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Pakistan Equity | Banks | Company Initiation

February 8, 2018 REP‐057
Prices as of February 7 2018
Prices as of February 7, 2018

Bank of Punjab (BOP)
Initiatingg coverage
g with a ‘Sell’

Umair NaseerAC Best Local Brokerage House


Brokers Poll 2011-14,
2011 14 2016-17
2016 17
umair.naseer@topline.com.pk
i @ li k
Tel: +9221‐35303330, Ext: 119
Topline Securities, Pakistan www.jamapunji.pk Best Local Brokerage House 2015-16
Table of Contents

Executive Summary -------------------------------------- 3

Company Overview -------------------------------------- 6

Ab
Above average L
Loss ratios
ti -------------------------------------- 7

Sectoral Concentration of Advances -------------------------------------- 9

Coverage Ratio well below required levels -------------------------------------- 10

Capital Adequacy of Bank -------------------------------------- 11

SBP Regulations on Capital Adequacy -------------------------------------- 12

Deterioration in Capital adequacy & its implication -------------------------------------- 14

Valuation -------------------------------------- 15

Peer Banks Comparison -------------------------------------- 16

About the Bank -------------------------------------- 17

2008 Crisis & its impact on BOP ------------------------------------- 18

Issues with Govt. owned banks -------------------------------------- 19

B k’ Comp
Bank’s C Sheet
Sh t -------------------------------------- 20

BOP: Financial Snapshot -------------------------------------- 21

Bank of Punjab (BOP) 2
Executive Summary

Bank of Punjab (BOP) 3
Executive Summary
ƒ Investment thesis: We initiate coverage on Bank of Punjab (BOP), (BOP) Pakistan’s tenth
largest Commercial Bank, with a ‘Sell’ call and target price of Rs8.7. We attribute KATS Code BOP
this to 1) high loss ratio of 16%, 2) below average provisions coverage of 63%, 3) Bloomberg Code BOP PA
requirement to book further provisions, and 4) below average CAR of 12% & Reuters Code BOPU.KA
likelihood of Tier I & Tier II capital raise. Resultantly, earnings growth will remain Market Price Rs10 18
Rs10.18
contained amid higher provisions & expected capital raise. We expect earnings to Market Cap Rs26.9bn/US$243.4mn
grow at a 3‐year (2018‐20) earnings CAGR of 7% vs. our banking sample earnings Free float Market Cap Rs11.4bn/US$102.7mn
CAGR of 14%. 1-Yr Avg. Daily Vol. (mn) 8.1
ƒ High
g loss ratio remain keyy risk: BOP,, owned byy ggovernment of Punjab j 1-Yr Avg. Daily Val. (mn) Rs101.4/US$1.0
(GoPb), remains affected from one of the highest loss ratios of 16% amongst peer 1-Yr High/ Low Rs18.3/7.4
banks. Severe loan losses suffered during 2008 crisis and public sector lending have Estimated free float 42%

infected the loan book of the bank. Loan losses of BOP climbed to 51% in 2008 Share outstanding (mn) 2,643.69

which has gradually come down to 16% as of Sep 2017. However, further Index weight 0.53%

improvement beyond 2018 would remain a challenge as interest rates are


expected to pickup. BOP vs KSE-100 Index
ƒ Coverage ratio well below Peer Banks average: Coverage ratio of the bank stands 10%
BOP KSE-100

at 63% which is well below the Peer Bank’s average of 86%. Due to lower than the -4%

required
i d coverage, bank
b k isi required
i d tot book
b k additional
dditi l provisioning
i i i expense goingi -18%

forward. -32%

ƒ Pending provisioning: State Bank of Pakistan (SBP) provided BOP relaxation to


-46%
-60%
book provisioning in a staggered manner. In 2017, BOP was required to book up to

eb-17

Apr-17

Jun-17

Aug-17

Oct-17

Dec-17

eb-18
25% of the un‐booked
un booked Rs16.5bn
Rs16 5bn and the remaining provisions are to be booked in

Fe

Fe
O
A
2018. In 2018, we expect BOP to book net provisioning of Rs9bn (net of recoveries) Source: Pakistan Stock Exchange (PSX)

which will dent bank’s profitability.


