MCB – top pick for banking sector in 2012

Despite expected slowdown in earnings growth in 2012 due to decline in policy rate, Muslim Commercial Bank (MCB) remains our top pick for 2012 in the banking sector, said Farhan Mahmood of Topline Securities. Thus with highest NIMs (8.5 per cent), better asset quality (NPL ratio of 11 per cent and highest coverage ratio of 86 per cent) and reasonable dividend yield of nine per cent, MCB with one of the highest ROE of 24 per cent offers an opportunity to capitalise once the economy revives amid hope of general elections, he added.

Overcoming foreign selling pressures

The analyst said despite expected earnings growth of 23 per cent in 2011, foreign selling amid global crisis led MCB share price to fall almost by one third. “MCB, which stands out amongst top five companies in which foreigners have substantial holding, yielded a negative return of 31 per cent. We believe that offshore selling which resulted in underperformance of the scrip in 2011 will likely to continue in early part of 2012 as well albeit at a slower pace,” he said.

Highest Net Interest Margins

With a decline in interest rate, improvement in ADR will slightly offset impact of reduction in net interest income (NII) of the bank, we believe. MCB currently has one of the lowest advances to deposit ratio of 50 per cent amongst the big five of the banking sector. Thus with highest NIMs (net interest margin) on advances, earnings growth impact would be higher on MCB once credit demand picks amid recovery in economy. As the economy showed lackluster growth in last few years due to floods and higher interest rate scenario, banks faced asset quality concerns which led to higher growth in non-performing loans (NPLs).

Lowest increment of bad loans

However, MCB is showing a divergent trend with one of the lowest increment of bad loans in its books. Moreover, banks’ aggressive provisioning over the years and stringent risk policy has led MCB to enjoy one of the highest coverage ratio of 86 per cent (the five big banks average of around 75 per cent), though NPL ratio of 11 per cent is also one of the lowest (the five big banks average of 14 per cent).