February 2010

BANKING SECTOR BANK AL FALAH LIMITED

TIME
TO

BREAK

THE

CHAIN

Company Update
URL: www.we.com.pk

Company Update

Company Flash Scan

Network
Branches ATM Employees 321 266 7,584 General Banking Financial Services Consumer Finance Treasury & International Remittances Islamic Banking

Bank Al Falah Ltd

Banking Exposure

Total Assets Total Deposits Total Loans & Advances

Rs346 billion 295 billion 179 billion

Subsidiaries
Alfalah Securities Pvt. Ltd

Market Share deposits Market Share Advances CAR Ratio

8.31% 9.35% 8.03%

Associates
Warid Telecom Pvt. Ltd Wateen Telecom Pvt. Ltd Alfalah Insurance Ltd Alfalah GHP Value Fund Alfalah Income Multiplier Fund Alfalah GHP Islamic Fund Alfalah GHP Investment Management Ltd

Credit Rating Long Term: AA Short Term: A1+

Major Shareholders
Directors 17.71% Banks DFIs other financial Institutions 11.51% General Public 45% Market Float 607 mn shares

Head Office
Karachi

Launched
June 21, 1992

Company Update
Continuing our coverage on BAFL we recommend 'BUY' for scrip - Fair Value 20.71/Upside potential of 57.9% KEY DATA KATS Code BAFL Reuters Code BAFL.KA Current Price (Rs) 13.11 12M High, Low (Rs) 15.49,9.29 Beta 1.17 Market Cap (Rs'bn) 17.68 Market Cap (US$ mn) 208 Shares Outstanding (mn) 1349.15 Free Float (%) 45% Source: KSE, Reuters & WE Research We continue our coverage on BAFL and recommend 'BUY' for the stock based on many favorable factors. The stock is under pressure since de freezing of market and trading below PBV 1.0x. Fair value of the bank is Rs20.71/- and offers upside potential of 57.9% from current price level. Profitability is going to improve at CAGR of 16.57% (CY09-CY11). Bank is relieved of MCR requirement BAFL's rising profitability would improve its ROE gradually but downside journey will not be witnessed any more. Bank has a paid up capital of Rs13.4 billion consequently reflecting weaker ROE compared to peer banks who are sitting on Rs6-7 billion and posting double digit ROE. Bank has wisely used the right share money in increasing branch network and streamlining its customer quality base. ADR ratio to strike 65% level Bank holds 61% ADR ratio much lower than CY07 & CY08 of 64.31% & 66.11% respectively. We expect it to strike 65% level by CY11 and further improve going forward to be reflected on bottom line. CA/SA of bank improved as bank would generate more of non remunerative funds going forward to keep its spread over 5% mark.
Relative performance of BAFL VS KSE 100
21 18 15 12 9 6 3 0 Jan-09 12000 10000 8000 6000 4000 2000 0 Mar-09 May-09 Jul-09 BAFL Sep-09 KSE 100 Dec-09 Feb-10

NPLs to slow down, reversal likely We expect NPLs to slow down CY10 onwards and there is low probability of defaults on new loans issued this would regain its balance sheet quality level as it was in CY06. Bank's hard efforts to restructure substandard or bad loans and helping its customer for repayment, would reverse some of the bad loans already reported in P&L. Valuation snap shot CY07 CY08 EPS (diluted Rs) 2.32 0.96 Book Value (Rs/ share) 10.20 18.27 P/Ex 5.65 13.58 P/BVx 1.28 0.72 ADR(%) 64.31% 66.11% IDR(%) 32% 25% ROE(%) 25.72% 9.17% ROA(%) 1.04% 0.38% Source: Company Reports, WE Research CY09 1.65 15.44 7.92 0.85 62.52% 29% 12.59% 0.62% CY10 1.87 17.31 7.02 0.76 64.14% 26% 11.40% 0.68% CY11 2.25 19.56 5.83 0.67 64.79% 26% 12.19% 0.79%

Source: KSE & WE Research

BAFL: PBx Band Analysis

90.00 85.00 80.00 75.00 70.00 65.00 60.00 55.00 50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 Jan-06

Jun-06

Nov-06
Price

Apr-07

Sep-07
1x 2x

Feb-08
3x

Jul-08
4x

Dec-08
5x

May-09

Oct-09

Source: Company Reports, KSE, WE Research

Company Update

Contents
VALUATION-------------------------------------------------------------------------5