Honda Atlas Cars (HCAR)
Bank of Punjab (BOP) 4
Executive Summary

ƒ Capital
C i l adequacy
d ratio
i (CAR) remaini wellll below
b l average: CAR off the
h bank
b k stood d at 12.3%
12 3% in
i 2016 which
hi h is
i wellll below
b l
CAR of 15% of Peer Banks and slightly above the requirement of 11.3% set by SBP for 2017 (11.9% for 2018). This is
primarily due to huge prior year losses. The bank issued 70% right shares worth of Rs13bn during 2017 to support CAR
of the bank. In order to improve
p the capital
p base of the bank,, BOP is anticipated
p to issue Tier I & Tier II capital
p which
could affect BOP’s earnings going ahead. We have assumed Rs5bn of Tier II capital to be issued in 2018 and 2019.
ƒ Valuation discount has narrowed: BOP is currently trading at a 2019 PE of 6.0x and PBV of 0.7x. The stock trades at a
30% discount to the market PE as compared to its 10‐year historical average discount of over 50% to the market PE.
Similarly, Peer Banks are trading at a 2019 PE of 7.7x and PBV of 0.9x with ROE of 12%. BOP has historically traded at a
46% discount to Peer Bank’s PE and 22% discount to Peer Bank’s PBV.
ƒ Risk: Key risks for BOP includes 1) increase in loss ratio, 2) delay in interest rate hike, 3) higher than expected
deterioration in CAR ratio,
ratio & 4) government intervention.
intervention

BOP: Key Numbers
2016A 2017A 2018E 2019F 2020F
EPS
EPS  1.8
1.8  1.5
1.5  0.4
0.4  1.7 1.8
Earnings Growth  3% ‐19% ‐75% 360% 8%
PE at Rs10.18 5.5x 6.9x 27.7x 6.0x 5.6x
Dividend Yield  0% 0% 0% 0% 0%
ROE  19% 13% 5% 12% 12%
PBV 1.0x 0.8x 0.8x 0.7x 0.6x
Source: Company Accounts, Topline Research

Honda Atlas Cars (HCAR)
Bank of Punjab (BOP) 5
Company Overview
p y

Bank of Punjab (BOP) 6
High NPL ratio to confine profitability growth
ƒ BOP has successfully brought down the NPL ratio of the bank from a peak of 51% in 2008 to 16% in Sep 2017 but it still remains
higher than Peer Banks average of 9% which poses key risk for the bank. For our analysis with comparable banks having similar
fundamentals, we define ‘Peer Banks’ as banks with deposit size of up to Rs700bn. These banks include 1) Askari Bank (AKBL), 2)
Bank Alfalah (BAFL), 3) Faysal Bank (FABL), 4) Habib Metropolitan Bank (HMB), 4) Soneri Bank (SNBL) & 5) Bank of Khyber (BOK).
ƒ BOP was adversely hit by sharp rise in NPLs during 2008 primarily due to losses arising from lending to Haris Steel Mills and other
select borrowers. The crisis was further magnified by 2008 economic crisis when economic growth slowed down and inflation
increased. To recall, NPL ratio of BOP had surged to 51% in 2008 vs. 3% in 2007.
ƒ Banks are required to make provisions against NPLs as per the prudential regulation set by SBP which thus impacts the
profitability of the bank.

SBP Classification & Provisioning Guidelines
Classification Determinant  Provisions to be made
Where mark‐up/ interest or principal is overdue by  Provision of 25% of the outstanding amount less liquid assets 
Substandard
90 days or more from the due date
90 days or more from the due date. realizable & Force Sale Value Benefit
realizable  & Force Sale Value Benefit

Where mark‐up/ interest or principal is overdue by  Provision of 50% of the outstanding amount less liquid assets 
Doubtful
180 days or more from the due date. realizable  & Force Sale Value Benefit

Where markup/ interest or principal Provision of 100% of the outstanding amount less liquid 
Loss
i
is overdue by one year or more from the due date
d b f h d d assets realizable  & Force Sale Value Benefit
li bl & F S l V l B fi
Source: SBP Prudential Regulation

ƒ As per Sep 2017 accounts, 82% of the total NPLs or Rs44bn are classified into loss category which requires 100% provisioning
p
expense. Out of the total ggross advances of the bank,, around 19% advances of the bank amountingg to Rs55bn is related to textile
sector, which is subject to high NPL ratio. NPLs against Textile lending stood at around 46% in 2016, whereas their coverage ratio
also stood at only 53% against these textile sector lending which indicates high risk.

