Karachi, April 22, 2022 (PPI-OT): HBL: Double-digit balance sheet growth on a high base

HBL’s balance sheet growth trajectory was further reinforced with an asset base expansion of 28% YoY in 1QCY22. The 29% / 27% growth in advances / investments was driven by 15% growth in deposits and a 3x growth in borrowings to take advantage of favourable money market conditions.

Asset quality indicators remain healthy where the 5% gross infection of the loan book is fully covered, while the management also indicated comfort on the bank’s Sri Lankan exposure as most of the bonds held by HBL are local currency bonds while any impairment on the foreign currency bonds will have a negligible impact on profitability and capital adequacy.

While 1QCY22 earnings were constrained to 2% YoY, due to a one-off severance expense; we expect complete re-pricing of assets and higher growth would improve profitability in CY22. At a recurring Tier I ROE of 17%, we believe the stock justifies an exit P/B of 0.85x, offering more than 60% returns from current levels.

Assets grow by 28% YoY

Habib Bank Ltd’s (HBL) deposits increased by 15% YoY to Rs3.19trn during 1QCY22; driven by zero-cost deposits (+22% YoY), taking the mix to 37%. The bank also expanded its Borrowing base by 3x YoY to almost Rs800bn. Both liabilities took the total asset base up by 28% YoY, where Advances/Investments increased by 29%/27% YoY, respectively. The higher Advances growth has now taken Gross ADR to 52%. The management expects high double-digit growth in Advances, while Deposits may continue to grow at 14%-15% in CY22.

Given the recent economic concerns in Sri Lanka, the management of HBL in yesterday’s Corporate Briefing session apprised that it is comfortable on its investments in the country. Moreover, since 80% of the Sri Lankan book consists of their LCY bonds, there would be minimum hit on HBL’s CAR in the scenario of any impairment. A restructuring of LCY bonds of Sri Lanka is highly unlikely as per the management and the Sri Lankan govt.

One-time costs limit bottom-line expansion

The higher growth reflected in the 12% YoY Net Interest Income growth, where complete impact of re-pricing is yet to reflect in the following quarter. The management expects further 50-75 bp expansion in NIMs in the remaining of CY22. On the non-core income front, Fee Income jumped by 24% YoY on improved Commission on trade and Consumer Income.

On the cost end, the bank reported a Severance Cost of Rs2.6bn during the quarter, taking Admin Expenses growth to 27% YoY. Resultantly, the Cost to Income ratio jumped to 65%. As a result, bottom-line growth limited to 2% YoY as EPS clocked in at Rs5.78. The bank also announced first interim dividend of Rs2.25/share. Excluding the one-time cost, the Cost to Income ratio would have been reported at 60%.

Buffer on adequacy levels trim

As at 1QCY22 end, the bank’s core BV reported an increase of 16% YoY, while contraction in Surplus on Revaluation under Investments (1QCY22: Revaluation deficit at Rs18bn) limited the total BV growth to 7% YoY to Rs191/share. During the same period, HBL’s adequacy ratios further trimmed, where CET I/Tier II CAR reached to 11.29%/15.26%, respectively. As one of the Domestic Systemically Important Banks (DSIB), HBL’s CAR requirement is higher than the sector, hence buffer on existing CET I/Tier II CAR stands at 179bp/176bp, respectively (including 100bp SBP relaxation to banking sector). The management remains comfortable with existing buffer.

Outlook

Core assumptions of higher yields with complete re-pricing impact, double-digit growth and Cost to Income ratio at 55%-60% maintains our prospective ROE estimates of ~17%. Though the bank’s sustainable Tier I ROE remains below sector average of 20%, we believe the stock justifies a P/B of 0.85x, as against the discounted 0.52x P/B it is currently trading at, providing a capital gain opportunity of more than 60%.