We rollover our valuations to CY22E and increase our TP for HNB to LKR 185.00/share (+12.1% to old TP; +20.3% upside; +26.2% TSR) and HNBNV to LKR 155.00/share (+19.2% to old TP; +14.8% upside; +25.1% TSR). HNB’s 3Q CY21 PAT saw a modest 1.8% YoY improvement as a higher impairment charge absorbed a robust top line. We believe that prudential impairments would continue in 4Q as well, before moderating in CY22E. Loan growth came ahead of our estimates and management indicated that 3Q saw some corporate demand. We have booked the surcharge tax into CY21E profits while the VAT increase will be absorbed by the bank in CY22E. The method of applying Social Security Contribution (SSC) is yet to be determined.
Solid top line absorbs high impairment; NIMs to expand further in CY22E
HNB’s net profit recorded a 1.8% YoY growth (-26.3% QoQ) in 3Q CY21. Compared to peers, this was a modest YoY growth which was due to a higher impairment charge. NII saw a 12.5% YoY pickup (-2.2% QoQ) with deposit repricing supporting growth. While most of the deposit repricing has taken place in 9M CY21, we note that loan rates are also picking up (HNB’s AWPR up 177bps between 01-Oct – 19-Nov) leading to continued NIM expansion further supported by HNB’s strong liquidity (86.2% LDR) and CASA position (40.4%).
Strong credit growth beats estimate; prudential impairments continue
Gross loans came ahead of our forecast, growing 7.2% QoQ driven by short-term loans (+25.9% QoQ), and overdrafts (+10.9% QoQ). Management indicated that corporate demand was seen in 3Q in contrast to 6M CY21 which we find encouraging. With the 9M loan growth, we upgrade our CY21E and CY22E forecasts. NPL stock saw a 1.1% drop QoQ, but the bank accelerated impairment provisions, taking a LKR 5.0bn charge to the P&L. Management indicated that the 3Q provision contained LKR 1.7bn for ISB’s due to SL’s credit rating downgrade while additional management overlay was built in prudentially. We note that this is the industry trend, given that the remaining moratorium holders are the worst affected. We continue to see elevated impairments in 4Q with some respite in CY22E.
Increase TP for HNB to LKR 185.00/share and HNBNV to LKR 155.00/share
We rollover our valuations to CY22E, and both HNB and HNBX currently trade at 0.4x CY22E BV. Compared to peers, HNB has seen robust price advance since last quarter, but we note that the improving profitability thesis is not yet reflected in the valuations. We up our TP for HNB to LKR 185.00/ share (+12.1% to old TP; +20.3% upside; +26.2% TSR) and HNBNV at LKR 155.00/share (+19.2% to old TP; +14.8% upside; +25.1% TSR) and maintain BUY for both classes.