In an exchange filing today, Habib Bank Ltd (HBL) has announced to voluntarily close its New York branch by March 31, 2020 (earlier than the initial guidance of mid-2020). This comes after formal conclusion of the look-back assessment, and possibly removes the chances of any tail-end fine, in our view. We understand that any costs associated with the wind up will be minimal. The stock has reacted positively given this removes a major overhang that has negatively affected 2017-2019 financial and stock price performance, and which threatened to hold back the medium-term outlook as well. In doing so, the stock has also shrugged off media reports over the weekend pointing towards historical compliance weaknesses in UAE, which the bank maintains have already been resolved.
The imminent closure of the New York business provides comfort on CAR outlook (Sep’19 - Tier-1: 12.4%, Total: 15.6%). It should also lead to a visible reduction in New York-related compliance costs from 2Q20 onwards. With branch closure to take place earlier than initially projected, there now appears to be space for us to reduce our full-year admin cost estimates for 2020f (projected C/I: 65%), which should push up our EPS estimate for this year (2020f EPS: PKR20.35).We await CY19 results and Analyst call before doing this.
Today’s announcement reinforces our positive medium-term outlook on HBL, where we see the C/I dropping to 55% by 2023f, with ROE projected to expand to 17-18% by then. In this regard, it is also possible that HBL will find space to increase its dividend payout going forward (our base-case assumption is a sustainable c 35% payout ratio). If this happens, it can further increase ROE over and above our base-case projections which can help re-rate valuations.
UBL underwent a similar process, announcing voluntary closure of its New York branch in Nov’18 which completed by end-January 2019. During this period, UBL’s share price gained 11% vs. a flat KSE-100. We think HBL can potentially react in a similar manner. HBL trades at a 2020f P/B of 1.0x and P/E of 7.8x (2021f P/B: 0.9x, P/E: 6.7x) where we reiterate our Buy rating on the name. Our Dec’20 TP is PKR191/sh which offers an ETR of 22%.