Earnings Report /

Habib Bank: 4Q19 – cost-to-income drops to the lowest since 4Q17

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    19 February 2020

    HBL has posted consolidated NPAT of PKR6,696mn (EPS: PKR4.56) in 4Q19, up 2.8x yoy / 36%qoq. This was above our projected 4Q19 EPS of PKR3.56, with the deviation driven by (i) lower than-expected admin expenses and (ii) stronger-than-expected profit from associates. This brought full-year 2019 earnings to PKR15,333mn (EPS: PKR10.45), up 27%yoy. Alongside the result, an inline final dividend of PKR1.25/sh took the full-year payout to PKR5.0/sh. 

    4Q19 result highlights:

    • Net interest income of PKR27,265mn, up 26%yoy/3%qoq with asset re-pricing likely to have continued.
    • Total provisions of PKR1,530mn, inline with expectations. We await detailed financials to determine the allocation between loan provisions and impairment on investments, if any.
    • Fee income of PKR4,991mn, lower by 6%yoy. Weak fee income in the quarter mimics UBL and BAFL, possibly due to timing differences on G2P payments.
    • Dividend income and share of profit from associates combined amount to PKR1,490mn, the highest since 4Q16. Furthermore, with the exchange rate remaining stable, HBL’s fx income in the quarter has come in at a strong PKR1,355mn.
    • Total non-interest expenses have clocked in at PKR23,523mn, much lower than our estimate of PKR25,122mn. It appears that consultancy and legal charges have begun to wind down where core admin expenses are up a contained 10%yoy (after stripping out a one-off reversal in the workers’ welfare fund in 4Q19). The Cost/Income ratio in the quarter has thus come down to 66%, down from 72% in 3Q19, and the lowest since 4Q17 when the after-affects of the New York fine had begun to come through.

    Highlights for CY19 include: (i) strong 24%yoy growth in net interest income on a combination of margin expansion and balance sheet growth, (ii) a 34%yoy decline in total provisions which points towards sustained asset quality despite a tough operating environment, (iii) a 21%yoy increase in non-interest income with core fee income growth at 13%yoy, (iv) optically high 24%yoy increase in non-interest expenses but one-off charges should wind down in 2020f, and (iv) a high effective tax rate of 46%. 

    HBL’s revenue and provisioning is inline with expectations but we are particularly encouraged by lower-then-expected admin expenses (there is a qoq reduction in 4Q19). With HBL’s New York branch scheduled to close by the end of next month, the associated consultancy and legal charges should not make their way through beyond 1Q20, thereby providing significant impetus to earnings. 

    Buy – target price of PKR191 offers ETR of 15%

    HBL trades at a 2020f P/B of 1.1x and P/E of 7.1x while offering a D/Y of 4.1%. Our Dec’20 TP of PKR191/sh offers an ETR of 15%. Our estimates incorporate a sustainable dividend payout ratio of 35%; any increase on this front (possible after the closure of the New York branch, in our view) will increase our base-case ROE projections, all else the same, and can lift our target price. We await detailed financials and the post-result analyst call to revisit our estimates.