BANK ALFALAH FLASH BACK----------------------------------------------6

INDUSTRY HIGHLIGHTS-------------------------------------------------------7

BALANCE SHEET POSITION: ADVANCES & DEPOSITS--------- 8

FINANCIAL SIDE----------------------------------------------------------------10

FINANCIALS----------------------------------------------------------------------16

Company Update
Valuation:
SOTP: Incorporating Telecom Investment i.e. Warid Telecom For SOTP valuation, the Core business fair value of BAFL is Rs11.02/- per share. We have used ROE Tier 1 - 12.59%, Terminal growth rate of 3.5%, ROR of 19.52% (beta 1.17, RP 6%, RFR 12.50%). Justified Price to Book value is 0.57 thus multiplying it by PBV of Rs19.43 we get core business per share value of Rs11.02/-. Warid Telcom Value: According to Jun'08 audited accounts, book value of Warid Telecom is Rs16.40/- per share and we expect the break up value would be around Rs19-20 per share according to audited accounts Jun' 09. We have considered fair value of Rs14.22/- net of tax (i.e. 26.25%) for Warid Telecom.
ROE vs Price to Book Value
2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 M CB HBL FABL HMB BAFL NBP UBL ABL BAHL

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% ROE

BAFL FABL MCB NBP ABL UBL HBL HMB BAHL

Source: Company Reports, KSE, WE Research

Warid sold off its 25% investment to SingTel in Mid 2007 at Rs46.6/- per share and earned net gain after tax of Rs27/- per share. We have used the same worth per share of Warid Telecom because at that time there was room for subscriber base growth and current scenario is pretty different. Subscriber base is hovering around 90 million for quite many months and room for further growth is not as high as it was previously during SingTel deal period. Telecom players can improve their topline only by offering competitive packages to improve their market share out of existing 900 million subscribers. Telecom war is now more of innovative packages and attractive advertisement to draw attention which is costly for companies compared to past scenario where advertisement cost was on lower side. Combine SOTP Fair value is Rs25.24/- per share. Price to Book Value incorporating 8 majors banks BAFL 1st and 2nd tier banks* Source: WE Research ROE/PB(X) 12.62 8.98 PB x Tier 1 0.85 1.66 ROE tier 1 9.17% 14.65%

PBV

Comparing with 1st and 2nd tier banks, BAFL is trading at a very low level for many working weeks in the range of Rs12.50-14.25. Consensus P/BVx tier 1 of all banks is over 1.0 mark. Using the average P/BVx of 1.66 we arrive at BAFL fair value of Rs21.42 per share offering 95% upside from its current level. * Banks incorporated to arrive at fair value are (MCB, NBP, ABL, UBL, HBL, FABL, HMB, BAHL) Peers valuation Method In this valuation method P/BVx of three 2nd tier banks have been used to arrive at value of BAFL. Banks considered in this valuation are FABL, BAHL & HMB and their market value is on weighted avg. basis to arrive at P/BVx of 1.38. Applying this P/BVx we arrive at Fair value for BAFL of Rs18.09 per share. Finally the Weighted Avg. Fair value of all valuations is Rs20.71/- per share SOTP PBV method Peers Valuation method Weighted Average Fair Value Source: WE Research Weight 25% 25% 50% Fair Value 25.24 21.42 18.09 20.71

