- We initiate coverage on BAHL with a Buy rating and December 2021 TP of PKR89/sh.
- BAHL is the leading trade finance bank in Pakistan, with best-in-class asset quality and a strong customer base.
- BAHL trades at a CY21f P/B of 0.84x, which is at a 30% discount to the previous 5yr average.
We initiate coverage on Bank AL Habib Ltd. (BAHL) with a Buy rating and December 2021 TP of PKR89/sh. BAHL is the foremost trade finance bank in Pakistan, demonstrates best-in-class asset quality, and commands strong customer loyalty. It has successfully navigated tough economic conditions in the past, a track record that has endured during the coronavirus pandemic.
Pakistani exporters have proven to be resilient and the outlook remains encouraging, particularly for the textile sector. This holds positives for BAHL’s loan growth and asset quality. BAHL also appears to be more aggressively pushing its Islamic business, which can help it lift market share and margins. These positives can help offset a limited fee franchise, weak digital presence and modest capital buffer.
BAHL trades at a CY21f P/B of 0.84x, which is at a 30% discount to the previous 5yr average. Valuations are cheap, even after accounting for flattish earnings across the next 2yrs and a lower sustainable ROE range of sub-18% vs. over 20% in the past. Upside to medium-term estimates can arise from higher-than-projected margins, if interest rates enter double digits, as well as from improved cost efficiency.
Market leader in trade finance
BAHL is conservative and has a narrow focus, but it is great at what it does. It is the leading trade finance bank in Pakistan, with an estimated 14% market share. This results in almost a third of its loans being extended to the Textile sector while trade commission makes up more than half its fee income. Pakistani exporters have increased market share during the Covid-19 pandemic, benefitting from strong home textile demand, amid US-China trade tensions and regional competitors suffering a much worse outbreak – while most of the past impediments to the Textile sector’s growth have been significantly allayed. BAHL’s focus on exporters should enable it to grow loans quickly while maintaining asset quality. We see a 5yr loan CAGR of c.15% and a cost of risk limited to 20-30bps, with prospects for net provisioning reversals in some years.
Leveraging the brand
BAHL’s brand commands strong customer loyalty. The bank generates almost two-thirds of its deposits from individuals, the second highest in our coverage after MEBL, which helps deliver a CASA approaching 80%. This partially offsets the relatively thinner yields on the loan book, which is focused on quality and has limited consumer exposure. We think BAHL’s funding cost advantage can further improve in future. Having had a quick deposits CAGR of 16% over the past five years to become the 7th largest bank in Pakistan, BAHL can now focus on further improving its deposit mix. Also, its growing focus on Islamic business (now c.9% of its deposits vs. 7.5% a year ago), can also reduce funding costs as Islamic savings deposits are not subject to a rate floor; this can help with margins in the future.
BAHL has outperformed peers on NII growth in the previous decade (18% pa vs. 11% pa for our Universe) driven by strong asset growth, particularly investments. That said, BAHL is more exposed to reinvestment risk as PIBs are nearly two-thirds of investments – the bulk of which have fixed yields and are maturing in CY21. This may push down NIMs to 4.0% in CY21f from 5.2% in CY20. The SBP is likely to remain dovish in light of the ongoing third wave of Covid-19 where we see only a gradual increase in interest rates in the next 1-2 years. As a result, NIM expansion may be modest and NII growth may settle at sub-15% pa over the medium term.
Off-peak ROE but valuations are very attractive
We expect BAHL to post mid-cycle ROE of 17-18%, down from an average of 20% in the previous 5yrs. That said, given that the CY21f P/B of 0.84x is already at a c 30% discount to the previous 5yr average, we believe valuations are attractive. BAHL’s fee franchise may remain limited, consumer lending is likely to be cautious, and the payout ratio may stay in the 25-30% range; but upside to our estimates can arise from higher than projected margins as well as improved cost efficiency (there is room for BAHL to reduce its staff per branch ratio). If this happens, it is possible that the Cost/Income is lower vs. c.60% that we have modelled. As a result, our projections for mid-cycle ROE may well prove to be conservative.
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The analyst certifies that the views expressed in the report reflect their personal views about the subject securities. He or she also certifies that no part of their compensation was, is, or will be,...