Branch Closures And Rising Competition Will Challenge Future Prospects

Key Takeaways

• Planned branch network reduction and intensified competition may limit customer acquisition and harm revenue from remittance and deposit growth.
  
• Focus on increasing current account deposits could reduce costs, but may not offset lower loan interest rates and tighter net interest margins.
  
• MCB Bank's digital growth, international expansion, focus on current accounts, and strong remittance market share enhance revenue and profitability amid financial stability.

Catalysts

Provides commercial banking and related services in Pakistan, South Asia, Eurasia, and the Middle East.

• The anticipated decline in advances from PKR 1.1 trillion to around PKR 700-750 billion in the coming quarter suggests reduced revenue from interest income on loans, impacting future revenue growth.
  
• The planned reduction in the branch network on the conventional side could limit customer acquisition and deposit growth, potentially affecting revenue and net margins by reducing physical banking opportunities.
  
• The strategic focus on increasing current account deposits, while positive for reducing costs, may not fully offset expected revenue declines from dropping interest rates on loans, potentially compressing net interest margins further.
  
• Intensified competition in the remittance market and reduced fee income from remittance rebates could negatively impact non-interest income streams and overall earnings growth.
  
• The planned increase in the Islamic banking footprint and digital transformation investments might initially increase operating expenses, which could affect net margins and earnings if not offset by commensurate revenue growth.

MCB Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MCB Bank's revenue will decrease by 11.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.0% today to 36.3% in 3 years time.
• Analysts expect earnings to reach PKR 51.6 billion (and earnings per share of PKR 43.07) by about April 2028, down from PKR 63.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, up from 5.4x today. This future PE is greater than the current PE for the PK Banks industry at 3.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 28.66%, as per the Simply Wall St company report.

MCB Bank Future Earnings Per Share Growth

Risks

• MCB Bank has shown strong growth in its digital user base, expanding from 100,000 to 1.4 million registered users. This digital transformation could potentially boost transactional revenue and enable cost savings, positively impacting net margins and earnings.
  
• The bank has increased its footprint in international markets with new branches, notably in remittance-heavy areas such as the UAE and UK. This expansion can enhance revenue streams through increased remittance volumes and international trade facilitation.
  
• MCB's strategic focus on increasing current accounts, which have few or no interest costs, can improve the cost of funds, supporting net interest margins despite the overall compression witnessed. This can enhance the bank's profitability.
  
• The bank holds a significant market share in remittances (13.2%) and continues to focus on optimizing this segment. Stability or growth in remittances, even amid competition, could support revenue stability in foreign exchange and fee income.
  
• The implementation of IFRS 9 and subsequent classification of equity investments as FVOCI led to a reversal of provisions, creating a surplus in capital markets investments. This, coupled with a strong capital ratio, provides a robust buffer aiding financial stability and potential earnings growth.

Valuation

• The analysts have a consensus price target of PKR305.671 for MCB Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of PKR398.0, and the most bearish reporting a price target of just PKR232.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be PKR142.3 billion, earnings will come to PKR51.6 billion, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 28.7%.
• Given the current share price of PKR286.67, the analyst price target of PKR305.67 is 6.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.