Company Update
Bank Alfalah Flash Back
The Bank is 6th largest in terms of deposits while it has expanded aggressively taking its branch network to 321 branches including 48 Islamic banking. The bank is one the major player and holds market share in consumer finance services i.e. (credit cars, personal loans, car lease etc). With such aggressive opening of branches in every nook and corner of the country there is definitely no looking back for BAFL. Management is now focused on improving their deposit base in newly opened branches which are not reaping profits and it's a normal phenomena. Per branch avg. deposit comes at 958 million approximately which is one of the best among top rated banks who posses over 700 branches and deposit avg. per branch is way below 1.0 billion mark. Bank has gone through rough phase lately when there was liquidity crunch faced by banking sector of Pakistan and there were rumors of default from BAFL which resulted in abrupt outflow of money from their valuable depositors. Banks deposits have received a bit of dent and they are consolidating at current levels. Deposits touched highest mark ever of Rs300 billion and fell to Rs273 billion mark as on Sep 30, 2009. With economic activity slowing down and inflation unabated the propensity to consume of country's inhabitants has deteriorated which affects banking sector too like any other sector. Bank's Advances slows down in particular for personal use as repayment capacity gets weaker and general psyche is to save in rough times rather to consume. On the other hand credit growth was negative from corporate side too as they were retiring their loans in such high interest rate scenario along with slow economy activity. Competing 1st tier and 2nd tier banks have enjoyed the advantage of improving their deposits as confidence of depositors shattered over small banks and the ones who were accused of default rumors. Bank Alfalah had 16.38% shares of WARID TELECOM which it sold of almost 15.4% (48.816 mn shares) to SingTel (Singapore) which reaped USD37.7 million while the investment cost was Rs10/- per share. Net gain per share was Rs27/- with impact of 26.25% tax, while per share gain was Rs2.04/- on bottom line. It still holds 267.957 million shares with the reported break up price of Warid Telecom is Rs16.30/- according to Sep 30, 2009 reports-BAFL. Concentration in Islamic banking by BAFL is good approach to tap the wide room left for Islamic banking business. We have seen astounding growth in Islamic banking since its inception and its acceptability among the people. Deposits of the bank are around Rs30 billion which is 11% of BAFL Conventional banking business and a good pie of total Islamic banking deposits.

Share of Advances

5%

95%
BAFL INDUSTRY

Source: SBP, WE Research

Share of Deposit
7%

93% BAFL INDUSTRY

Source: SBP, WE Research

GROWTH PROFILE
350 300 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% CY05 CY06 DEPOST INVESTMENTS ADVANCES GROWTH CY07 CY08 9-Sep ADVANCES DEPOSIT GROWTH INVESTMENT GROWTH

Rs in billion

250 200 150 100 50 -

Source: SBP, WE Research

Company Update
INDUSTRY HIGHLIGHTS
Industry deposits grew at CAGR of 16.27% from (CY05 - SEP' 09) to reach at Rs4.16 trillion largely supported by M2 at a CAGR of 12.55% (CY05 SEP' 09). The growth till Sep'09 from CY08 is 9.48% from Rs3.8 trillion to Rs4.16 trillion, 1) it's a sign when economy is in slow mode and more opportunities are not arising the idle cash is locked in profitable schemes of private and public sectors banks, 2) the other option available is the residents of country invest in foreign currencies by opening FC accounts 3) Country witnessed 2% GDP growth in FY09 along with hyper inflation scenario and political + law n order instability is still prevailing. Business community prefers to leave money in banks rather go for new venture or business avenue, in uncertain country situation. On Advances front growth has been excellent with CAGR of 11.46% (CY05Sep'09) to reach at Rs3.154 trillion on Sep' 09. Surprising fact is that advances have been stagnant and industry ADR again settled down in CY09. It crossed highest ever in CY08 to 82.63% now hovering at 75.78%. Advances witnessed decline in initial months of CY09 while now consolidating on CY08 position. Corporate sector has retired their loans and huge NPLs have been witnessed in the industry both from corporate and consumer side. Banks have adopted stringent policies before advancing any loan all these factors along with slowing economy resulted in advances slow down.
ADVANCES CY06 CY07 CY08 Sep-09

Deposit & Advances position

4,500 4,000 3,500
Rs in million

3,000 2,500 2,000 1,500 1,000 500 DEPOSIT CY05

Monthly Advances trend of Industry Source: SBP, WE Research Rs in billion Dec09 Jan09 Feb09 Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09 3141 3127 3099 3061 3053 3174 3168 3147 3147 3154 Source: SBP Industry ADR CY05 76.79% Source: SBP CY06 80.32% CY07 74.36% CY08 82.63% SEP'09 75.78%

Pvt. banks lending rates trend has been upward since CY05 with no respite and one of the major reason for decline in advances growth. Cost of the funds for the banks too moved upward subsequently cost of funds increased for banks since July 08, when 5% return on saving accounts made mandatory for all banks before this order returns were in the range of 2-3% to saving account holders. Spreads of Pvt. banks stands at 7.69% in CY09 well above of 7.31% CY08.
Kibor 6m/Lending/Deposit position
16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% CY05 CY06 CY07 LENDING RATE CY08 Dec-09

