Karachi, June 25, 2021 (PPI-OT): BAHL: Re-rating due

We re-iterate a Buy rating for Bank Al Habib Ltd (BAHL) with a TP of Rs105, offering ~50% upside from current levels. Given 9% underperformance on a CY21 YTD basis to the benchmark index, we believe the stock offers opportunity for fresh investments. While flat earnings in the medium term remains a concern for some quarters of the market, we believe BAHL’s current multiples are attractive owing to (1) recurring Tier I ROE at 17% (sector: 14%) and (2) superior asset quality of the bank. The stock currently trades at CY21 P/B of 0.9x, close to multiples of banks generating an ROE of ~14%.

Fresh investment opportunity at current levels

We re-iterate a Buy rating for Bank Al Habib Ltd (BAHL) with a TP of Rs105, offering ~50% upside from current levels. Given 10% underperformance on a CY21 YTD basis when compared to the benchmark index, we believe the stock is a good avenue for fresh investments. While flat earnings in the medium term remains a concern for some quarters of the market, we believe BAHL’s current multiples are undervalued owing to (1) recurring Tier I ROE at 17% (sector: 14%) and (2) superior asset quality of the bank. Moreover, robust in Fee Income (1QCY21: 38% YoY) dominated by trade income provides additional support to its ROE. The stock currently trades at a CY21E P/B of 0.9x, close to multiples of banks generating an ROE of ~14%. Nonetheless, focus on growth may keep the stock’s D/Y lower than peers, along with limited cushion to minimum adequacy ratios (CET I: 9.9%, Tier II: 14.1%).

We expect the bank to continue expanding it’s market share every year broadly through branch expansion as we assume deposit growth of 16% per annum (sector: 12% per annum) and maintain a higher leverage against its assets. To note, BAHL reported 29% YoY growth in zero-cost Deposits during 1QCY21, improving the mix to 37%. However, we do not change the deposit mix in our base case. Hence, despite its ROA at par to peers, the bank is likely to keep generating a higher ROE.

Assets skewed towards government securities

The Investment book is broadly parked in Government Securities with 67% in PIB Investments and 19% in T-Bills as at Dec-2020. Almost one third of the PIB Investment book is estimated to be parked in PIB floaters; while two third is in fixed PIB papers. The book currently holds a duration of more than 2 years. Moreover, we expect the bank’s T-Bill portfolio to be completely re-priced by 2QCY21.

On the Advances front, BAHL remained one of the most active banks in lending under the Temporary Economic Refinance Facility (TERF), and was the third largest lender under the Refinance Scheme for Payment of Wages and Salaries; both introduced by the State Bank of Pakistan (SBP) as a part of reliefs during the pandemic. While CY21F is expected to continue with challenges on the asset quality front, the bank is well covered for any unforeseen events. At present, BAHL’s Gross Infection ratio stands at 1.2%, while Coverage ratio is at 183% as the bank has increased its General Provisioning by Rs2.7bn (+80%) in the past four quarters.