Honda Atlas Cars (HCAR)
Bank of Punjab (BOP) 7
High NPL ratio to confine profitability growth

ƒ Other than the prevailing high NPL ratio, lending against Public NPL Ratio of BOP over the years
Sector Entities (PSEs) and Federal/Provincial governments 20% 18.7%
(being a government owned bank) constitutes around 26% of 18%
15.7%
16%
13 6%
13.6% 13.8%
the total lending of the bank.
bank These are backed by government 14%
13 5%
13.5%

12%
guarantees and are not subject to SBP’s NPL classification and
10%
provisions criteria. However, non‐recovery of interest income 8%
6%
against such lending affects profitability and ROEs of the bank.

2017EE

2018EE
2016A
A

2019FF

2020FF
This is one of the key reasons why ROE of bank merely stands at
around ~13% lower than some of the private banks. Bank often Source: Company Accounts, Topline Research

faces delays or non payment of interest income from PSEs due


BOP’s loss ratio vs. Peers (Sep 30, 2017)
to their poor financial health.
ƒ
18% 16%
Although, NPL ratio of the bank has come down from 51% in 16%
14% 12%
2008 to 16% in Sep 2017, however inadequate provisioning still 12% 10% 10%
10% 8%
poses great risk to bank’s profitability and equity base. 8% 6%
ƒ We are also of the view that NPL ratio may not see further
6%
4%
4%

2%
improvement beyond 2018 as interest rate hike could stall 0%
AKBL BAFL BOP FABL HMB SNBL BOK
f h decline
further d li in
i NPL ratio.
i WeW expect NPL ratio
i to bottom
b out
Source: Company Accounts, Topline Research
at 13% in 2018 from where it is expected to rise to 14% in 2020.

Honda Atlas Cars (HCAR)
Bank of Punjab (BOP) 8
Concentration of advances & associated NPLs

Textile sector dominates sector wise lending (Dec 31, 2016) Textile sector with the highest loss ratio
Textile & ginning 90% Loss Ratio Coverage Ratio 80%
6% 45.9% 70%
Public Sector Enterprises 60% 41.7% 60%
14% 37.3%
30% 20 1%
20.1% 50%
16.3%
Federal & Provincial 1.3% 40%
10% 35% Government 0% 30%
Individuals

ommerce

Sugar

Others
ndividuals

d & Allied
Textile &

Trading &
ginning
16%
Trading & Commerce

Co

Food
In
19%
Others

Source: Company Accounts, Topline Research Source: Company Accounts, Topline Research

BOP Coverage ratio well below Peer Bank’s coverage Provisioning Expense of BOP on rise
100% 95% 95% Rsbn
94%
8,000
88%
90% 85%
83% 6,000
80% 4 000
4,000
2,000
70%
63%
-
60%
(2,000)

2019F

2020F
2013A

2014A

2015A

2016A

2017E

2018E
50%
AKBL

BAFL

FABL

BOK
BOP

SNBL
HMB

Source: Company Accounts, Topline Research Source: Company Accounts, Topline Research