KIBOR 6M

DEPOSIT RATE

Source: SBP

Company Update
BALANCE SHEET POSITION: ADVANCES & DEPOSITS
BAFL Advances key to bank's bottom line growth Advances of BAFL stands at Rs179 billion as on SEP'09 with ADR of 60.81%, way below industry's ADR of 75.78% and bank's highest benchmark of 69.61% in CY04. It has huge room to improve advances and improve its interest earnings by exploiting its handsome branch network. BAFL is well known for consumer finance space and it's a major player among other 1st tier banks. This edge over peers also dented its balance sheet, subsequently P&L too. NPLs of the bank stands at 13.237 billion Sep'09 went up by 48.16% against CY08 NPLs of Rs8.934 billion. We expect the NPLs growth would slow down from CY10 onwards similarly bank would increase its advances as it has adopted and implemented stringent measures before loaning any customer. This would improve its balance sheet quality along with interest income. On stuck up advances front bank is also in consultation with its substandard and doubtful clients to facilitate them in repayment of loans. There is possibility of reversal from provisions reported in balance sheet and bank's management is confident over it to revert some of the NPLs.
NPLs and Gross Advances position
250 200 150 100 50 0 CY06A CY07A CY08A CY09E CY10F CY11F 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00%

Advances of BAFL stands at Rs179 billion as on SEP'09 with ADR of 60.81%.

Rs in Million

GROSS Advances

NPL/GROSS ADVANCES

Source: Company Reports & WE Research ADR ratio to rebounce ADR ratio of BAFL compared to peer banks is fairly on lower side. This can be increased from both sides Islamic and conventional banking. ADR ratio of BAFL compared to peer banks is fairly on lower side. This can be increased from both sides- Islamic and Conventional banking. We expect going forward bank would rebound and initially try to catch its own standard around 65%. Bank has lately introduced few consumer products and would unfold further in upcoming months to improve its advances base from consumer & corporate front. On corporate side there is some recovery with LSM numbers to be on better side for FY10 and bank is advancing on easy rates to sound groups. Trend of syndicated loan is appreciated by banks to minimize risk and create portfolio with numerous syndication.
ADR Ratio of BAFL
68.00% 66.00% 64.00% 62.00% 60.00% 58.00% CY06A CY07A CY08A CY09E CY10F CY11F 63.56% 64.31% 66.11% 64.14% 60.81% 64.79%

ADR Ratio

Source: Company Reports & WE Research

Company Update
Deposits base to expand from newly opened branches BAFL deposit base would consolidate in CY09 at Rs300-307 billion level but going forward would grow at CAGR of 4.02% to Rs332.9 billion by CY11. Bank would not going to increase deposit aggressively at higher rates rather would prefer at lower cost to improve its NIM. Bank's large branch network in small towns of city would attract deposits, and also bank's admin cost in small town is lesser compared to metropolis. The very reason of BAFL to expand branches in these areas is that it senses better advances and deposit mobilization potential along with less stiff competition. Only BIG5 banks possess large branch network and BAFL would only face these bank in smaller towns compared to more than 20 banks in metropolis business streets. Big privatized banks enjoy the edge of low admin cost owing to huge branch network in smaller cities, along with low cost deposit which fetches higher spread margins.
Comparison of ADR with peer banks
120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% HBL UBL CY06 BAFL CY07 ABL CY08 FABL

BAFL: Deposit break up

100% 80% 60% 40% 20% 0% CY06A CY07A CY08A CY09E CY10F CY11F

Source: Company Reports & WE Research

Fixed deposits Saving Deposits Current accounts Others

Source: Company Reports & WE Research

Rs in billion

350 300 250 200 150 100 50 0 CY06A

BAFL: Deposits position

7000 6000 5000 4000 3000 2000 1000 0

CY07A

CY08A BAFL

CY09E IND

CY10F

CY11F

Source: Company Reports & WE Research

Rs in billion

Company Update
FINANCIAL SIDE
Net Interest Income to inch up to 69% Interest income is the core income of any bank and Net Interest Income over total revenue of the bank reflects the dominancy level of interest income versus non interest income. We can compare that with other 1st and 2nd tier banks having better NII/TR ratio. BAFL has room to pull it to 70% however one reason for low NII/TR ratio is due to large penetration in consumer finance which generates Non Interest Income (NIR) at a sizeable rate. Bank generates hefty income in form of processing fee on consumer or corporate loan issuance, bi annual charges on both advances and deposit fronts and other facilities charges bolstered by large retail customer portfolio.

