How to Value a Bank Stock in Pakistan: A Step-by-Step Walkthrough

Quick answer: A bank stock is valued from the balance sheet up: estimate deposits, split them into loans and investments, work out the spread, subtract costs and tax to get net profit and earnings per share, then apply a price-to-earnings multiple to reach a fair-value range.

Ask most people how they pick a bank stock and the answer is a dividend yield or a gut feeling. But a bank is one of the few businesses you can actually model from the ground up, because its raw material — money — sits on a single page: the balance sheet. If you can estimate how much a bank will take in as deposits and what spread it will earn on that money, you can build its profit, its earnings per share, and a defensible fair-value range — the price the shares would be worth if your assumptions hold.

This walkthrough lays out that method the way an analyst at a brokerage house would, one line at a time, using Meezan Bank (MEBL) — Pakistan's largest Islamic bank and a stock many retail investors already hold — as a familiar reference point. To be clear from the outset: every rupee figure below is deliberately rounded and illustrative, chosen to show how the arithmetic flows, not to forecast any company. This site does not publish price targets. The goal is that you can build and stress-test your own numbers.

Why a Bank Is Valued Differently

For a normal company you forecast sales, subtract costs, and arrive at profit. A bank is different because both its costs and its revenue come from money. It pays depositors and lenders to raise funds (its cost of funds), then earns a return by lending that money out or investing it in government securities. The difference between the two — the net spread (called net interest income at a conventional bank, or net profit on a profit-and-loss-sharing basis at an Islamic bank like Meezan) — is the engine of the whole business.

That means the lever that matters most is the cost of funding, and not all funding costs the same. This is where current accounts earn their reputation as a bank's most prized asset.

This is why analysts obsess over the CASA ratio — the share of cheap current and savings deposits in the funding mix. A bank that funds itself largely with zero-cost current accounts keeps far more of what it earns on its assets. When you read that a bank is targeting a "50% current-account share," that is management telling you they intend to protect the cheapest part of their funding.

Step 1 — Write Down Your Assumptions

Every valuation is only as good as the assumptions underneath it, so the disciplined first move is to write them down explicitly. Doing this lets you — and anyone reading your model — see exactly which lever to pull if reality turns out differently. For a Pakistani bank, a handful of assumptions drive almost the entire result.

Notice the policy rate sits at the top. Because a bank earns on assets and pays on funding, a change in the State Bank's policy rate moves both sides of the spread at once — which is why a single rate decision can reshape an entire bank model. We will come back to this in the risk section.

Step 2 — Build the Balance Sheet

With assumptions in hand, grow the deposit base by your assumed rate, then decide what the bank does with that money. This is where the ADR comes in: it splits deposits into advances (loans to households and businesses) and investments (government securities — for an Islamic bank, sovereign sukuk rather than conventional T-bills). Together, advances and investments make up the bank's earning assets — the pool of money on which it actually earns a return.

Two things are worth pausing on. First, money never sits idle: whatever is not lent out is invested, so the bank earns on essentially its whole deposit base. Second, the ADR is not just an operational choice — in Pakistan it has historically carried a tax consequence, with banks below a threshold ADR taxed at a higher rate to nudge them toward lending. That is why the ratio appears twice in our assumptions: once for revenue, once for tax.

Step 3 — Build the Profit & Loss: the Earnings Engine

This is the heart of the model. You take the earning assets, apply a blended yield to get revenue, subtract the cost of funding and running the bank, subtract tax, and what survives is profit attributable to shareholders. Laid out as a ledger, each line follows from the one above it.

A few lines in that ladder deserve a word, because they are where bank models get their nuance:

• Cost of funds is not one number. It blends the profit paid on savings deposits (tied to the minimum deposit rate that regulation sets relative to the policy rate), the cost of any borrowings (close to the policy rate), and the zero cost of current accounts. Improve the current-account mix and this line shrinks.
• The repricing lag. When the policy rate jumps, a bank's assets do not all reprice instantly — some loans are locked at older rates while funding costs rise immediately. Because assets and liabilities reprice on different schedules, a sharp rate move can briefly compress the spread until the book catches up — a normal asset-liability timing effect rather than a one-off loss.
• Provisions set aside an estimate of loans that may not be repaid. For a well-managed bank in a stable year this is often a small line, but it can spike in a downturn.
• Operating expenses grow with inflation and with branch expansion — a bank opening hundreds of new branches will carry higher costs before those branches mature into deposits.
• The tax line is unusually heavy for Pakistani banks and, as noted, is linked to the ADR — which is why two banks with identical pre-tax profit can deliver different earnings to shareholders.

Step 4 — Turn Earnings Into a Value

Now you have an estimate of earnings per share. The final step is to decide what those earnings are worth — and there are two common routes.

The choice hinges on the payout ratio — the slice of profit handed out as dividends. Consider a bank earning around Rs 45 of EPS but paying only about Rs 18 a year in dividends — a payout ratio of around 40%. Value that share on its dividend alone and you ignore the retained profit that is still building the business — so the dividend-yield method tends to understate the value of a lower-payout bank. For that reason, analysts usually lean on the P/E method for banks like this, and treat dividend yield as a cross-check rather than the main tool.

The P/E method is simple arithmetic: estimated EPS multiplied by a chosen earnings multiple. The judgement is entirely in the multiple — and because a point either way changes the answer materially, the honest thing to do is show a range, not a single number.

What multiple is reasonable? That is a function of the market's mood and the bank's quality. Pakistani banks have generally traded at modest, single-digit-to-low-double-digit earnings multiples — partly a reflection of the macro risk premium investors attach to the market. A stronger, higher-quality franchise tends to command the upper end of the range; a more uncertain backdrop (higher rates, geopolitical stress) compresses multiples across the board. The point of the sensitivity table is to make that judgement visible rather than hidden inside one number.

Step 5 — Total Return, and the Risks That Move the Answer

A share's payoff is not just the price moving — it is the price change plus the dividends collected along the way. So the last piece is to add the expected dividend back to your price estimate to get a total return. A bank paying a meaningful dividend can deliver a respectable total return even if the share price moves only modestly.

But every figure rests on the assumptions from Step 1, and some matter far more than others. Ranked roughly by impact:

• The policy rate — by far the biggest. Because it moves both the yield on assets and the cost of funds, a single SBP rate decision can rebuild the entire model. This is the assumption to stress-test first.
• Deposit growth. Faster growth expands earning assets and profit; a slowdown does the reverse. Conservative modelling here protects you from over-optimism.
• Current-account share. A few points either way shifts the cost of funds and the spread — though a well-run bank tends to keep this stable.
• The ADR. It affects both how much the bank lends and the tax rate it pays, so it touches the result twice.
• Operating costs and inflation. Usually a smaller swing, but worth flexing if inflation runs hot or branch expansion accelerates.

Run your model at a few different policy-rate and deposit-growth assumptions and you will quickly see that a bank valuation is a range of plausible outcomes, not a single right answer. That humility is the most useful output of the whole exercise.

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