We maintain our BUY rating and TP for HNB at LKR 165.00/share (+27.2% upside; +33.7% TSR) and HNBNV at LKR 130.00/share (+29.4% upside; +37.8% TSR). HNB’s bottom line saw a 55.1% YoY pickup in 1Q CY21, largely coming from 1) trading gains, 2) HASU’s premium income and 3) a lower impairment charge. With a drop in short-term loans, HNB marked a contraction in its loan book. NPL stock fell 1.3% QoQ, while CoR dropped to 139bps (-89bps YoY; -48bps QoQ), while specific provision coverage increased to 81.8% - the best in the sector. While the ongoing third wave will lead to a slowdown in our initial growth story, we believe that HNB’s strong capitalisation, lower NPL profile and mid-term growth potential are heavily discounted by short-term headwinds.
Loan book contracts in 1Q; CY21E estimates lowered
Gross loans saw a 0.7% QoQ contraction largely due to the bank focusing more on overall profitability of business and taking a cautious stance on short-term lending (S/T loans -22.2% QoQ). This was below our estimates and in contrast to the peers that reported robust loan growth. Management confirmed that credit demand has slowed in 2Q with the third wave concerns. Accounting for the 1Q weakness and the ongoing tepid economic conditions (our base case assumes economic activity resuming back to April levels again in July) we cut our loan growth to 6.0% for CY21E vs. 10.0% before.
NII drops on weak credit growth; trade gains and fee/commission income up
HNB’s NII saw an 8.1% YoY drop (-1.5% QoQ) coming largely from weak credit growth. However, total operating income saw a 3.8% YoY pick up (+3.1% QoQ) backed by net fee and commissions (+14.5% YoY), trading gains (FX + GSec) and HASU premium. This supported the strong bottom line growth of 55.1% YoY. Looking ahead, we expect a slight setback in the NIM growth trajectory which we expected at the beginning of the year with AWPLR curve flattening and another round of moratoriums announced. Our cut in NIM forecast reflects this.
Maintain TP for HNB at LKR 165.00/share and HNBNV at LKR 130.00/share
HNB currently trades at 0.4x CY21E BV, while HNBNV is at 0.3x. While we adjust our estimates down to book the impact of the third wave, the current valuation discount more than reflects this. Added to this is the bank’s strong capitalisation position (T1 CAR 13.29% in CY21E). We maintain our 12-month TP for HNB at LKR 165.00/share (+27.2% upside; +33.7% TSR) and HNBNV at LKR 130.00/ share (+29.4% upside; +37.8% TSR), and rate both classes BUY.