BAFL generates hefty income in form of processing fee on consumer or corporate loan issuance, bi annual charges on both advances and deposit fronts and other facilities charges bolstered by large retail customer portfolio.

Net Interest Income/Total Revenue

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 76% 69% 74% 77% 73% 73% 67% 60% 68% 55%

HBL

ABL

UBL
CY07 CY08

BAFL

FABL

Source: Company Reports & WE Research Net Interest Income to grow slowly owing to high base effect and it has crossed Rs10 billion in CY08 we expect growth would be 8.25% and 7.75% in CY10 & CY11 respectively and likely to be around Rs12.419 billion in CY11.

NII/Total Revenue & its growth

70% 68% 66% 64% 62% 60% 58% 56% 54% CY06A CY07A CY08A CY09E CY10F NII growth CY11F 60% 18% 17% 0% 8% 67% 65% 54% 66% 68% 69% 70% 60% 50% 40% 30% 8% 20% 10% 0% -10%

NII/Total Revenue

Source: Company Reports & WE Research

10

Company Update
Deceleration in Cost of Funds is most likely BAFL cost of funds has not surged compared to 1st tier banks who were enjoying till announcement of 5% mandatory return on saving deposits, while BAFL already had costly deposits which improved its market share and it was able to afford high cost of funds owing to high lending rates from consumer loan. The bank's spreads have been around 4.53% on average. Unfortunately spreads dipped in CY09 by 98 bps to 4.57% owing to more emphasis on corporate and business loans at low lending rates to mitigate the risk of bad loans witnessed previously from consumer side. Cost of funds likely to increase to 7.15% in CY09 with large deposits in saving and fixed accounts. Going forward we expect yielding assets return would decline minutely but cost of funds would drop back around 6.45% level, to cushion the net interest income.

Going forward we expect yielding assets return would decline minutely but cost of funds would come back around 6.45% level, to cushion the net interest income.

Yield on Earning Asset vs Cost of Funds

14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% CY06A CY07A CY08A CY09E CY10F Cost of Funds CY11F

Yield on earning assets

Source: Company Reports & WE Research CA/SA and spread position to consolidate We expect going forward it would stable around 70% level because in slow economy saving deposits rise from retail business segment. By analyzing the deposit mix of BAFL back from 2001, the bank had very poor CA/SA of 22.11% as it was in its establishment phase with very low branch network in main 7 cities. With the passage of time and growth phase of 2002-2007 of economy bank expanded so as its CA/SA improved. There is positive relationship between CA/SA ratio against spread, with improvement in CA/SA spreads are rising and dropping when CA/SA is deteriorating. We expect going forward it would stable around 70% level because in slow economy saving deposits rise from retail business segment. On saving accounts the money is not locked and it's a checking account, the retail business segment doesn't require huge working capital in recessionary phase thus prefer to put money in savings account to earn soft interest. The case is opposite when economy is growing and we witnessed in past banks used to issue O/D to retail business and corporate segment for working capital needs and earn secure soft return.
CA/SA vs Spreads
100% 80% 60% 40% 20% 0% CY06A CY07A CY08A CA/SA CY09E CY10F CY11F 6% 5% 4% 3% 2% 1% 0%

SPREAD

Source: Company Reports & WE Research

11

Company Update
Non Interest Revenue backs bottom line Non Interest Revenue (NIR) is 36% of total revenue of the bank on avg., while fee/brokerage income constitutes 48-50% of NIR and 18% is income from dealing in foreign currencies. Going forward NIR would slightly decline in terms of percentage share against total revenue however would grow at 8.2% CAGR from CY09-CY11. Income from foreign currency also depends on number of branches in metropolis business areas along with SBP FC rules, which for quite some time have been very stringent. This section of income would struggle and grow gradually going forward. Compared to other banks, NIR of BAFL is on much better side which is a very much favorable and backup against slow down in Interest Income, particularly in rough phase NIR supports the bottom line and vice versa. Banks emphasis on trade finance is reflected from the growth witnessed in LC-business which rose to Rs41 billion in Sep'09 up from Rs21.4 billion in CY05 thus supports NIR significantly and going forward to be a sizeable contributor.

