Earnings Report /

Habib Bank: 3Q22 Review: Lower tax charge and better core business performance leads to beat

  • HBL has reported 3QCY22 EPS of PKR7.85, up 27%YoY and 3.4x QoQ – an earnings beat

  • Strong NII, lower provisions and a lower effective tax rate have led the deviation

  • We maintain a Buy rating on HBL with a TP of PKR140/sh

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
26 October 2022

HBL has reported 3QCY22 NPAT of PKR11.5bn (EPS: PKR7.85), up 27%YoY and 3.4x QoQ - coming from a low base in 2Q (due to taxation). This takes 9MCY22 NPAT to PKR23.4bn (EPS: PKR15.95), down 12%YoY. The result is higher than our estimated 3Q EPS of PKR7.00, with the deviation led by beats on NII and provisions, as well as a lower effective tax rate (45% as HBL pushed up its Gross ADR to more than 53%). HBL announced interim cash DPS of PKR1.50 (in line), taking 9MCY22 payout to PKR5.25/sh.

3QCY22 Results Highlights:

  • NII came in at PKR42.1bn, up 31%YoY and 12%QoQ, and above our estimate of PKR40.6bn. This is led by strong margin expansion as the balance sheet continues to reprice, coupled with strong 20%YoY asset growth.

  • Total provisioning expenses have dropped 50%QoQ and YoY to PKR788mn. This masks a net loan provisioning reversal of PKR306mn, where domestic NPLs are flat. Overseas NPLs have risen 6%QoQ, but this is a function of PKR weakness. Overall coverage remains intact at 100%.

  • Fee income is up 25%YoY and flat QoQ, - in line with projections. This is led by a push on cards, improving trade commissions and merchant discount fee. Fx income has jumped 3.3xQoQ to PKR4.8bn, helping counter a large PKR2.3bn loss on derivatives. Strong Fx income is a function of both PKR volatility and improved trade volumes, a common theme across incoming banks results. 

  • Admin expenses are up a sharp 38%YoY and 11%QoQ, coming in at PKR31.9bn. This is in line with the systemic rise in admin expenses witnessed this quarter, with headline CPI in excess of 20%. Cost/Income has inched upwards to 60% vs. 58% in 2Q.

  • HBL has improved its gross ADR to 53.6% - attracting a lower tax rate. HBL therefore reported a tax expense of PKR9.5bn and an effective tax rate of 45% - contributing significantly to the earnings beat as our expected effective tax rate was 52%.

  • HBL’s Capital Adequacy Ratio has inched lower to 14.27% vs. 14.39% in the previous quarter, with T1 coming off marginally to 11.30% from 11.39% in 2Q. The bank recently announced its intention to issue a top-up ADT-1 instrument up to PKR10bn.

This is a strong result, where domestic asset quality remains resilient despite the large interest rate hikes in recent months. HBL has also worked to improve its gross ADR, leading to an improved tax rate. Going forward, we expect revenue growth to remain upbeat as balance sheet repricing spills into the coming quarters. HBL trades at a CY23f P/B of 0.3x and P/E of 2.1x. We have a Buy stance based on a TP of PKR140/sh but flag that legal issues in the US likely need to settle before upside is meaningfully unlocked.