Equity Analysis /
Pakistan

Habib Bank: MSCI event can be buying opportunity; maintain Buy

  • We raise our CY21/22f EPS estimates by 5/8% after incorporating sharper monetary tightening

  • Margin expansion and strong balance sheet growth should help deliver a 15%+ EPS CAGR over the next 3 years

  • Outflow from exiting passive EM funds in the upcoming MSCI event is an opportunity, Buy

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
9 November 2021

We raise our CY21/22f EPS estimates by 5/8% after incorporating sharper near-term monetary tightening compared with previous assumptions. This is balanced by a higher risk-free rate of 11.0% vs. 10.5% previously, keeping our rolled over Dec’22 TP at PKR165/sh.

Margin expansion and strong balance sheet growth should help deliver a 15%+ EPS CAGR over the next 3 years. Provisioning coverage of 100% gives comfort on asset quality, while admin costs have normalized.      

HBL's growth aspirations in Islamic, focus on digital banking and exit from non-core businesses can help ROE lift from 13% this year to 16% by CY25f. Valuations are attractive (CY22f P/B of 0.61x and P/E of 4.7x) where we believe outflow from exiting passive EM funds in the upcoming MSCI event is an opportunity to add the name. 

Estimates revised on new macro assumptions

We have raised CY21/22f EPS estimates by 5/8%, as we build in a sharper rise in interest rates (+200bps rise to 9.25% in CY22f vs. 8.50% previously). Our CY21/22f EPS estimates are now PKR24.62/27.15. Margin expansion (NIMs of 4%+ through the cycle) and strong balance sheet growth should help deliver a 15% EPS CAGR across the next 3 years. This is balanced by a higher risk-free rate of 11.0% which, despite a valuation rollover to Dec’22, leaves our TP unchanged at PKR165/sh.

In-line 3Q performance

HBL reported 3QCY21 NPAT of PKR9.1bn (EPS: PKR6.17), down 10%yoy and 3%qoq, taking 9MCY21 NPAT to PKR 26.7bn (EPS: PKR18.21) up 6%yoy – in line with estimates. Key takeaways for 3Q included strong fee & fx income (up 37%yoy / 3.5x yoy), and continued normalcy in admin expenses (+2%yoy), which offset a sequential pickup in loan provisions. The 3Q dividend of PKR1.75/sh, bringing the 9MCY21 payout to PKR5.75/sh, was also in-line.

Focus on Islamic banking

With admin costs normalizing, management focus on growth areas is now more visible. While HBL is expected to continue with its digital & technology strategy which is resulting in quick conversion (40% of transactions now take place through digital channels vs. about 30% a year earlier), it also appears to be pushing Islamic banking more, with the conversion of non-core conventional branches to Islamic mode. HBL’s Islamic business is currently c.10% of its balance sheet and is growing quickly (balance sheet share was 8% in Dec’20).

Valuations remain attractive

Strong revenue growth coupled with an end to legacy issues, particularly the high admin costs, leads us to estimate a 15%+ EPS CAGR for HBL in the next 3 years. Valuations are very attractive where HBL trades at a CY22f P/B of 0.61x and P/E of 4.7x, vs. a mid-cycle ROE of c. 16%. Our TP offers a 1yr ETR of 36% to our Dec’21 target price of PKR165/sh and we maintain a Buy rating.

Buy into the EM to FM reclassification

Pakistan gets downgraded to MSCI FM effective November 30th and HBL is one of the top names owned by passive EM funds. While some preemptive selling may already have taken place (FIs have sold US$24mn of Banks since the downgrade decision), residual selling may lead to pressure on HBL’s stock price. This would be an opportunity to add a quality name, in our view.