JS Securities Limited - JS Research (March 25, 2022)

Brokerage

JS Securities Limited – JS Research (March 25, 2022)

March 25, 2022

Karachi, March 25, 2022 (PPI-OT): HMB: Gearing for an earlier re-pricing

With a high IDR of 86%, and most of it parked in shorter duration variable instruments, HMB’s asset re-pricing is likely to reflect earlier than peers.

The consistent improvement in deposit mix also adds to the bank’s potential to maintain its ROE above 20%. The bank generates a higher ROA than most banks, fueling its ROE by an even higher leverage.

We believe the prevailing stock price does not reflect the bank’s consistent improvement in its recurring ROE as it trades at unjustified P/B and P/E of 0.6x and 2.6x, respectively. We therefore expect HMB to outperform its peers with a Target Price of Rs80, on a justified P/B of 1.1x. The attractive capital upside is in addition to DY of 14%, based on existing payout ratio of 35% – 40%.

Deposit base expands by zero-cost deposits

HMB closed CY21 as the fourth consecutive year to expand the share of zero-cost deposits in the total mix. With 13% YoY deposit base expansion in CY21, zero-cost deposits witnessed a growth of 22% YoY. In its Corporate Briefing session held yesterday, the management apprised that branch network expansion is targeted to reach close to 500 as at CY22 end, with continued focus on total and zero-cost deposits growth per branch. The management targets to expand share of current account deposits by 100bp – 150bp every year (unchanged mix in our base case assumption).

IDR shoots up to 86%, two-third parked in T-Bills

The Investment book further increased by 14% YoY in CY21 as the bank continued to take much support from a higher levered book through increasing Repo Borrowings and taking IDR up to 86%. With the investment mix tilted towards shorter tenor papers (61% of Investments), in addition to 8% of Investments in Floater PIBs and most of the loan booked (ADR: 52%) priced at 3M KIBOR, the bank is well-geared to reap benefits of earlier asset re-pricing than peers.

The bank’s investment in fixed PIB is 76% of the total PIB portfolio, which carries a duration of less than a year. In-line with our earlier note where we had highlighted concerns on the banking sector’s bond portfolios as at CY21-end given the spike in bond yields, HMB’s Surplus on Revaluation did witness a Rs4bn decline during 4QCY21. However, these concerns mellow down for the bank as out of the Rs165bn of fixed PIBs, Rs93bn are scheduled to mature in the next four months.

Asset quality improves amid aggressive lending

Aggressive lending growth of 28% YoY during CY21 took the ADR up to 52% (+570bp YoY). General provision increased by Rs1.3bn during 4QCY21 and Rs2.2bn during CY21 as part of preparation to brace impact of IFRS-9 implementation. With that, the loan book’s Coverage ratio reached to 124%, while Gross Infection ratio dropped to 4%. To note, the bank reported a negligible reversals amount under provisions for loans during 4QCY21.

ROE remains above 20%

The improvement in deposit mix and higher leverage assisted the bank to maintain its Net Interest Income to CY20 levels, despite decline in average interest rates. Moreover, maintaining largest market share in trade income with 26% YoY growth, its fee income improved by 29% YoY. As a result, the Cost to Income ratio limited to 41% and bottom-line expanded by 12%. Higher earnings kept Tier I ROE above 20%.

Valuations reflect steep discount

We believe the prevailing stock price does not reflect the bank’s consistent improvement in its recurring ROE as it trades at unjustified P/B and P/E of 0.6x and 2.6x, respectively. We therefore expect HMB to outperform its peers with a Target Price of Rs80, on a justified P/B of 1.1x. The management’s medium term ROE target is north of 20%, based on increasing profitability and efficient ROA. We flag the bank generates a higher ROA than most banks, fuelling its ROE by higher leverage.

The attractive capital upside is in addition to DY of 14%, based on existing payout ratio of 35% – 40%. We highlight the strong CET-I ratio that the bank maintains at 13% (minimum req. 8.5%), maintaining one of the highest buffers among peers. We hence do not rule out that the bank has the muscles to gradually return to its previous payout ratio (~55% during CY11-17), which has dropped to ~40% since CY18 to gradually buildup the bank’s CET I ratio.