Equity Analysis /
Pakistan

SBP maintains HBL, NBP, and UBL as systemically important banks

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Raza Jafri
    Raza Jafri

    Executive Director, Research

    Intermarket Securities
    19 July 2019

    Based on the assessment of 2018 financials, the SBP has reaffirmed that HBL, NBP and UBL will remain classified as systemically important banks (D-SIBs). These banks will be subject to enhanced supervisory requirements and a higher capital surcharge in the form of CET-1.  Somewhat surprisingly, MEBL has not officially been notified as a systemically important bank (MEBL has an overall asset market share of less than 5%, but this increases to more than 30% within Islamic banking).   

    The D-SIB framework was introduced in 2018 in Pakistan, with additional capital surcharge of 2.0% for HBL, and 1.5% each for NBP and UBL. As a result, UBL issued an ADT-1 instrument of PKR10bn last year while we understand that HBL is contemplating doing the same.

    For the next year, the additional capital surcharge requirement stays unchanged for HBL at 2.0%, but has now been enhanced to 2.0% for NBP and reduced to 1.0% for UBL. This is negative for NBP and positive for UBL. Practically, however, there is unlikely to be any change for these two banks, given that NBP has already not been paying out any cash dividends for the last two years, while UBL may retain its more conservative cash payout ratio (projected at 50% going forward vs. more than 60% on average in the last 5 years).   

    We continue to have Buys on both HBL and UBL, with Dec’20 target prices of PKR165/sh and PKR180/sh, respectively. HBL trades at a 2020f P/B of 0.72x and P/E of 5.1x, and offers a total return of 47%. UBL trades at a 2020f P/B of 0.93x and P/E of 6.2x, and offers a total return of 38%. We are Neutral on MEBL (2020f: P/B: 1.7x, P/E: 6.5x) with a Dec’20 target price of PKR99/sh.