Bank of Punjab (BOP) 9
Coverage ratio well below average

ƒ BOP coverage ratio i currently


l standsd at aroundd 62% or Rs33bn
R 33b which
hi h is
i wellll below
b l average off 90% off Peer
P b k Out
banks. O off
the total NPLs, NPLs in the loss category accounts for 82% of total NPLs. However, the coverage is considerably lower
compared to peer banks due to the relaxation given by SBP to book provisions in a staggered manner. This relaxation was
ggiven on back of two Letter of Comfort ((LOCs)) issued byy the Government of Punjab j ((GoPb)) that if BOP fails to meet the
capital requirements, GoPb on behalf of the bank, will inject Rs14bn of capital. GoPb has also extended its commitment
to support and assist the bank ensuring it remains complaint.
ƒ By the end of 2016, provisions of Rs16.5bn have not been subject to provisions due to relaxation given by SBP dated Mar
9 2017.
9, 2017 AsA per the h permission
i i given
i b SBP,
by SBP the
h bank
b k is
i required
i d to book
b k provisions
ii off 25% off the
h Rs16.5bn
R 16 5b (~Rs4.1bn).
( R 4 1b )
The bank has so far booked Rs3.3bn in 9M2017 and is anticipated to book remaining Rs1bn in 4Q2017.
ƒ In 2018, BOP will be required to clear the remaining Rs12bn unless SBP provides any further relaxation. We anticipate
BOP to book net p provisions of ~Rs9bn ((EPS impact
p Rs2.4/share)) in 2018 as around Rs2bn of NPL recoveryy is likely. y
ƒ After incorporating the additional provisioning, BOP’s coverage ratio will also improve to 84% in 2018 from 64% in 2017
but will still be lower than some of the Peer Banks.
NPLs & its Provisioning 
Rsmn 2015A 2016A 2017E 2018E 2019F 2020F
NPLs  57,027  54,911  53,794  51,379  57,166 63,919
Total Provisions 30,597  31,463  34,213  43,158  48,019 53,692
Unbooked Provisions 19,450 
, 16,505 
, 12,300
, ‐ ‐ ‐
Net Provisions Booked through P&L 3,431  922  2,750  8,945  4,861 5,673
Source: Company Accounts, Topline Research
Honda Atlas Cars (HCAR)
Bank of Punjab (BOP) 10
BOP to ramp up its CAR   
ƒ CAR of the bank at the end of 2016 stood at 12.2% 12 2% which is well below Peer average of 16% and barely above the
requirement set by SBP of 11.0% by 2016 end.
ƒ CAR is likely to clock in at 14.4% at Dec 2017 as issuance of 70% right shares in 2017 will offer some support. However, it
will still remain below average.
ƒ SBP requires banks to gradually improve their capital base and has set out CAR & Tier 1 requirements.
requirements Banks have to
gradually improve their CAR from 10.65% in 2016 to 12.50% in 2020. On the other hand, Tier 1 ratio has to be
maintained at 7.5% till 2020.
ƒ GoP has undertaken to inject Rs13bn of capital after 2018 in case the bank fails to meet the required capital adequacy.
This capital will be used to raise either Tier I or Tier II capital that could affect bank
bank’ss profitability.
profitability Tier I capital could
includes share issuance, rights or Perpetual bonds whereas Tier II capital includes issuance of subordinated debt.
ƒ We have assumed issuance of Tier II subordinated debt of Rs5bn each in 2018 and 2019. This is expected to improve
BOP’s CAR from expected 14% in 2017 to 16% in 2019. However, it will result in higher interest expense and will limit any
major margin improvement of bank despite expected rise in discount rates. rates
BOP CAR Ratio vs. Peers BOP’s Net Interest Margins (NIMs)
BOP  Peer Banks 4.0%
19% 3.3% 3.4%
17% 3.0% 3.1%
17% 16% 16% 17% 16%17% 3.2% 2.9%
15%
14% 15%
15% 2.4%
13% 12%
1.6%
11%
0.8%
9%
0.0%
7%

2019F
F

2020F
F
2016A
A

2017E
E

2018E
E
5%
2016A 2017E 2018E 2019F 2020F
Source: Company Accounts, Topline Research Source: Company Accounts, Topline Research

Bank of Punjab (BOP) 11
BOP Capital Ratios & Capital Requirements 

SBP Capital Requirements & BOP Capital Ratios 
Ratio 2013A 2014A 2015A 2016A 2017E 2018E 2019F
SBP C it l R
SBP Capital Requirements
i t
CET1 5.0% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0%
ADT‐1 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Tier 1
Tier‐1 6 5%
6.5% 7 0%
7.0% 7 5%
7.5% 7 5%
7.5% 7 5%
7.5% 7 5%
7.5% 7 5%
7.5%
Total capital plus CCB (CAR) 10.0% 10.0% 10.3% 10.7% 11.3% 11.9% 12.5%
BOP Capital Ratios
CET1 8 6%
8.6% 7 7%
7.7% 8 4%
8.4% 9 4% 11.6%
9.4% 11 6% 10.9%
10 9% 11.3%
11 3%
ADT‐1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Tier‐1 8.6% 7.7% 8.4% 9.4% 11.6% 10.9% 11.3%
Total capital plus CCB (CAR)
Total capital plus CCB (CAR) 9 0% 10.2%
9.0% 10 2% 10.5%
10 5% 12 3% 14.3%
12.3% 14 3% 14.8%
14 8% 16.3%
16 3%
Source: Company Account, SBP, Topline Research

Bank of Punjab (BOP) 12
Definition of various Capital Ratios 

Fully paid up (common shares) capital / assigned


Subordinated debt/ Instruments.  
capital.
Share premium resulting from the issue of instruments
Balance in share premium account.

Tier 2 Capital
included in Tier 2.
Reserve for Issue of Bonus Shares. Revaluation Reserves (net of deficits, if any).  
CET1

General/ Statutory Reserves as disclosed on the


General Provisions or General Reserves for loan losses.  
balance‐sheet.
Un‐appropriated profit. Foreign Exchange Translation Reserves. 
Less regulatory adjustment applicable on CET1. Undisclosed Reserves. 
Less regulatory adjustments applicable on Tier‐2 capital. 

