 61% 37% 83% 540 593 360 221

Askari Bank AKBL 25 249 5.7 0.9 4% 18% 0.8% 29% 3.3% 95% 8% 12% 61% 19% 9% 55% 52% 74% 516 573 312 300

Soneri Bank SNBL 12 111 6.6 0.7 7% 13% 0.6% 29% 2.2% 78% 6% 13% 74% 12% 4% 69% 65% 70% 290 243 168 157

Bank of Khyber BOK 13 107 8 3 0 9 9% 11% 0 6% 22% 2 8% 90% 5% 20% 62% 61% 12% 54% 57% 87% 167 170 92 97Bank of Khyber BOK 13 107 8.3 0.9 9% 11% 0.6% 22% 2.8% 90% 5% 20% 62% 61% 12% 54% 57% 87% 167 170 92 97

Bank Islami BIPL 13 105 30.8 0.8 0% 3% 0.2% 34% 3.5% 72% 4% 14% 117% 7% 5% 61% 27% 101% 330 172 105 47

Silk Bank SILK 1 94 8.0 0.9 0% 12% 0.9% 23% 5.4% 78% 6% 11% 62% 20% 23% 75% 24% 67% 123 125 94 30

JS Bank JSBL 7 77 7.6 0.5 0% 7% 0.3% 24% 2.4% 79% 2% 13% 77% 80% 19% 74% 47% 70% 323 310 229 147

Samba Bank SBL 8 63 8.9 0.6 0% 7% 0.8% 25% 2.3% 97% 4% 20% 70% 50% 16% 83% 89% 88% 37 60 49 53


Total Listed Banks 11,799 10.0 1.1 5% 12% 0.8% 36% 3.4% 94% 7% 14% 57% 21% 9% 52% 61% 72% 12,265 13,009 6,815 7,936


*Excluding revaluation surplus ; **Average earning assets include advances, investments and lending to FI; ⱶLatest Reported as on Dec

Pakistan Islamic Banking Sector


Fi t i l i b ki li i P ki t i i 2002 d i th f b k (D b i I l i B k I l i Al B k MCB

Islamic Banking Sector – An Overview

First islamic banking license in Pakistan was given in 2002 and since then four banks (Dubai Islamic, Bank Islami, Al‐Baraka, MCBIslamic bank) have been added to the list of fully fledged islamic banks. Among these banks, MEBL is the largest, commanding atotal market share of ~36% in islamic banking.

At the same time, sensing the growth potential in the industry, 16 conventional banks have also opened up islamic windows,grabbing a share of 40% in islamic banking deposits and taking share of islamic deposits to ~15% of total banking sector deposits.

Islamic banking has grown its deposits at a 10‐Year CAGR (2008‐17) of 25%. Moving forward we expect the 3‐Year CAGR (2018‐20)for Islamic Banking deposit growth to be 17%, taking share of Islamic deposits to 18%, compared to SBP target of 20% share by2020.

Although lack of investment opportunities remains an issue, the introduction of Bai Muajjal (an instrument offering yield slightlyless than a 6M T‐Bill) has given Islamic Banking sector an avenue to park their excess liquidity. The banks have been using thisfacility heavily as indicated by ~22% deposits parked in Bai Muajjal in addition to IDR of ~18% and ADR of ~62%.

Islamic Banking Advances Islamic Banking Deposit

1,600

2,000 Rsbn

9291,114 1,300 Rsbn

-

400

800

1,200

06 07 08 09 10 11 12 13 14 15 16 17 18

-186 371 557 743 929

06 07 08 09 10 11 12 13 14 15 16 17 18


200

200

200

200

201

201

201

201

201

201

201

201

Jun'

-1

200

200

200

200

201

201

201

201

201

201

201

201

Jun'

