Floating Rate Securities And CASA Mix Will Shape Future Performance

Catalysts

About MCB Bank

MCB Bank is a Pakistan focused commercial bank that provides retail, corporate and Islamic banking services across a large branch and digital network.

What are the underlying business or industry changes driving this perspective?

• Although the bank has reached a high 55% current account concentration and over 97% CASA, further gains toward the 60% current account goal could be harder to achieve as easy wins are already captured. This may limit additional relief in funding costs and keep pressure on net interest margins and earnings growth.
• While the large shift into government securities, especially the PKR 1.2b floating rate PIB portfolio, provides yield visibility today, the heavy tilt toward this asset class exposes the bank to future repricing and reinvestment risk if yields move unfavorably. This could cap net interest income and compress margins.
• Despite strong remittance volumes with around 12% share and over US$4b equivalent flows, regulatory changes that removed past incentives and intense competition from other banks have already pushed this line close to or into loss making territory. Any slow normalization of pricing could keep fee income subdued and weigh on overall revenue.
• Although the Islamic subsidiary now runs more than 300 branches and has upgraded to a new digital platform, the recent MDR application has already cut profit before tax by about 45%. Any slower than expected ramp up in low cost Islamic current accounts could mean weaker group earnings contribution than management would like.
• While digital usage is growing with about 1.7m registered users and over half financially active, the bank is simultaneously carrying higher spending on technology, marketing and staff expansion. If revenue lift from digital and deposit growth does not keep pace, the push toward a lower cost to income ratio could stall and restrict profit growth.

Assumptions

This narrative explores a more pessimistic perspective on MCB Bank compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming MCB Bank's revenue will decrease by 2.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 27.1% today to 35.4% in 3 years time.
• The bearish analysts expect earnings to reach PKR 66.2 billion (and earnings per share of PKR 52.92) by about January 2029, up from PKR 54.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.7x on those 2029 earnings, up from 9.4x today. This future PE is greater than the current PE for the PK Banks industry at 7.1x.
• The bearish 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 29.68%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• MCB Bank is targeting deposit growth north of 20% for the upcoming year and is planning to add 42 to 45 new conventional branches plus 10 to 15 Islamic branches, along with 3,000 to 4,000 new retail staff. If this expansion and deposit push translate into stronger earnings or return on equity than today, the share price may rise rather than stay flat as profitability improves.
• The bank’s funding profile is shifting toward a very high quality mix, with current account concentration already at 55% and management aiming for 60% and total CASA above 97%. If this low cost base supports healthier net interest margins over time, it could support higher net interest income and earnings and put upward pressure on the share price.
• MCB Bank holds a large investment book with PKR 1.2t in floating rate PIBs, significant fixed rate PIBs at a yield of 12.29% and treasury bills, and the surplus on revaluation of securities has risen to PKR 46.7b. If interest rate and yield conditions remain supportive for this portfolio, the valuation surplus and related income could strengthen earnings and asset value, which may lead to share price upside.
• The Islamic subsidiary has already scaled to more than 300 branches, upgraded its digital platform and is targeting a higher ranking in the Islamic banking segment. If current account mobilization and consumer lending in this franchise grow and the MDR impact on profit before tax normalizes, the subsidiary could add more to group profit and support a higher earnings base.
• Digital usage is growing, with around 1.7m registered users and more than half financially active, while the bank is investing in technology and outsourcing ATM and card management to Euronet with CDM roll out planned. If these investments start to lift fee income and help push the cost to income ratio towards the 35% target, operating leverage could improve and support stronger net margins and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for MCB Bank is PKR403.0, which represents up to two standard deviations below the consensus price target of PKR462.33. This valuation is based on what can be assumed as the expectations of MCB Bank's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of PKR544.0, and the most bearish reporting a price target of just PKR403.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be PKR187.1 billion, earnings will come to PKR66.2 billion, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 29.7%.
  
• Given the current share price of PKR435.42, the analyst price target of PKR403.0 is 8.0% lower. 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.