Instruments issued by the banks meeting the


Caapital (AT1)
Additional 

criteria for AT1 (non cumulative Preferred Tier I


Tier 1 

Shares). CAR 
Less regulatory adjustments applicable on AT1
Tier II
A

Capital.
Tierr 1

CET1
AT1

Bank of Punjab (BOP) 13
Deterioration in Capital adequacy could hamper bank’s growth’s potential

ƒ Lower than expected profitability & capital ratios of BOP can Bank-wise CAR Ratio (Dec 31, 2016)
20.3%
also hurt bank’s credit growth and growth potential as it may 21%
18.3%
18%
lead to non‐compliance of SBP requirement. It is to be noted 14.6%
15% 13.2% 12.9%
12 9%
12 5%
12.5% 12 3%
12.3%
that CAR of the bank is derived from total capital to total risk 12%

weighted average. 9%

ƒ We expect BOP’s advances to grow at 3‐year (2018‐20) CAGR


6%
3%
of 10% lower than last 3‐year growth of 19%. This will also be 0%
AKBL BAFL BOP FABL HMB MEBL SCBPL
lower than the anticipated advances growth of 14‐15% for
Source: Company Accounts, Topline Research
the Peer Banks.
ƒ
BOP Advances Growth
Capital adequacy also hampers the likelihood of any cash Rsbn Advances Growth
450 35%
payouts in the near term. 30%
375
25%
300
20%
225
15%
150
10%
75 5%
- 0%
2015A 2016A 2017E 2018F 2019F 2020F

Source: Company Accounts, Topline Research

Honda Atlas Cars (HCAR)
Bank of Punjab (BOP) 14
Valuations

ƒ We have
W h a ‘Sell’
‘S ll’ stance on BOP with
i h a target price
i off Rs8.7/share.
R 8 7/ h W have
We h usedd a blend
bl d off Justified
J ifi d PBV and
d PE ratio
i to
arrive at our target price. For Justified PBV we have used Gordon Growth Model (ROE‐g/K‐g) whereas for Justified PE
ratio we have taken projected market PE and applied 50% historical discount. For cost of equity, we have assumed a risk
free rate of 9% equivalent
q to 10‐year
y PIB rate and a market risk p
premium of 6%.
Valuation Assumption
Fair Value Weightage Rupees
P/B* 10.0 75% 7.5 
P/E** 5.0  25% 1.2 
Target Price 8.7 

Assumptions
ROE 12%
Growth rate 5%
C t f E it (k)
Cost of Equity (k) 15%
Average Book Value (Rs/share) 15.4 
Justified PBV (R0E‐g/K‐g) 0.6x
Average Market PE 8.0x
Average Discount to Market 50%
Justified PE
Justified PE 4 0x
4.0x
Average Earnings (Rs/share) 1.3
Source:  Topline Research
*Justified Price to book
**Based on 10‐year historical discount to market PE

ƒ The bank is currently trading at 2019 PE of 6.0x and PBV of 0.7x with ROE of 12%. The stock trades at 38% discount to
market PE as compared to its last 10‐year historical discount of over 50%.
Honda Atlas Cars (HCAR)
Bank of Punjab (BOP) 15
Peer Banks Comparision

2017E PE of Peer Banks 2017E PBV of Peer Banks


(X) (X)
10.0 9.6
9.0 1.2 1.1
8.4
7.7 1.0 0.9 0.9
8.0 6.9 6.9 0.8 0.8 0.8
08 0.8
5.5 0.8
6.0
0.6
4.0
0.4
2.0
0.2
- 0.0
AKBL BAFL BOK BOP FABL HMB SNBL AKBL BAFL BOK BOP FABL HMB SNBL

Source: Topline Research Source: Company Accounts, Topline Research

BOP’s PE & discount to peers BOP’s PBV & discount to peers


(X) Discount (RHS) Peer Banks PE (LHS) BOP PE (LHS) (X) Discount (RHS) Peer Banks PBV (LHS) BOP PBV (LHS)
30.0 104% 2.5 80%
91% 70%
25.0 2.0
78% 60%
20.0 65% 15
1.5 50%
15.0 52% 40%
39% 1.0 30%
10.0
26% 20%
5.0 0.5
13% 10%
0.0 0% 0.0 0%
8A

9A

0A

2011A

2A

3A

4A

5A

6A

7A

2008A
A

2009A
A

2010A
A

2011A
A

2012A
A

2013A
A

2014A
A

2015A
A

2016A
A

2017A
A
2008

2009

2010

2012

2013

2014

2015

2016

2017

Source: Company Accounts, Topline Research Source: Company Accounts, Topline Research

