Bank of Punjab on path to recovery

Brokerage house says bank expected to report Rs6.3b profit in 2018

KARACHI: Bank of Punjab (BOP) is expected to report Rs6.3 billion as after-tax profit for calendar year 2018, driven by 15% higher net interest income (NII), said Fortune Securities in a note to clients recently.

It said the underlying performance of the bank has shown impressive growth over the last few years but largely remained unappreciated due to the overhang of high non-performing loans (NPLs), and the looming provisioning charge.

“We expect the bank to report Rs6.3 billion in after tax profits for CY18 (EPS: Rs2.38) driven by 15% higher NII, which is likely to be further bolstered by possible net reversals over the next few quarters,” said Fortune Securities. “With significantly cleaner asset book, trading at 0.95x 1Q’18 book value and (adjusted for net reversals) 5.4x CY18E earnings, we believe BOP is ripe for price discovery.”

With 540 branches across Pakistan and a market share of approximately 3.5%, Fortune Securities said it believes BOP’s investment into branch network over the last few years has started to deliver desired result through reduced funding cost. “We also believe, under the new management, BOP’s quality of lending has significantly improved vis-a-vis its predecessor and is unlikely to result in large negative surprises going forward.

“We understand that BOP, with the help of a strong first-quarter 2018 financial performance and Rs4.3 billion of TFC issuance (which will be booked under Tier 2 capital), has managed to enhance its capital to the required minimum (11.42%) and expected profitability over the course of CY18 is likely to further strengthen the capital base.”

The note added that the bank’s core underlying business improvement has failed to attract investors’ attention on account of legacy issues. “Underlying numbers, stripping out the one off provisioning charge associated with legacy NPLs, shows an improving trend where core revenue has increased 1.75x over the last three years.

“We believe, with the entire stock of outstanding provisioning now charged in the income statement; cleaner books, high NPL coverage and a robust underlying core business performance, BOP is well positioned to undergo price discovery as investors assess next few quarterly announcements.”

The brokerage house said key risks to the bank include a slowdown in economic growth that would likely reduce credit demand. “Additionally, though we feel that interest rate cycle has changed whereby the medium-term outlook remains tilted toward monetary tightening, it is possible that interest rates remain at current levels for longer than expected.” 

Published in The Express Tribune, May 25^th, 2018.

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