Description

Description

• Bank Alfalah (BAFL) is the 4^th largest private sector bank in Pakistan in terms of deposits and one of the leading players in the consumer finance segment.
• BAFL has a nationwide network of 195 branches, and it is the 18^th largest company in Pakistan in terms of market cap.
• BAFL’s total loan book size is approximately PKR$149B, 24% comprised of consumer loans and 76% comprised of corporate loans.
• BAFL maintains 16% market share in the consumer lending segment and controls an 8% share in deposits. BAFL is also the leader in the credit cards segment.
• BAFL employs a relatively high average cost of funds (6.2% vs. industry level of 3.1%) and one of the highest cost-to-income ratios of 65.7% primarily due to staffing costs. The high cost of funds derives from the bank’s aggressive branch opening plans (the bulk of deposits were raised in 2005 when monetary tightening was instituted by the central bank).
• Over the past three years, BAFL’s deposit growth has outstripped loan growth by 10% (30% loan growth, 10% deposit growth) compared to the industry average of loan growth outstripping deposit growth by 10%. Bank Alfalah is therefore sitting on excess cash with a loan-to-deposit ratio of 0.85x (industry average 1.05x).
• BAFL is 44% owned by the Abu Dhabi group of the UAE (which also owns United Bank and Warid Telecom)
• BAFL owns a 16.4% stake in Warid Telecom the 4^th largest mobile operator in Pakistan.

Thesis

• Rumors have been floating around for the past several weeks month that Warid Telecom would be selling a stake to a foreign operator after China Mobile (CHL) bought a stake in Paktel (CHL tends to increase the competitive nature of markets it operates in).
• Recently, the chairman of Warid Telecom suggested it was engaged in talks about the possibility of selling a minority stake to the foreign operator.
• The Financial Times has reported the EV/subscriber (BAFL has 10mm subscribers) would be around US$100/sub (a significant discount to the roughly $270/sub CHL paid for Paktel).
• Dow Jones Newswire reported that a deal has been formalized and will be announced tomorrow at 12PM Singapore time valuing the company at roughly USD$250/sub.
• At a $250/sub valuation, BAFL’s stake in Warid Tel is valued at roughly USD$400mm vs. total market cap of BAFL of ~US$667mm
• Book value of BAFL’s stake in Warid is ~USD$33mn, so at $250/subscriber an incremental US$360mn flows to the balance sheet.
• If Warid Tel is valued at US$250mm/sub, BAFL is trading at ~1x 2007 P/B and 0.97x 2008 P/B, with a 20% ROE.
• Separately, press reports indicate Orascom increased its stake in Mobilink by 11.3% with a proposed US$230mm investment – according to the latest numbers released by Pakistan Telecommunication Authority (PTA), Warid is ranked 3rd, behind Mobilink and Ufone

• BAFL is the largest consumer lender in the country.
• BAFL has the capital base to grow loans aggressively and improve its net interest margins and room to improve the cost to service ratio to industry benchmarks.
• Liquidity: BAFL is relatively liquid trading US$11mm/day.

Catalysts

• Formal agreement of stake sale which we are hearing is supposed to be scheduled for 12PM tomorrow.

• Lack of monetization of stake sale (the Abu Dhabi group may sell their stake in Warid Telecom from their portfolio and not through Bank Alfalah)
• Reinvestment of sale proceeds in unprofitable ventures vs. compensating investors through dividend payments
• Unexpected increase in loan loss allowances in the consumer portfolio
• A decline in net interest margins and slowing loan growth

Stock price:       PKR$62.15

Target price:     PKR$82.6    (1.3x '08 Adj. BV)      Reward:       PKR$23.4 (33% upside)

Loss limit:            PKR$53                                             Risk:               PKR$6.2

Risk/Reward ratio = 3.7:1

Catalyst