Bank of Punjab (BOP) 16
About The Bank

ƒ BOP is currently h 10th largest


l the l commerciall bank
b k off Pakistan
k with
h totall branch
b h networkk off 465 branches
b h and
d owned
d by
b
government of Punjab (Pakistan largest province) with total shareholding of 57%. BOP was given the status of a
scheduled bank by SBP on September 19, 1994. It is principally engaged in commercial banking and related services.
ƒ BOP’ss total assets has grown at a 5
BOP 5‐year
year (2012
(2012‐16)
16) CAGR of 14% whereas total branch network of the bank has grown
from 306 branches in 2012 to 465 branches as of Sep 2017. Similarly, BOP’s deposits have grown at a 5‐year (2012‐16)
CAGR of 14% in line with industry average growth.
ƒ BOP currently has a 4% market share in banking sector deposits whereas it has a market share of 5% in banking sector
advances.
ƒ GoPb remains the major support for the bank as it provides capital injection and letter of comforts (LOCs) against
provisioning of certain NPLs.

Shareholding pattern

8.66% Provincial Government

6.16%
Individuals (Local)
7.25%
57.47% Joint Stock Companies

20.46% Financial Institutions

Others

Source: Company Accounts, Topline Research

Bank of Punjab (BOP) 17
BOP one of the worst hit from 2008 crisis  
ƒ Pakistan banking sector was severely affected from the 2008 financial crisis as it resulted in sharp rise in NPLs for the banks
which led to sharp deterioration of banking sector profits. Profitability of Pakistan’s banking sector fell by 14% as rise in NPLs and
operating expenses kept profitability in check. Slowdown in economic growth, high double digit inflation and ballooning current
account deficit had dented economic outlook of the country thus affecting the entire banking sector.
ƒ BOP was amongst the worst hit by the crisis as the bank ran into losses post 2008 crisis. crisis The bank ran into losses for three
consecutive years from 2008 to 2010. NPL loss ratio due to the above surged from 3% in 2007 to 51% in 2010. Total NPL stock of
the bank rose to Rs77bn in 2010 versus Rs3bn in 2007. Consequently, the bank took provisioning charge of Rs29bn that eroded
BOP’s bottom‐line and equity base. The bank took relaxation from SBP to book the remaining provision expense in a staggered
manner.
ƒ Along side higher provisions, receipt of interest income of BOP also got impacted by the same as interest expense of the bank
outpaced interest earned. Key factors behind sharp rise in NPLs included 1) abrupt rise in interest rates, 2) high concentration of
advances to few selected clients, & 3) deterioration of Pakistan macros.
ƒ The crisis magnified further due to escalation in costs amid inflationary pressures. Operating expense climbed to 2.3 times of the
income in 2010 as against cost to income ratio of 25% in 2007.
ƒ The bank is still in process of providing of its loans against NPLs to cover up losses arising from crisis situation.
NPLs & profitability post 2008 
Rsmn 2006A 2007A 2008A 2009A 2010A
NPLs  2,346  3,350  42,689  77,342  77,394 
Loss ratio 2% 2% 28% 51% 52%
Cost to income 25% 25% 53% NM 263%
Provisions  1,059  2,500  21,447  30,174  29,301 
Profit/Loss after tax
Profit/Loss after tax 3 804
3,804  4 454 (10
4,454  (10,085)
085) (10 069)
(10,069) (4 029)
(4,029)
EPS/LPS (Rs/share) 1.4  1.7  (3.8) (3.8) (1.5)
Source: Company Accounts, Topline Research