Banks emphasis on trade finance is reflected from the growth witnessed in LC-business which rose to Rs41 billion in Sep'09 up from Rs21.4 billion in CY05

Non Interest Revenue vs Total Income

30000.0

Rs in million

25000.0 20000.0 15000.0 10000.0 5000.0 0.0 CY06A CY07A CY08A CY09E CY10F CY11F

Non Interest Income

Total Revenue

Source: Company Reports & WE Research

Non Interest Revenue Break up

7,000 6,000

Rs in million

5,000 4,000 3,000 2,000 1,000 CY06A CY07A CY08A CY09E CY10F CY11F

Fee income Income from FC Other income

Source: Company Reports & WE Research

Dividend Income Gain on sale of securities

12

Company Update
Costs & Expenses BAFL cost to income ratio has been on higher side like other 2nd tier and 3rd tier banks 1) Branch network expansion expense, 2) Rents and taxes increased significantly for branches' space 3) Inflationary pressures along with salary expense, 4) HR related Training & IT infrastructure development along with its huge maintenance cost and all these costs are unavoidable in stiff competition. As the banks income in terms of monetary value would grow, but the percentage ratio would decelerate. On the other hand 1st tier privatized banks possess most of self owned branches which eases the rent expense burden in cost section. If we compare per branch wise cost the calculation comes at Rs35-37 million per branch this is abnormal amount per branch compared to privatized banks of Rs12-17 million. BAFL's branch setup ambiance is costly in order to create differentiation against traditional style old banks and also to compete with foreign banks to leave long lasting impression over even one time customer who just comes to pay utility bill. This benchmark and standard maintenance has its cost, because this specification is not only in few branches but in all branches of the bank.
COST/INCOME Comparison
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% HBL UBL BAFL CY07 CY08 ABL FABL

BAFL's branch setup ambiance is costly in order to create differentiation against traditional style old banks and also to compete with foreign banks to leave long lasting impression over even one time customer who just comes to pay utility bill.

Source: Company Reports & WE Research

BAFL: Cost to Income Ratio

100.00% 80.00% 60.00% 40.00% 20.00% 0.00% CY06A CY07A CY08A CY09E CY10F CY11F 85.55% 69.76% 64.63% 78.41% 76.73% 74.17%

Cost to Income Ratio

Source: Company Reports & WE Research

13

Company Update
Asset Quality Bank's asset quality was most clean among peers till CY06 but it started aggravating with rising NPLs from consumer loan portfolio and then in CY08 from corporate front too. Sudden upward movement of discount rate in CY08 was never in mind of any smart risk management person in any business segment, this resulted in NPLs from all fronts. SBP allowed FSV benefit of 40% which is second revision in 10 months from 30% allowed in Jan' 09. This would definitely support the balance sheet quality of all banks on the other hand restructuring of loans from BAFL front is in process. The possibility of reversal cannot be ruled out this would boost the earnings of the banks and reflect on its stock price. Like all other banks BAFL has reformed and reviewed its Risk Management rules, took new measures with regard to loaning thus to avoid in future such deterioration in asset quality. Reversal rate over NPLs charged has improved to 11.92% CY08 to Rs1.064 billion up from Rs125 million in CY05 it is a positive signal and shows bank's commitment to restructure loans or with mutual agreement with customer set a time frame rather to harass. This leaves the impression on customer "BAFL - the caring bank".

Reversal rate over NPLs charged has improved to 11.92% CY08 to Rs1.064 billion up from Rs125 million in CY05 it is a positive signal

BAFL: NPL vs Net Interest Income

30% 25% 20% 15% 10% 5% 0% CY06A CY07A CY08A CY09E NPL % over NII 11.71% 19.00% 25.87% 23.39%

Source: Company Reports & WE Research

BAFL: NPL/Advances
8% 7% 6% 5% 4% 3% 2% 1% 0% CY06A CY07A CY08A CY09E CY10F CY11F

NPL/Advances

Source: Company Reports & WE Research

14

Company Update

120% 100% 80% 60% 40% 20% 0% CY06A 42% 58%

BAFL: Loan duration break up

63%

67%

63%

62%

62%

37% CY07A

33% CY08A LOAN >1 yr

37% CY09E LOAN <1 yr

38% CY10F

38% CY11F

Source: Company Reports & WE Research CAR and MCR Bank's Capital Adequacy Ratio (CAR) is 8.03% according to CY08 accounts while it had CAR of 9.85% in CY07 largely supported from divestment in WARID which supported falling CAR of 9.48%. In CY08 bank announced Right Share of 50% to support its falling CAR according to our estimates CAR would be around 10.50% in CY09 and sufficient enough to meet SBP requirements. MCR requirement is already fulfilled by bank of Rs6 billion paid up capital by end of CY09 as its paid up capital is around Rs13.49 billion significantly higher than target of Rs10 billion set by SBP for all banks till 2013.

