Equity Analysis /

Habib Bank: Revenue growth makes up for higher costs; maintain Buy

  • We trim our EPS estimates for HBL as enhanced focus on digital is coming at a cost. Our revised Dec’22 TP is PKR150/sh

  • Strong NII amid high interest rates and double-digit balance sheet growth should help post 3yr profit CAGR of 16%

  • Valuations are attractive (CY22f P/B of 0.6x and P/E of 4.4x), particularly compared with the other large banks

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
11 March 2022
  • We trim our EPS estimates for HBL by 7% on average, with the bank’s enhanced focus on digital coming at a cost (C/I rising to 55% through the cycle). Our revised Dec’22 TP is PKR150/sh vs. PKR165/sh previously but we retain our Buy rating as HBL has already corrected to 2% since its result announcement.

  • Strong NII in the backdrop of higher interest rates, backed by robust double-digit balance sheet growth and better non-funded income delivery (fee and fx in particular), should help deliver a 3yr profit CAGR of 16%. High provisioning coverage of 104% provides comfort.

  • HBL is on track to deliver ROE of c.15% through the cycle, while maintaining a 30% cash payout. Valuations are attractive (CY22f P/B of 0.6x and P/E of 4.4x), particularly compared with the other large private banks. HBL remains one of our top picks among banks.

Estimates reduced on higher provisions and admin costs

We have reduced our CY22-26f EPS estimates by 7% on average, as we build in higher admin costs to support HBL’s growth plans. Cost-to-income now stays at or above 55% over the medium term, vs. 52% previously. We build in a higher cost of risk over the next few years (CY22/23f: 46/38bps vs. 28/51bps previously), given macroeconomic headwinds and volatile commodity prices. We also revise down our average Policy Rate assumption from 10.75% to 10.0% in CY22f, with the central bank seemingly willing to look through near-term inflation. Our new CY22/23f EPS estimates now stand at PKR26.16 and PKR32.62, respectively, 7%/5% lower vs. previous projections. Our Dec’22 TP is now PKR150/sh vs. PKR165/sh previously.

Focus on digital taking precedence over traditional brick & mortar

HBL’s deposits grew 19% yoy in CY21, but CASA fell toward 70%, from 73% a year earlier. Management is guiding for deposit growth in the mid-teens for CY22f, and we keep it at 13% thereafter, broadly inline with Pakistan’s nominal GDP growth trajectory. We expect CASA to trough near 70% and slowly fill out over the next few years – while HBL may not expand its overall branch network aggressively; it is expected to maintain focus on growing the Islamic business. At the same time, HBL continues to invest in digital infrastructure & technology. This is bearing fruit – 40% of transactions are now from digital – but also adding to costs. We keep cost-to-income above 55% going forward vs. sub-50% prior to 2017 (pre-restructuring). 

Strong revenues growth from both funded and non funded lines

We expect HBL’s NII to lift 7% yoy in CY22f on lagged asset re-pricing, before rising 13% pa on average over the medium term. NIMs are expected to hover at c. 4.0% in CY22/23f.  HBL reported stellar growth in fee (up 35% yoy in CY21), with its flagship cards business accounting for more than 50% of the growth, followed by the trade business. We expect fee / non-interest income to grow at a 12/10% CAGR. Importantly, PKR volatility no longer poses a threat to HBL’s open loan position, which is now manageable.

Coverage provides comfort

HBL reported robust 23% yoy growth in loans (domestic loans up 20% yoy), driven by housing & construction (up 41% yoy), microfinance (up 37% yoy) and consumer loans (up 22% yoy). However, asset quality remained strong – the NPL ratio is 5.0% and overall coverage has crossed 100% – with HBL retaining its Covid-related general provisioning buffer. This improves the quality of the balance sheet and placed HBL in a better position to withstand asset quality pressures. Given a trickier macroeconomic environment, in part due to the volatility in global commodity prices, together with IFRS-9 implementation ahead, we keep our cost of risk estimates near 50bps in the near term, before a gradual tapering off going forward. 

Earnings miss in 4QCY21 on high provisioning expense

HBL reported 4QCY21 NPAT of PKR8.3bn (EPS: PKR5.67) in 4QCY21, up 46% yoy but lower by 8% qoq. This took CY21 NPAT to PKR35.0bn (EPS: PKR23.88), up 13% yoy. HBL reported very high provisioning expenses (PKR2.6bn, up 47% qoq) due to a rise in general provisions, sequentially higher admin expenses and a high effective tax rate of 46%. This offset strong fee income (up 38% yoy) and fx income. HBL announced a final cash dividend of PKR2.25/sh, higher than projected, taking CY21 payout to PKR7.50/sh.