We broadly retain our EPS projections for HBL and keep our Dec’22 target price unchanged at PKR150/sh. Adjusted for the one-off VSS expense, the 1QCY22 result was inline. The accompanied DPS was a beat.
Core revenue growth is impressive, with both funded and non-funded streams delivering strongly. Digital volumes are growing swiftly and all major fee lines are doing very well.
We expect Cost/Income to come below 60% going forward, per guidance. 3yr EPS CAGR and mid-cycle ROE are both projected at c16%. CY22f P/B is 0.5x and P/E is 3.9x, while even the D/Y is a healthy 8.2%. Buy
Estimates & TP retained
HBL posted NPAT of PKR8.5bn (EPS: PKR5.78) in 1QCY22. Adjusted for the one-off impact of the VSS taken up by legacy union staff (PKR2.6bn), the result was in line with expectations. The first interim dividend of PKR2.25/sh beat our expectation of PKR2.0/sh. Our revised CY22/23f EPS estimates are PKR27.77/PKR34.68, representing strong growth over CY21 EPS of PKR23.88. Our Dec’22 TP is unchanged at PKR150/sh and we retain our Buy rating.
Revenue growth is impressing
Net interest income rose by 12% yoy / 6% qoq in 1QCY22. With margins expected to further expand once April’s 250bps policy rate hike fully transmits, NII growth should be in the high teens this year and the next. Non-interest income is high quality, led by fees which is growing strongly across all major lines. This is backed by HBL’s focus on digital, with throughout on multiple digital channels up nearly 65% yoy. Profitability from associates disappointed in 1Q but this is due to a timing difference (one overseas provision in 4QCY21), and the headline number is expected to normalize over the year. We expect HBL’s revenue to grow at a c 15% CAGR over the next 3yrs.
Opex is high
Operating expenses increased by a swift 27%yoy in 1QCY22. Adjusted for the one-off VSS expense of PKR2.6bn (taken up by 869 out of 1,100 union staff), the normalized cost increase reduces to 16%yoy. This is broadly in line with admin expense growth for peers such as UBL and MEBL, with HBL’s normalized Cost/Income at 60% vs. 66% per reported numbers. Management is guiding for sub-60% Cost/Income going forward, and we believe this is realistic. Positive surprises can occur if HBL backs its digital proposition by reducing its brick & mortar footprint going forward. That said, after a slight reduction in branches in CY21, the network has again increased in 1QCY22.
High provisioning coverage
Domestic NPLs rose 8%qoq to PKR53.5bn on subjective classifications (in Energy and Consumer), but high 100% provisioning coverage provides comfort particularly as HBL still retains c PKR5bn of Covid-related discretionary provisions. Overseas asset quality has also stayed intact despite some exposure to Sri Lankan bonds (80% is local currency exposure, not expected to undergo a haircut). HBL management expects the international business to achieve breakeven in CY22f (US$1.7mn loss in 1QCY22). We project HBL’s cost of risk near a manageable 50bps over the next few years.
Cheap at the price
HBL is expected to deliver very strong revenue growth going forward, but falls behind on cost efficiency. Even so, the stock price has corrected significantly such that HBL’s c 30% cash payout ratio is translating into a healthy D/Y of more than 8.0%. The CY22f P/B of 0.5x and P/E of 3.9x stack up well against a mid-cycle ROE of c 16% (our assumed Cost of Equity is 17.5%) and 3yr EPS CAGR of 16%. Buy!