- We reduce our 2019/20f EPS estimates for HBL by 7/4% on still high admin cost However, we continue to see the New York branch closing by mid-2020, leaving our medium-term estimates intact. HBL is on track to deliver 17%+ ROE through the cycle and we maintain our Dec’20 TP of PKR160/sh.
- HBL’s domestic business transformation programme is now complete and, as per management, the large open FX position should reduce by c30% by Dec’19. This, together with a robust domestic franchise, should lead to earnings more than doubling in 2020f, followed by a 3-year CAGR of more than 20%.
- HBL’s valuations remain attractive – 2020f P/B of 0.8x is at a 43% discount to its 5yr P/B, and at an 11% discount to its closest peer UBL despite similar ROEs through the cycle. Our target price offers an ETR of 33% and we reiterate our Buy rating.
Sharp pick-up in NII override elevated costs in Q3
HBL posted consolidated NPAT of PKR4,932mn (EPS: PKR3.63) in 3Q19, vs. EPS of PKR1.15 in Q3 18 and PKR0.44 in the previous quarter. Strong reported earnings were largely a function of (i) sharp pick-up in NII and (ii) sizeable FX & fee income (albeit coming from a low base), which helped offset a 20% yoy rise in admin expenses. There were some recoveries on the overseas book but there is nascent asset quality deterioration on the domestic front with a 10% qoq NPL increase (albeit concentrated in the OAEM category which does not require provisioning). We have built in a c 40/80bps cost of risk for HBL across 2019/20f and do not see the need to change it as yet.
Near-term estimates reduced slightly, but maintain TP
Admin expenses have risen sequentially in 9M 19, with cost normalisation yet to begin. Higher-than-expected admin costs lead us to reduce our 2019/20f EPS estimates by 7%/4% to PKR9.61/20.35. However, our medium-term EPS projections remain broadly intact and we still continue to see HBL delivering 17%+ ROE through the cycle. We thus retain our Dec’20 TP at PKR160/sh and maintain our Buy stance.
Cost normalisation should come through from 2020f
HBL’s non-interest expenses rose by a higher-than-projected c 20%yoy in Q3 19 on higher consultancy costs, legal charges, and one-off regulatory expenses (re-carding of debit card base). The domestic business transformation program is now complete but HBL continues to incur large charges in connection with its New York branch. With the closure of the New York branch targeted by mid-2020f, admin expenses should flatten out next year. As costs normalise and revenue continues to be strong, the C/I should come off from almost 80% in 2019f to c.65% in 2020f and 55% by 2023f.
Local franchise remains strong and valuations are attractive
HBL’s core business remains strong, backed by stable CASA at more than 75% (current a/c 37%). Similar to peers, loan growth may decelerate to the early double-digits (if not lower), but margin expansion is still making its way through and fee lines are depicting swift growth. A narrowing open fx loan position (expected to be 30% lower by Dec’19), together with a more stable PKR should lead to sharp rebound in non-funded income (2020f: more than 30% yoy growth). Despite the nascent buildup in domestic NPLs, we are comfortable on HBL’s asset quality outlook as a higher cost of risk should be more than offset by higher margins and normalizing admin costs. HBL’s valuations remain attractive - it trades at a 2020f P/B of 0.8x and P/E of 6.2x and we reiterate our Buy rating on the name.
Risks: (i) General macroeconomic risks in Pakistan as well as the other countries HBL operates in, (ii) another large fine on the New York branch, (iii) Losses from non-core income lines and (iv) continued cost slippages.