BAFL paid up capital vs SBP MCR

16.0 14.0 13.5 8.0 6.0 4.0 3.0 CY05 CY06 CY07 CY08 CY09 CY10 5.0 7.0 13.5

Rs in billion

12.0 10.0 8.0 6.0 4.0 2.0 2.0 3.0 5.0 6.5

SBP MCR Req

BAFL Paid up capital

Source: Company Reports & WE Research

15

Company Update
FINANCIALS
2007A Income Statement Interest Income Interest Expense Provisions/diminution Net Interest Income After Provision Non Interest Income Non Interest Expense Profit Before Tax Profit After Tax EPS 25783.871 16620.963 2,376.71 6,786.20 6,038.47 8,289.11 4,535.55 3,129.85 2.32 31046.583 20331.194 3,543.36 7,172.03 5,245.43 10,622.74 1,794.72 1,301.30 0.96 35,049.67 24,365.95 2,365.63 8,318.08 5,386.58 10,755.87 2,948.60 2,230.66 1.66 34,401.19 22,867.56 2,184.82 9,348.81 5,900.00 11,700.55 3,548.26 2,519.26 1.87 35,461.90 23,041.99 2,201.71 10,218.20 6,310.28 12,258.55 4,269.92 3,031.65 2.25 2008A 2009E 2010F 2011F

Balance Sheet Advances Total Assets Deposits Total Liabilities Share capital Total Equity Ratios Advances/Deposits Investments/Deposits NII/Total Income Cost/Income Cost/Assets Spreads ROE Tier 1 ROA NPL/Loans

2007A 171,199 328,896 273,174 312,675 6,500 16,220 2007A 64.31% 32% 39.72% 64.63% 2.52% 4.82% 25.72% 1.04% 2.68%

2008A 192,671 352,988 300,733 331,946 11,993 21,042 2008A 66.11% 25% 32.86% 85.55% 3.01% 5.55% 9.17% 0.38% 4.49%

2009E 192,361 364,537 307,641 341,134 13,492 23,403 2009E 62.52% 29% 33.52% 78.41% 2.95% 4.57% 12.59% 0.62% 3.97%

2010F 203,431 374,362 317,164 348,311 13,492 26,050 2010F 64.14% 26% 32.00% 76.73% 3.13% 5.27% 11.40% 0.68% 2.71%

2011F 215,673 394,852 332,900 365,635 13,492 29,216 2011F 64.79% 26% 31.00% 74.17% 3.10% 5.01% 12.19% 0.79% 2.44%

2007A EPS DPS BVPS Tier 1 BVPS Tier 2 P/Bx P/Ex Source: Company Reports & WE Research 2.32 1.5 10.20 12.02 1.28 5.65

2008A 0.96 0 18.27 12.63 0.72 13.58

2009E 1.65 0 15.44 17.34 0.85 7.92

2010F 1.87 0 17.31 19.30 0.76 7.02

2011F 2.25 0 19.56 21.65 0.67 5.83

16

WE Financial Services
Corporate Office: 1112-1115, Eleventh Floor, Park Avenue, 24-A, Block 6, P.E.C.H.S. Karachi - 75400 Tel: (92 21) 455-2886, 455-2846 455-2889 Fax: (92 21) 452-3048 URL: www.we.com.pk E-mail: info@we.com.pk

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1st Floor Ala Ahmed Plaza University Road Sargodha. Tel: (92 048) 3017377 Fax: (94 048) 3769961

Jauharabad Branch
236-B, Main Bazar College Road Jauharabad, District Khushab Tel: (92 454) 723357-58 Fax: (92 454) 721927

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, we do not accept any responsibility for its accuracy & completeness and it is not intended to be an offer or a solicitation to buy or sell any securities. WE Financial Services & its employees will not be responsible for the consequence of reliance upon any opinion or statement herein or for any omission. All opinions and estimates contained herein constitute our judgment as of the date mentioned in the report and are subject to change without notice.

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