An outlook of the bank Habib Bank Ltd

HBL held their Analyst Briefing call today to discuss the financial performance and outlook of the bank. To recall HBL reported 2QCY21 NPAT of PKR9.3bn (EPS: PKR6.35), up 12%qoq but lower by 16%yoy. This took 1HCY21 NPAT to PKR17.6bn (EPS: PKR12.04) up 17%yoy. This was led by (i) large capital gains, (ii) strong profit from associates and (iii) good cost control (4%yoy increase in admin expenses). HBL announced an interim cash dividend of PKR1.75/sh, in line with projections.

Analyst Briefing Takeaways

Elevated tax due to budgetary changes

HBL’s effective tax rate rose to 43% in 2QCY21 (vs. 41% in 1QCY21 and SPLY). HBL has taken a provision against the additional 2.5% tax imposed (in the Federal Budget) on the entire income on Federal Government Securities for banks with ADR below the defined limits. This tax was previously imposed on incremental income. HBL’s ADR stands at 42%, which attracts a 2.5% additional tax; HBL is continuing its lobbying efforts with the government on this matter. While loan book will continue to grow at double digits in CY21 (14%yoy growth in 2QCY21), a 50% ADR (which would attract a lower tax rate) is unlikely to be achieved by end-Dec 2021, as per management.

Loan provisioning coverage has crossed 100%

Total provisions clocked in at PKR3.7bn, for 2QCY21, which included a PKR2.4bn credit charge, a PKR0.8bn impairment reversal, and a PKR2.5bn charge against off-balance sheet/other items. HBL’s NPL ratio has come off to 5.5% (vs. 6.3% in 1QCY21), while total provisioning coverage has increased to 103% with domestic coverage now at 108%. Charge against off-balance sheet and other items emerged due to high exposure to entirely unfunded assets, acceptances and LCs – resulting in provisioning. This will normalize in 3Q.

Costs to remain in check

Admin expenses reduced 2%yoy in 1HCY21 with C/I (excluding capital gains) coming off from 65.3% last year to 57.8% in 1HCY21. That said, growth in admin expenses going forward may be slightly higher than peer banks; this would be centered on digital infrastructure investment and technology initiatives. HBL projects a 10%yoy growth in Admin expenses in CY21f.

Capital buffers are adequate

Tier-1 came off from 13.9% to 13.1% in 2QCY21 with CAR coming off from 17.9% to 16.8% in 2QCY21. The pressure on Tier-1 is transitory and will normalize in the coming quarter, where about 30bps impact on CAR is a function of PKR devaluation. T1 capital remains 210bps above the regulatory requirement and remains comfortable.

Islamic business is a core area

HBL plans to convert another 100 branches to Islamic, taking the total to 300 branches by December 2021. HBL will continue to expand overall branches by 30-40 but the focus will remain on growing its Islamic business.

Interest rates to remain flat for the next few months; PIBs skewed towards fixed

The bank’s interest rate outlook is aligned with that of the SBP. Real interest rates are to remain negative and unless demand side pressures or CAD exceeds expectations, inflation should trend downwards. Hence, interest rates are therefore likely to remain flat over the next few months. On Treasury operations, the average yield on PIBs is north of 9% with floating rate PIBs making up 40% of the PIB book. The duration of the investment book is 1.25 years while duration of the PIBs book is 3.5 years.

HBL continues to beat expectations, where strong cost control was a key feature of yesterday’s results. We see HBL reporting a c.15% EPS CAGR across the next 5yrs, backed by double-digit asset growth and margin expansion. HBL trades at a CY22f P/B of 0.63x and P/E of 5.2x, against a mid-cycle ROE of over 15%, where we reiterate our Buy stance with a Dec-21 TP of PKR160/sh.

Courtesy – Intermarket Securities Limited.

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