Karachi, March 29, 2022 (PPI-OT): BAHL: Growth momentum to continue

Post management’s outlook shared in Bank Al Habib’s (BAHL) Annual General Meeting today, our investment thesis remains intact with a TP of Rs135.

We expect the bank to continue expanding its market share every year broadly through branch expansion as we assume deposit growth of 14% per annum (sector: 12% per annum) while maintaining a higher leverage against its assets, keeping an average Tier I ROE of 20%.

With CY21 bottom-line reported at similar levels to CY20, payout ratio increased from 28% (DPS: Rs4.50) in CY20 to 42% (DPS: Rs7.00) in CY21. To support the bank’s trimmed adequacy ratios, BAHL will be issuing a Rs7bn Tier I paper in the coming months.

+20% Tier I ROE trend to continue

Post management’s outlook shared in Bank Al Habib’s (BAHL) Annual General Meeting today, our investment thesis remains intact with a TP of Rs135. We believe re-rating for BAHL is due owing to (1) higher growth and (2) superior asset quality, keeping Tier I ROE at ~20%. We expect 14% YoY deposit growth through branch expansion as the management targets to open more than 120 branches in CY22 (20 branches opened so far), while maintaining a higher leverage against its assets. Hence, despite its ROA at par to peers, the bank is likely to keep generating a higher ROE.

Assets expand on aggressive lending opportunity

Asset base expanded by 22% YoY during CY21, led by 44% YoY increase in the loan book size. During the same period, NPL stock remained sticky at Rs7.7bn while Specific and General Provisioning each were reported at Rs6.5bn, taking Coverage Ratio to 169%. This also makes BAHL prepared for the implementation of IFRS-9, with minimal impact on its adequacy ratios as well. The expansion in Advances led to higher Risk Weighted Asset growth, trimming the bank’s adequacy ratios in CY21. Hence, BAHL will be issuing a Rs7bn Tier I paper soon.

On the Investment book side, the bank opted to reduce T-Bill Investments, limiting total Investment growth to 8% YoY. On the PIB Book, the management guided that ~55% is parked in PIB Floaters. The Fixed PIB book carries a duration of ~1.5 years, with a yield of over 10%.

Funded by a mix of Deposits and Borrowings

Asset growth was funded by 19% YoY higher Deposits and 43% YoY higher Borrowings. While most Deposit growth was reported under the zero-cost deposit segment (+28% YoY), the bank also continued to increase Borrowings under various SBP facilities (+40% YoY) that supported its loan book growth. BAHL was also the fourth largest in terms of absolute zero-cost deposit mobilization during CY21. To note, BAHL reported a CAGR of 20% in zero-cost Deposits during CY18-21, improving the mix to 39%. However, we do not change the deposit mix in our base case.

Payout ratio enhanced despite flat earnings

Change in Investment mix and reduced interest rates declined the bank’s core income by 4% YoY in CY21. However, this was more than offset by 39% YoY higher Fee Income reported during the year, fuelled by 27% YoY higher trade income and 3x YoY higher Card related income. As a result, bottom-line remained flat during CY21, while payout ratio increased from 28% (DPS: Rs4.50) in CY20 to 42% (DPS: Rs7.00) in CY21.