Maintain Buy as growth prospects trump dividend cuts
We raise our CY21-25f EPS estimates for HBL by 7% on average on quicker balance sheet growth. However, this growth is balanced by a more prudent capital conservation stance, which leads us to cut our cash dividend payout from c. 40% to 25-30%. Hence, our Dec’21 TP falls to PKR160/sh from PKR175/sh earlier. We retain our Buy rating.
Our estimates have room for positive surprises on margins, provisions and cost efficiency. Despite 100% provisioning coverage, we build in HBL’s cost of risk at an average 65bps across CY21-23f (vs. last 3yr average of 50bps). At the same time, we keep the Cost/Income at c.60% for the next few years.
HBL’s growth aspirations and robust earnings outlook partly compensate for lower payouts. After earnings doubled in CY20, we see a c.15% EPS CAGR across the next 3yrs. We think valuations are very attractive where HBL trades at a CY21f P/B of 0.65x and P/E of 5.3x, against a mid-cycle ROE of over 15%.
Earnings miss on higher general provisioning buffer
HBL posted 4QCY20 NPAT of PKR5.7bn (EPS: PKR3.90), nearly half the earnings it posted in 3QCY20, which took CY20 NPAT to PKR30.9bn (EPS: PKR21.07), up 2x yoy. The 4Q result came in lower than expectations due to sharply higher general provisioning expenses (up 2.4x yoy), minor loss on disposal of securities and a higher effective tax rate (44%). These were partially offset by higher than expected NII. A key feature of the result was the significantly lower final dividend payout of PKR3.0/sh vs. our expectation of PKR7.0/sh. This took the full-year cash dividend to PKR4.25/sh (20% payout).
Earnings estimates raised on accelerated balance sheet growth
We raise our CY21-25f earnings estimates for HBL by 7% on average due to accelerated deposit growth (5-yr CAGR: c.12%) finding its way to loans (5-yr CAGR: 13%). Our CY21/22f EPS estimates now stand at PKR23.26 and PKR25.51, respectively, up 10/4% compared to previous projections. With comfort emanating from 100% provisioning coverage, we also reduce our cost of risk to c.80/60bps in CY21/22f vs. c.90/70bps previously. Note that our estimates are still fairly conservative – due to receding pressures on asset quality, some peer banks are eyeing reversals in general provisions in 2021. In addition, we continue to keep the Cost/Income at an elevated c.60% while also incorporating a slow increase in NIMs across the medium term. Both these elements can surprise on the upside, in our view.
But capital conservation warrants dividend cuts; TP reduced
HBL’s dividend payout strategy has changed as the bank balances a renewed focus on balance sheet growth with the aim to build stronger capital buffers. HBL’s T1 capital stands at 13.5% vs. the minimum requirement of 12.0% where the management is targeting a c. 2.0%+ buffer. This is particularly pertinent ahead of the expected one-time hit to equity (c. 40bps) on implementation of IFRS-9. This leads us to reduce our CY21-25f cash payout ratio to 25-30% vs. 40% previously, which cuts our Dec’21 TP to PKR160/sh from PKR175/sh. HBL’s outlook remains robust where we estimate a c.15% EPS CAGR through the cycle, with sustainable ROE projected to lift to over 15% (T1: 16.5%). HBL trades at a CY21f P/B of 0.65x and P/E of 5.32x – still at a c. 16% discount to UBL despite similar mid-cycle ROE. With the stock price having corrected sharply since result announcement, we retain our Buy rating.
Cost of risk to moderate
HBL’s NPL ratio has declined to 6.3% in CY20 vs. 6.6% in CY19, with specific and total coverage at 86% and 100%, respectively. The bank has prudently raised general provisions to PKR11.1bn in CY20 (of which domestic: PKR9.0bn) vs. PKR3.7bn in CY19, taking them to c.1% of the domestic loans. While we reduce our cost of risk estimates for HBL to c.80/60bps in CY21/22f vs. c.90/70bps previously, these are still fairly high numbers – some peer banks are eying net provisioning reversals in CY21f. As asset quality pressure ease, we expect HBL to deliver 13%pa loan growth through the cycle (greater than nominal GDP growth).
Costs have normalized but C/I may be sticky
Admin expenses grew by a modest 2%yoy in CY20 following the closure of the New York branch and consequent normalization of associated legal & consultancy fees. We expect a similar pace of growth in CY21f followed by a more normalized 8-9% run rate across the medium term as (i) the bank continues with its digital & technology spend and (ii) focuses on opening dedicated Islamic branches. In this regard, there has been a clear migration from OTC transactions towards transactions through internet/mobile banking and HBL’s Konnect app in CY20; internet banking volumes more than doubled to PKR557bn with transaction count rising from 21mn to more than 43mn. In addition, we understand HBL intends to focus on growing its Islamic business – HBL’s Islamic business is fairly large (9% of deposits; 13% of loans) and is run primarily out of window operations rather than dedicated branches. Over the next few years, HBL may add to its network of dedicated Islamic branches. This may help to grow the business further but is also likely to elevate costs (HBL’s Islamic operations had a C/I of less than 20% in CY20 due to the primacy of cost-effective window operations), in our view. All in all, we expect HBL’s Cost/Income to stay sticky in the c.60% vicinity.
Valuations remain attractive
HBL’s growth aspirations and robust earnings outlook partly compensate for lower payouts, where we estimate a c.15% earnings CAGR through the cycle. We think valuations are very attractive where HBL trades at a CY21f P/B of 0.65x and P/E of 5.3x, vs. a mid-cycle ROE of 15%+ (T1: 16.5%). Our TP offers a 1yr ETR of 34% to our revised target price of PKR160/sh, where we maintain a Buy rating.
Courtesy – Intermarket Securities Limited.