KARACHI - MCB Bank is expected to post earnings of Rs 15.0 billion (EPS of Rs23.8) in 2008, depicting a negative growth of 2 percent on year-on-year basis. The Bank witnessed earnings of 15.3b rupees with EPS of Rs24.3 during calendar year 2007. It is important to mention here that MCB is announcing its annual financial results for CY08 on February 10, 2009 (today). The decline in earnings is mainly led by a sharp increase in administrative expenses due to lower actuarial gains on the pension plan. The growth in the admin expenses is anticipated to increase sharply by 66 percent to 8.3 billion rupees in CY08 on account of lower actuarial gains. However, MCB's net interest income is projected to maintain at 8 percent coupled with 17 percent YoY top line growth in CY08 on account of achieving 18 percent strong growth in advances and 85pc increase in its both categories of deposit portfolio such as current and saving account. According to research estimates, the board of directors of MCB bank is likely to announce a final cash dividend of Rs3-4/share, taking the full year dividend to Rs12-13/ share while presenting audited financial results for CY08. A research analyst at Invest Cap is of the view that driven by high spreads and strong advances growth, MCB net interest income is expected to increase to Rs27.4 billion, showing a decent growth of 14 percent YoY. "One of the major strengths and competitive advantages of MCB over its peers is its strong margins. However, due to higher cost of borrowing caused by deposit mobilisation NIMs is expected to squeeze by 60bps in 4QCY08", he added. As per JS Global projections, the cumulative loss on Available For Sale (AFS) investments during 2008 is likely to range between Rs5-6bn, however their remains a question mark over how the impairment would be recognised in the financial accounts. While IAS 39 requires full recognition in P&L, reports suggest that regulators and stakeholders are working on an amortisation formula whereby impairment loss would be spread over 2 years, though no official announcement has been made in this regard. Resorted to sensitivity analysis, MCB's earnings are anticipated to be in range between 50-100 percent with impairment recognition in 2008. One of the key issues currently occupying all corporate stakeholders including regulators is impairment in investment value post sock market crash. MCB bank like many other companies, has a significant equity investment portfolio (listed equities and mutual funds investment of Rs11bn as of 2007 accounts) classified as Available For Sale (AFS) and accounted for under IAS 39. With the stock market falling by a massive 58 percent in 2008, these investments have witnessed a substantial/prolong decline in value, hence cumulative loss needs to be recognised in P&L, which would significantly dilute reported earnings for 2008. JS report said if MCB recognizes the entire impairment loss in 2008, the reported earnings are likely to fall to Rs18.2/share (24 percent lower than earnings without impairment). However, if only 50 percent impairment is recognized, we estimate MCB's EPS at Rs21. It is important to mention though that the recognition of impairment loss in P&L is non-cash in nature and only affects reported earnings. Due to the recent rally in banking stocks post changes in FSV mechanism, MCB bank has seen a sharp increase in its share price. As a result, stance on MCB is downgraded from 'Buy' to 'Hold' at current levels. The bank trades at 2009F PE and PBV of 5.3x and 1.2x, respectively. Moreover it also offers 2009F ROE of 24 percent and dividend yield of 10 percent.