-1

I l i b ki h h t ti l f th ithi P ki t d t i h t li i i li ti f l A t d

Significant Pent‐up Demand for Islamic Banking

Islamic banking has huge potential for growth within Pakistan due to inherent religious inclinations of populace. As per a studyconducted by SBP and Department for International Development in 2014, ~95% and ~98% of the of the banked and unbankedrespondents, respectively, believed in prohibition of interest. Similarly, ~88% and ~93% of the banked and unbankedrespondents, respectively, believed interest charged and given by the banks to be prohibited.Moreover, the study also showed that 74% of the banked respondents were willing to shift to Islamic Banking. However, majorreason for not shifting was lack of Islamic banking branches in their vicinity. The same survey estimated effective demand forislamic products to be 65% for households and 26% for corporate. A considerable proportion of respondents even indicatedpaying more for shariah compliant products (62% of banked and 43% of unbanked respondents). Hence, the said survey provesthat there is huge unmet demand for islamic banking in Pakistan.Financial inclusion in Pakistan remains very low with just 21% (as per recent available data) of adult population having accountswith formal financial institutions. SBP target is to increase the proportion of adult population with bank accounts to 50% by 2020through both conventional and Islamic Banking– opening up room for growth without having to cut competitors share.

Islamic Banking Sector Branch Network

g g p g p g g p

2 000

2,500

3,000

Respondents of SBP Survey Willing to Switch to Islamic Banking

Not Sure17%

No9%

0

500

1,000

1,500

2,000

6 7 8 9 0 2 3 4 5 6 7 8

Yes74%

17%

Meezan Bank (MEBL) 37Source: Company Accounts, Topline Research

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Jun'

-18


About the Bank


About the Bank

MEBL was incorporated in 1997 as Islamic Investment Bank. In 2002, Bank was granted Pakistan’s first ever Islamic

Commercial Banking license by SBP and simultaneously the bank acquired Pakistan operations of Society General. The

bank also acquired HSBC operations in Pakistan in 2014. MEBL is currently the 7th largest commercial bank and the

largest Islamic Bank of Pakistan with a deposit base Rs673bn (as of Dec 2017) and total branch network of 601 (as of Dec

2017) branches in 151 cities.

Key Shareholders of the Bank include Noor Financial Investment Co. Kuwait, Pakistan Kuwait Investment Company (Joint

venture between government of Pakistan and Kuwait) and Islamic Development Bank with a share of 39%, 30% and

9%, respectively, as of Jun 2018 . The Bank has a long term rating of AA and a short term rating of A1+.

Shareholding Pattern (as of Jun 2018)S a e o d g atte (as o Ju 0 8)

Noor Financial39%IDB

9%

others21%

Pak Kuwait30%


Source: Company Presentation, Topline Research

About the Bank

MEBL’s total assets have grown at a 5‐year CAGR of 23% whereas total branch network of the bankhas grown from 310 branches in 2012 to 601 branches as of Dec 2017. Similarly, MEBL’s depositshave grown at a 5‐year CAGR of 24% much faster than industry growth of 13%.

MEBL (as of Dec 2017) has a ~5.4% market share in Banking Sector deposits and 35.7% in Islamicbanking. The Bank’s ADR and IDR are currently at ~62% and ~18%, respectively. The Bank also has acustomer base of over 1 8mn (as of Dec 2017) and is ranked as top bank for maximum number ofcustomer base of over 1.8mn (as of Dec 2017) and is ranked as top bank for maximum number ofpoint of sale transactions of 1 link.

The Bank also owns 65% share in Al‐Meezan Investment Management Limited which is the largestprivate sector AMC in Pakistan with AUMs of ~Rs93bn.

The banks has received various recognitions at local as well as international forums. Few importantiti i l d ‘B t I l i B k f P ki t ’ d ‘B t I l i R t il B k i th ld’ brecognitions include ‘Best Islamic Bank of Pakistan’ and ‘Best Islamic Retail Bank in the world’ by

institutes such as CFA society Pakistan, Pakistan Banking awards, Islamic Finance awards, The Bankerand Asia money etc.