Bank of Punjab (BOP) 18
Pitfalls of being a government owned banks 

ƒ Government owned
d banks
b k faces
f their
h i unique
i set off problems
bl that
h impacts
i the
h financial
fi i l health
h l h off the
h bank.
b k High
i h loss
l ratios,
i poor
corporate governance, mismanagement, politically motivated lending, overstaffing etc are few key reasons why government
owned banks have witnessed lower ROEs than their peer private banks on consistent basis. Due to the above listed reasons, they
have ggenerallyy traded at a discount to their book value includingg Bank of Punjab
j ((BOP).
)
ƒ National Bank of Pakistan (NBP), the second largest commercial bank and a Federal Government owned bank also faces same set
of problems. NPL ratio of NBP stands at around 16% which is considerably higher than industry average of 8% driven by lenient
lending policy and high proportion of public sector loans (35% of total gross advances). To recall, NBP ran into severe trouble as
the
h bank
b k was required
i d to provide
id for
f loan
l l
losses against
i i Bangladesh
its B l d h operations
i i 2013 which
in hi h amounted
d to ~Rs15bn
R 15b for
f a
single year.
ƒ Just like BOP, NBP also lends around 35% of its total advances to the public sector or their associated public sector entities which
also contributes to higher
g NPLs.
ƒ NBP’s cost to income ratio also stands at 60% which is higher than industry average of 58% and higher than the average of banks
with similar magnitude.
ƒ Bank of Khyber (BOK), is another listed bank owned by provincial government of Khyber Pukhtunkha (KPK), Pakistan’s third
l
largest province.
i BOK management in
i Apr
A 2016 alleged
ll d that
h the
h finance
fi minister
i i off KPK pressurized
i d the
h management with
i h illegal
ill l
recruitment, use of bank resources for political functions and interference in the independence of the board and other corporate
matters. Hence, political interference often leads to mismanagement and inefficient use of resources.
ƒ BOK’s cost to income ratio of 68% stands considerably higher than the peer banks however loan losses are in single digit of 8%.
ƒ Hence, we believe that due to the fundamental issues associated with government banks, valuation discount to Peer Banks and
market is justified.

Bank of Punjab (BOP) 19
Banks Comp Sheet

Key Valuation Numbers
Share 
2017E Quarter Ended Sep 2017
Quarter Ended Sep 2017
Market 
Price (Rs) 
Name  Symbol Cap.  Div.
Feb 7,  Coverage NPLs to Cost to Loan Deposit Advances/ Invest./ NII/total Deposits Advances  Investment 
(US$mn) PE PBV ROAE ROAA CASA NIMs CAR* Branches
2018 Ratio Loans Income Growth  Growth Deposit Deposit income (Rsbn) (Rsbn) (Rsbn)
Yield

Bank AL Falah BAFL 48 698 8.4 1.1 4% 14% 1.0% 83% 3.9% 94% 4% 13% 64% 21% 3% 60% 61% 73% 634 661 397 409

Habib Metro  HMB 38 363 9.0 0.9 6% 11% 0.8% 56% 2.9% 95% 10% 18% 60% 28% 0% 37% 79% 79% 274 474 174 369

Faysal Bank FABL 24 287 6.9 0.8 5% 14% 1.1% 70% 3.5% 88% 12% 15% 71% 19% 14% 60% 53% 75% 376 359 214 191

Askari Bank AKBL 22 248 5.5 0.8 10% 13% 0.8% 84% 3.0% 95% 10% 13% 69% 19% 14% 47% 55% 74% 501 527 247 292

Bank of Punjab BOP


Bank of Punjab 10 243 6 9 0.8
6.9 08 0% 13% 0.5%
0 5% 71% 3.0%
3 0% 63% 16% 12% 56% 24% 20% 59% 45% 84% 465 505 299 228

Soneri Bank SNBL 13 134 9.6 0.8 7% 11% 0.7% 71% 2.5% 83% 6% 14% 73% 58% 6% 73% 62% 69% 286 215 156 133

Bank of Khyber BOK 14 122 7.7 0.9 9% 11% 0.7% 54% 2.3% 85% 8% 21% 68% 175% 4% 41% 98% 91% 165 162 66 158

Peer Banks  2,065 7.7 0.9 6% 12% 0.8% 73% 2.9% 86% 9.6% 15% 65% 54% 9% 38% 62% 61% 2,701 2,903 1,553 1,780

