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Pakistan Market Savvy

August 08, 2018
HBL: Downward revision in earnings Company Name Habib Bank Ltd.
Symbol HBL
We revise our earnings estimates for Habib Bank Limited (HBL) after incorporating Recommendation Buy
1HCY18 results and management’s viewpoint on bank’s outlook. Consequently, we Target Price (Rs) 184
have trimmed our CY18 earnings estimate by 25% and 4-13% for CY19-CY23F.
Key Data
Despite the fact that our target price is revised down by 13% to Rs184/share, the
Current Price (Rs) 161.0
stock still offers a return of 20%. During last 4 months, HBL’s share price plunged by
Avg. Daily Volume (mn sh)* 1.3
26% mainly due to concerns over international loan book and pension expense. We
Outstanding Shares (mn sh) 1,467
maintain ‘Buy’ stance on HBL which is trading at CY19E P/E and P/B of 7.6x and 1.2x,
Current Market Cap. (Rs mn) 236,280
respectively. Free Float (mn sh) 733
CY18E EPS revised down to Rs13.6 * 52 Weeks
Source: PSX, Sherman Research
We reduce our CY18 earnings forecast to account for lower than expected 1HCY18
results and expected muted earnings outlook during the 2H as well . Just to recall, Revised Estimates
HBL posted disappointing earnings of Rs7.6bn during 1HCY18 (EPS of Rs5.16) as (Rs) CY18E CY19F CY20F
against Rs15.0bn (EPS of Rs10.22) in 1HCY17, down 50%YoY. The deterioration in EPS - Old 18.1 23.8 27.7
earning resulted from 1) one- off impact of pension expense of Rs1.9bn (EPS impact EPS - New 13.6 21.1 23.9
Source: Sherman Research
Rs0.8) 2) rupee devaluation led losses of Rs2.5bn ( per share impact of Rs1.1) on
foreign currency loans, which were taken for the settlement of New York branch
Key Numbers
penalty and 3) bank wide business and compliance transformation projects cost of
CY17A CY18E CY19F CY20F
Rs1.4bn (per share impact of Rs0.6) . Besides above, lower capital gains of Rs0.3bn, EPS (Rs) 4.8 13.6 21.1 23.9
down 85%YoY (EPS impact Rs0.7) also diluted bottom line. P.E. (x)* 33.4 11.8 7.6 6.7
ROE (Tier-1) (%) 5% 12% 17% 17%
Having said that, compliance and business transformation program and legal,
P/BV (x)* 1.4 1.3 1.1 1.0
regulatory & remediation cost related to New York branch are expected to continue
Div. Yield (%) 5% 3% 6% 7%
roughly at same pace till mid of 2019 and likely to slowdown after that. Thus, higher * At Current Price
anticipated operating expense is likely to keep 2HCY18 & 1HCY19 earnings in check. Source: Company Accounts, Sherman Research

We expect CY18&CY19 EPS to stand at Rs13.6 and Rs21.1 respectively.

International business in losses, may turn into profits from CY19
It is pertinent to note that the bank’s international business during 1HCY18 incurred
a loss of Rs4.9bn against a profit of Rs0.5bn during 1HCY17. The management stated
that key factor behind the decline in overseas revenue was significant shrinkage in
overseas balance sheet in order to optimize its risky assets.
As a result of de risking of its International operation, the bank’s overseas assets
have witnessed a massive reduction. International advances declined by 35%YoY to
Rs123bn in Jun’18 from Rs189bn in Jun’17. Consequently, the share of overseas
advances in overall bank’s advances have decreased to 13.1% in Jun’18 from 22.7%
in Jun '17. Having said that management expects the international business is likely
to start delivering profits from next year.
De-risking and dividend cuts bring the CAR at comfortable level
Just to recall, Capital Adequacy Ratio (CAR) of the bank dropped significantly to
13.6% after HBL booked hefty penalty of US$225mn. Since then, in order to build
up its CAR, the bank started optimizing the risky assets and also cut dividends. As
a result of this, CAR of the bank has improved to 17.1% as at Jun’18, which is above
the regulatory requirement of 11.9% for CY18. Having said that, we believe despite Chander Kumar
the adequate CAR, the bank’s dividend payout is likely to remain below 50% till CY19 chanderkumar@shermansecurities.com
(+92-21) 35302927 Ext. 1501
due to muted near term earnings outlook and potential implementation of IFRS9,
Sherman Securities (Private) Limited
which requires higher provisions. Corporate Office: 501-502, 5th Floor Continental Trade Centre
G/6, Block-8, Main Clifton Road, Karachi.
Sherman Research is also available on S&P Capital IQ and Thomson Reuters Eikon
Email: research@shermansecurities.com.
► Analyst Certification and other disclosures on next page Tel: (+92-21) 35822822
 Risks to valuation:
Risks to valuation include 1) Lower than expected credit off-take 2) political/economic instability 3) unexpected higher deterioration
in asset quality and 4) lower than expected increase in interest rate.
Analyst Certification and Disclosures:
The research analyst(s) primarily involved in the preparation of this report, certifies that (1) the views expressed in this report
accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was,
is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Furthermore, it is stated
that the research analyst or any of its close relatives do not have a financial interest in the securities of the subject company
aggregating more than 1% of the value of the company. Additionally, the research analyst or its close relative have neither served as
a director/officer in the past 3 years nor received any compensation from the subject company in the past 12 months.
Price Methodology:
To arrive at our period end Target Price, Sherman Securities uses different valuation methods which include : 1) Discounted Cash
flow method 2) Relative Valuation method and 3) Justified Price to Book Value method.
Company Specific Disclosures:
Sherman Securities (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions,
research or analysis in which they are based before the material is disseminated to their customers. Sherman Securities (Pvt.) Ltd.,
their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of
the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or
sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open
market or otherwise. Sherman Securities (Pvt) Ltd. may make markets in securities or other financial instruments described in this
publication, in securities of issuers described herein or in securities underlying or related to such securities.
Research Dissemination Policy:
Sherman Securities (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner
through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material
at the same time.
Disclaimer:
Sherman Securities (Pvt) Ltd. has produced this report for private circulation only. The information and statistical data herein have
been obtained from reliable sources to our knowledge where such information has not been independently verified and we make
no representation or warranty as to its accuracy, completeness or correction. This report makes use of forward looking statements
that are based on assumptions made and information currently available to us and those are subject to certain risks and uncertainties
that could cause the actual results to differ. This report is not a solicitation or any offer to buy or sell any of the securities mentioned
herein. It is meant for information purposes only and does not take into account the particular investment objectives, financial
situation or needs of individual recipients. Neither Sherman Securities (Pvt.) Ltd. nor any of its affiliates or any other person connected
with the company accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the
information contained herein.
Rating System:
Sherman Securities employs a 3-tier rating mechanism i.e. Buy, Hold and Sell, which is based upon the level of expected return
for a specific stock. Time horizon is usually the annual financial reporting period of the company. If total expected return
exceeds or equals to 16%, a Buy rating is issued. If total expected return exceeds or equals to -10%, a sell rating is issued. If
return is in between the two ranges, hold rating is assigned. Aforementioned ratings are subject to change on the basis of
change in stock price, change in analyst’s estimates, change in assessment of company’s business risk or a combination of
these factors.
Rating Interpretation
Buy ≥ 16%
Sell ≤ ‐10%
Hold Between -10% to 16%.

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