CONTACT US

Mr Mohammed Sohail CEO Dir +92 (21) 35303333 4 sohail@topline com pkMr. Mohammed Sohail CEO Dir: +92 (21) 35303333-4 [email protected]

Research Team:

Mr. Saad Hashemy Chief Economist & Director Research Dir: +92 (21) 35303346 [email protected]

Mr Umair Naseer Deputy Head of Research +92 (21) 35303330 2 umair naseer@topline com pkMr. Umair Naseer Deputy Head of Research +92 (21) 35303330-2 [email protected]

Mr. Nabeel Khursheed Senior Research Analyst +92 (21) 35303330-2 [email protected]

Mr. Shankar Talreja Research Analyst +92 (21) 35303330-2 [email protected]

Mr Syed Daniyal Adil Research Analyst +92 (21) 35303330-2 daniyal@topline com pkMr. Syed Daniyal Adil Research Analyst +92 (21) 35303330 2 [email protected]

Mr. Fahad Qasim Manager Research +92 (21) 35303330-2 [email protected]

Mr. Asif Habib Database Officer +92 (21) 35303330-2 [email protected]

Equity Sales Team:qu ty Sa es ea

Ms. Samar Iqbal Head of International Equity Sales Dir: +92 (21) 35370799 [email protected]

Mr. Muhammad Hammad Aman Senior Manager Equity Sales Dir: +92 (21) 353030297 [email protected]

Mr. Rai Omar Basharat Senior Manager Equity Sales Dir: +92 (21) 35303323 [email protected] q y ( ) @ p p

Corporate Office:508, Continental Trade Center,Block-8, Clifton, Karachi, PakistanTel: +9221-35303330-2Fax: +9221-35303349


The research analyst(s), denoted by an “AC” on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her

Analyst Certification and DisclosuresThe research analyst(s), denoted by an AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/herpersonal views about all of the subject companies/securities/sectors and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressedin this report.Furthermore, it is stated that the research analyst or its close relative have neither served as a director/officer in the past 3 years nor received any compensation from the subject company in the past 12months.Additionally, as per regulation 8(2)(i) of the Research Analyst Regulations, 2015, we currently do not have a financial interest in the securities of the subject company aggregating more than 1% of the value ofthe company.

Rating SystemTopline Securities employs three tier ratings system to rate a stock, as mentioned below, which is based upon the level of expected return for a specific stock. The rating is based on the following with timehorizon of 12‐months.Rating Expected Total ReturnBuy Stock will outperform the average total return of stocks in universe Neutral Stock will perform in line with the average total return of stocks in universeSell Stock will underperform the average total return of stocks in universeFor sector rating, Topline Securities employs three tier ratings system, depending upon the sector’s proposed weight in the portfolio as compared to sector’s weight in KSE‐100 Index:Rating Sector’s Proposed Weight in PortfolioOver Weight > Weight in KSE‐100 IndexMarket Weight = Weight in KSE‐100 IndexUnder Weight < Weight in KSE‐100 IndexRatings are updated daily to account for the latest developments in the economy/sector/company, changes in stock prices and changes in analyst’s assumptions or a combination of any of these factors.

Valuation MethodologyTo arrive at our 12‐months Target Price, Topline Securities uses different valuation methods which include: 1). Present value methodology, 2). Multiplier methodology, and 3). Asset‐based methodology.

Research Dissemination PolicyTopline Securities endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as email, fax mail etc.Nevertheless, all clients may not receive the material at the same time.

Di l iDisclaimerThis report has been prepared by Topline Securities and is provided for information purposes only. Under no circumstances this is to be used or considered as an offer to sell or solicitation of any offer to buy.While reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completenessand it should not be relied upon as such. From time to time, Topline Securities and/or any of its officers or directors may, as permitted by applicable laws, have a position, or otherwise be interested in anytransaction, in any securities directly or indirectly subject of this report. This report is provided only for the information of professional advisers who are expected to make their own investment decisionswithout undue reliance on this report. Investments in capital markets are subject to market risk and Topline Securities accepts no responsibility whatsoever for any direct or indirect consequential loss arisingfrom any use of this report or its contents In particular the report takes no account of the investment objectives financial situation and particular needs of investors who should seek further professionalfrom any use of this report or its contents. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors, who should seek further professionaladvice or rely upon their own judgment and acumen before making any investment. The views expressed in this report are those of Topline Research Department and do not necessarily reflect those ofTopline or its directors. Topline as a firm may have business relationships, including investment‐banking relationships, with the companies referred to in this report.All rights reserved by Topline Securities. This report or any portion hereof may not be reproduced, distributed or published by any person for any purpose whatsoever. Nor can it be sent to a third party without prior consent of Topline Securities. Action could be taken for unauthorized reproduction, distribution or publication.

42Meezan Bank (MEBL)

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