Source: Company Accounts, Topline Research 
*  Latest Reported as on Dec, 2016 

Bank of Punjab (BOP) 20
BOP: Financial Snapshot 

Consolidated Income Statement Assumptions
Rsmn 2016A 2017E 2018F 2019F 2020F 2016A 2017E 2018F 2019F 2020F
Mark‐up / Interest earned 29,671  33,453  40,813  51,705  62,909  Discount Rate 6.3% 6.0% 6.6% 7.6% 8.5%
Mark‐up / Interest expense 17,430  18,668  23,501  31,829  40,189  Deposit Growth 21% 12% 10% 10% 10%
Net Mark‐up
Net Mark up / Interest income
/ Interest income 12,241
12,241  14,785
14,785  17,311
17,311  19,877
19,877  22,720
22,720  Advances Growth
Advances Growth 19% 18% 9% 10% 10%
Provisions against NPLs 922  2,750  8,945  4,861  5,673  NIMs 2.9% 3.0% 3.1% 3.3% 3.4%
Total Provisions 1,019  2,847  9,095  5,026  5,854  Key Ratios
Non Interest Income 5,303  4,576  4,588  5,100  5,630  2016A 2017E 2018F 2019F 2020F
Non‐Interest Expense 8,468  9,992  11,307  13,068  15,092  Earnings growth 3% ‐19% ‐75% 360% 8%
PBT 8 056
8,056  6 523
6,523  1 497
1,497  6 883
6,883  7 403
7,403  PE at Rs10 18
PE at Rs10.18 5 5x 6.9x
5.5x 6 9x 27.7x
27 7x 6.0x
6 0x 5.6x
5 6x
PAT 4,864  3,918  973  4,474  4,812  Dividend Yield 0% 0% 0% 0% 0%
EPS (Rs)  1.8  1.5  0.4  1.7  1.8  PBV 1.0x 0.8x 0.8x 0.7x 0.6x
Source: Topline Research Return on performing loans 8% 8% 8% 9% 10%
Cost of deposits 5% 5% 5% 7% 7%
NII/ G
NII/ Gross Income
I 70% 76% 79% 80% 80%
Consolidated Balance Sheet Cost / Income ratio 48% 51% 51% 52% 53%
Rsmn 2016A 2017E 2018F 2019F 2020F Return on equity (ROE) 19% 13% 3% 12% 12%
Paid‐up capital 15,551  26,437  26,437  26,437  26,437  Return on assets (ROA) 1% 1% 0% 1% 1%
Shareholders' equity 24,253  32,056  33,029  37,503  39,428  Advances‐to‐deposit (ADR) 58% 61% 60% 60% 60%
Surplus on revaluation of assets 3,607  2,700  2,565  2,437  2,315  Investment‐to‐deposit (IDR) 44% 42% 43% 44% 44%
Total equity 27,859  34,756  35,594  39,940  41,743  CASA 71% 72% 73% 73% 74%
Deposits 453,220  507,606  558,367  614,203  675,624  Gross infection ratio (%) 19% 16% 14% 14% 14%
Total liabilities 517,360  583,304  646,325  716,418  788,216  Net infection ratio (%) 9% 6% 2% 2% 3%
Net advances 262,025  308,421  337,369  371,175  408,097  Coverage ratio (%) 57% 64% 84% 84% 84%
Net investments 199,784  214,413  241,378  271,589  298,943  CAR 12% 14% 15% 16% 15%
Total assets 545,219  618,060  681,919  756,358  829,959  Number of Branches 453  470  505  545  585 
Source: Topline Research Source: Topline Research

Honda Atlas Cars (HCAR)
Bank of Punjab (BOP) 21
Analyst Certification and Disclosures
The research analyst(s), denoted by an “AC” AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her
personal views about all of the subject companies/securities/sectors and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed
in this report.
Furthermore, it is stated that the research analyst or its close relative have neither served as a director/officer in the past 3 years nor received any compensation from the subject company in the past 12
months.
Additionally, as per regulation 8(2)(i) of the Research Analyst Regulations, 2015, we currently do not have a financial interest in the securities of the subject company aggregating more than 1% of the value of
the company.

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Topline Securities employs three tier ratings system to rate a stock, as mentioned below, which is based upon the level of expected return for a specific stock. The rating is based on the following with time
horizon of 12‐months.
Rating Expected Total Return
Buy Stock will outperform the average total return of stocks in universe 
Neutral Stock will perform in line with the average total return of stocks in universe
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Over Weight > Weight in KSE‐100 Index
Market Weight = Weight in KSE‐100 Index
Under Weight < Weight in KSE‐100 Index
Ratings are updated daily to account for the latest developments in the economy/sector/company, changes in stock prices and changes in analyst’s assumptions or a combination of any of these factors.

Valuation Methodology
To arrive at our 12‐months Target Price, Topline Securities uses different valuation methods which include: 1). Present value methodology, 2). Multiplier methodology, and 3). Asset‐based methodology.

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Nevertheless, all clients may not receive the material at the same time.

Di l i
Disclaimer
This report has been prepared by Topline Securities and is provided for information purposes only. Under no circumstances this is to be used or considered as an offer to sell or solicitation of any offer to buy.
While reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness
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contents In particular,
particular the report takes no account of the investment objectives,
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investors who should seek further professional
advice or rely upon their own judgment and acumen before making any investment. The views expressed in this report are those of Topline Research Department and do not necessarily reflect those of
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Bank of Punjab (BOP) 22

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