Equity Analysis /

Habib Bank: 2QCY22 Review - Pre-tax earnings beat while core business remains on track

  • HBL has reported 2QCY22 EPS of PKR2.32, down 63%YoY and 60%QoQ - an earnings miss

  • High one-off taxation is to blame (effective tax rate: 83%)

  • Pre-tax earnings are up 20%YoY with core performance being largely inline

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
28 July 2022

HBL has reported 2QCY22 NPAT of PKR3.4bn (EPS: PKR2.32), down sharp 63%YoY and 60%QoQ. This is due to one-off higher taxation after recent budgetary changes, taking effective tax rate for the quarter to 83%. Pre-tax earnings are up 20%YoY and 37%QoQ, with core income statement lines being largely inline. The reported EPS came in below our expectations of PKR3.15, but the DPS of PKR1.50 was a slight beat. HBL’s 1HCY22 NPAT comes to PKR11.9bn (EPS: PKR8.10), down 33%YoY.

2QCY22 result highlights include:

  • NII came in at PKR37.6bn, up 16%YoY and 4%QoQ, on strong balance sheet growth (total assets up c.20%YoY). Margin expansion has continued, and should reflect more fully in 2HCY22 and CY23, in our view.

  • Fee income continues to impress (up 31%YoY and 5%QoQ), albeit in-line with projections. This is led by a push on cards and improving trade commissions. Fx income has jumped 73%QoQ to PKR4.4bn, where the days of the open fx loan position and losses on a weaker PKR seem to be in the past.

  • Admin expenses are up 25%YoY but lower by 5%QoQ to PKR28.7bn. The sequential decline is led by lower compensation expense and other operating expenses; 1QCY21 saw a one-off VSS expense. This has helped offset a sequential c. 7% rise in IT and property expense. Cost/Income has dropped to 58% vs. 66% in 1Q.

  • Provisioning expenses clocked in at PKR1.6bn, up 26%QoQ but lower by 14%YoY. Domestic NPLs are flat, while overseas NPLs have risen 10%QoQ to reflect the translation into PKR. Overall coverage has risen to 105%, vs. 100% in the previous quarter.

Effective tax rate came in at 83% against our estimated 74%. This has contributed in dragging HBL’s CAR to 14.4% vs. 15.3% in the previous quarter, driven by large losses on fixed income AFS securities, as domestic interest rates rose rapidly. The high effective tax rate is non-recurring, and we expect normalized earnings, going forward. The performance of core revenue lines remains on track. The overall banking sector may see some nascent asset quality pressure going forward, given the recent macroeconomic deterioration, but HBL’s coverage levels provide comfort.  We see HBL reporting a c.15% EPS CAGR across the next 5yrs, backed by double-digit asset growth and margin expansion. We retain our BUY stance on HBL, which trades at a CY22f P/B of 0.6x and P/E of 3.8x, against a mid-cycle ROE of over c. 16%.