Karachi, January 06, 2022 (PPI-OT): Pakistan Banks: HBL Potential re-rating in the offing!

Habib Bank Limited (HBL) is currently trading at a decade low CY22F P/B of 0.54x. Consequently, implied risk premium stands at 11.8% – at similar scale to that witnessed towards the end of CY08 and continued till CY10.

Improvement in macros in CY11 reduced risk premium level to close to 4.2% (avg.) and we are setting the aforementioned performance as a precedent to drive HBL valuations forward with worst already behind us on macro front. Hence, we see current levels perfect for accumulation with our Dec’22TP standing at PkR145.1/sh.

We expect HBL’s ROE to stand at avg. 13.7% over CY22-24F – at similar levels to CY21, implying a target P/B of 0.63x. For ROE to materialize, earnings growth is expected at a 3y CAGR of 9.5% with steepening of earnings likely in CY23 as full impact of interest rate hikes comes into play. The expected ROE is likely to buttress bank’s CAR in our view, opening up possibility of stronger payouts going forward.

Key risk to performance is UAE being potentially put under the ‘grey-list’ by FATF. To highlight, UAE occupies 22.2% share in total advances of the bank while generating auxiliary income through fees on trade and remittances for domestic ops.