Fresh from the OGDCL setback, government is going ahead with the planned offloading of its 11.5 percent stake in Allied Bank of Pakistan (ABL). Being a relatively smallish offer, there is not much noise in the market, but the participants are sure that it would fetch decent sums in terms of privatisation proceeds for the cash-strapped government.
"ABLs should be an easy transaction, being one of the finest banks in terms of health, efficiency and core profitability," said a research analyst from a leading brokerage house. The offer consists of 131.2 million ordinary shares, expected to fetch a floor price at discount to the prevailing market price. The market consensus estimates suggest the floor price would be close to 10 percent discount to market price, whereas few outliers suggest a discount as steep as 20 percent.
Sector analysts have pitched a fair value to the tune of Rs140-150 per share for ABL, which offers 22-30 percent upside from current levels. Besides, there is a healthy dividend yield of 6-7 percent on offer as well, making ABL the stock of choice in the banking universe. There are enough reasons for it. ABL boasts of the cleanest book amongst its peers, with an infection ratio of only 7 percent, which is half the industry average. The NPLs are also adequately provided for, with coverage ratio of 80 percent, having been as high as 90 percent as recently as 2QCY14. Needless to say, the capital adequacy ratio of a very healthy 18 percent provides enough cushion and room to ABL to go for riskier investments and lending in the future, if needed.
The asset composition is tilted towards investments, as is the case with most similar sized banks. The ADR of 44 percent has stayed flattish in previous few quarters. The investments in PIBs have grown substantially, and the bulk of it is in held to maturity category. ABL may not be able to pounce on the opportunity of realising gains in the current scenario of falling yields, but the overall investment portfolio remains lucrative. Little surprise that ABLs cost to income ratio at 41 percent is the finest in the industry, speaking volumes of its efficiency. This however, is also termed as a risk by a few, as nearly half the earnings come at the back of returns on investment portfolio. The over dependence can carry a risk, should yields go in the other direction.
The deposits too have been growing steadily and more importantly in the right direction, and an ever improving CASA ratio is testament to that. Analysts are of the view that ABL faces the least impact of monetary easing in terms of profitability erosion because of the improved deposit structure. With healthy upside on offer as ABL trades at hefty discount to consensus estimates, it is fair to say corporate and high net worth investors would be eying to have a share in the ABL pie. All eyes on the floor price now.
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