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Pakistan

Habib Bank: Q3 19 review: Sharp pick up in NII overrides still-elevated admin costs

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    15 October 2019

    HBL posted consolidated Q3 19 NPAT of PKR4,932mn (EPS: PKR3.36) vs. EPS of PKR1.15 in 3Q18 and PKR0.44 in the previous quarter. HBL’s performance is gradually beginning to reflect its true earnings potential. The result is in line with our projected Q3 19 EPS of PKR3.25, but higher than consensus. Growth was led by (i) sharp 30% yoy jump in NII as margins expand, (ii) a sizeable 36% yoy growth in fee income on likely recovery in trade volumes, and (iii) FX income of PKR1.9bn (vs. a run of intermittent Fx losses in the last 18 months). These helped override a still-elevated cost base (admin expenses up 20% yoy) and provisioning charges. The result brings 9M 19 NPAT to PKR8,636mn (EPS: PKR5.89), down 10% yoy (pre-tax profits: up 3% yoy due to super tax charge this year). Results were accompanied with a DPS of PKR1.25/sh, in line with estimates, taking 9M 19 payout to PKR3.75/sh. 

    Q3 19 key highlights:

    • Net interest income grew by a sharp 30% yoy to PKR26,355mn, above our estimates, on likely strong asset re-pricing this quarter following 100bps hike in DR to 13.75% in the Jul'19 MPS. NII is likely to remain robust in the coming quarters as well, in our view.
    • Provisioning expenses came broadly in line with our expectations at PKR1,272mn, but more than double the Q2 19 charge of PKR595mn. While we expect there may be an element of impairment, we seek clarity in the upcoming detailed financials. We project HBL's cost of risk at 40bps over CY 19, where asset quality pressures remain at bay for now.
    • Non-interest income rose by a sharp 45%yoy driven by 36%yoy higher core fee income, and also positive FX income of PKR2,301mn (vs. FX loss of PKR3,293mn in Q2 19). This is likely led by recovery in trade volumes from foreign ops. However, HBL has posted a minor capital loss, possibly on its equities portfolio. 
    • Non-interest expenses came in higher than expected at PKR24,515mn, up 21% yoy. However, strong income levels helped drive down overall cost/income to 71.7% vs. 92.0% in Q2 19.
    • Effective tax rate of 41% for the quarter came in higher than our expected 39%.

    This is a particularly good result by HBL – where stronger-than-expected marks in both NII and core fee income are key takeaways. Asset quality also appears manageable for now, and while admin expenses continue to grow quickly, this is diluted by strong income levels, in our view. HBL trades at a 2020f P/B of 0.83x where our Dec’20 target price is PKR160/sh (ETR: 26%). We have a Buy stance on HBL, where the key catalyst going forward would be the smooth closure of its New York branch.