HBL has posted consolidated 2QCY19 NPAT of just PKR652mn (EPS: PKR0.44), down a sharp 81%yoy and significantly below our projected NPAT of PKR3,906mn (EPS: PKR2.66). Although the fx loss is inline with expectations, the big miss relative to estimates is due to (i) losses on derivatives and on sale of securities, and (ii) higher than expected admin expenses. This brings HBL’s 1HCY19 NPAT to PKR3,706mn (EPS: PKR2.53), down 53%yoy (pre-tax: down 30%yoy). Alongside the result, HBL announced a second interim dividend of PKR1.25/sh, to bring the 1HCY19 payout to PKR2.50/sh.
Highlights from the 2QCY19 result include:
- Net interest income of PKR24,333mn, up 20%yoy, and inline with our estimates, with margin expansion continuing to come through.
- Total provisions (including impairment) of PKR594mn, also broadly inline with our estimates. Despite a more challenging domestic economic environment, it appears that asset quality is holding up.
- Non-interest income declined by 77%yoy to just PKR1,319mn. While fee income of PKR5,355mn is inline with our estimates and so is the fx loss of PKR2,085mn, HBL has booked a loss on derivatives (PKR1,208mn) and also on sale of securities (PKR1,727mn; possibly on the equities portfolio).
- Non-interest expenses came in at PKR23,599mn, up 25%yoy and also higher than our estimates.
- Effective tax rate of 49% for the quarter, higher than our expected 39%.
The combination of the aforementioned (i) losses on derivatives, (ii) losses on sale of securities and (iii) higher than expected admin expenses amounts to a negative EPS impact of PKR1.83. This is a very poor result for HBL - although core income lines are on track and asset quality appears resilient, admin expenses continue to grow quickly and there are large losses on non-core lines. A potential silver lining could be that the investments portfolio has possibly been cleaned up completely, which should prevent a repeat of such losses going forward. That said, HBL’s key issue remains the ongoing look-back in New York, which could impede stock price performance until it is resolved.
HBL trades at a 2020f P/B of 0.75x where our Dec’20 target price is PKR165/sh (ETR: 43%). However, after the large earnings miss in 2QCY19, we will look to revise our estimates shortly (HBL management call is scheduled for tomorrow).
Risks: (i) General macroeconomic risks in Pakistan as well as the other countries HBL operates in, (ii) another fine on the New York branch, (iii) continued losses from non-core income lines and (iv) continued cost slippages.