Inter

Market Pulse
Pakistan Banks Research Entity Number – REP-085
8 August 2018
HBL: Earnings normalization will take time
• Contagion emanating from the CY17 NY fine compels us to cut our CY18F-20F EPS Habib Bank Limited
estimates for HBL by 10% on average. Projections beyond CY20F remain largely intact Price (PKR/sh) 161.08
but large near-term cuts reduce our Dec’18 TP to PKR175/sh (vs. PKR185/sh TP (PKR/sh) 175.00
previously). We remain Neutral. Stance Neutral
Upside 8.6%
• While we note positives from continued strong asset quality and improvement in CAR
(Jun’18: 17.1%), we expect multiple drags on both income and expense lines will Fwd D/Y 6.2%
extend into CY19F as well. These include pressure on NII and fee as international Total Return 14.8%
exposure reduces, possibility of further fx losses, and high compliance & legal costs. Bloomberg / Reuters HBL PA / HBL.KA
Complete normalization in earnings may not occur until CY20F, at the earliest, in our Mkt Cap (US$mn) 1,901.8
view. 52wk Hi-Low (PKR/sh) 237.03/152.41
6m Avg. D. Vol ('000 shrs) 1,203
• HBL trades at a CY18F P/B of 1.2x and P/E of 12.9x (CY19F: 1.1x and 8.3x). While we 6m Avg. Td Val (US$mn) 1.90
continue to like HBL’s long-term prospects, multiple challenges over the next 12-18
months coupled with an elevated risk profile - for instance, the look-back exercise
HBL – Estimate Revision
continues in NY - will likely keep a lid on share price performance.
EPS (PKR) 18F 19F 20F TP (PKR)
Estimates trimmed on weak 2QCY18 results New 12.45 19.44 25.39 175.0
We reduce our CY18-23F EPS estimates for HBL by 6% on average, with the bulk of Old 14.38 21.80 27.25 185.0
downward revision concentrated in CY18/19F (-14%/-11% from previous estimates). Our Chg -13.5% -10.8% -6.8% -5.4%
new CY18/19F EPS estimates are PKR12.45 and PKR19.44 and our revised Dec’18 TP is now
Source: Company Announcement
PKR175/sh, where we maintain our Neutral stance. Cuts to estimates arise from weak
2QCY18 results (EPS: PKR2.29; -48%yoy) on (i) hits to income lines including international
NII and commission on home remittances, and (ii) costs associated with the NY branch as HBL - Valuation Snapshot
well as an ongoing business transformation project. The bank has booked a c. PKR350mn CY17 CY18F CY19F CY20F
reversal on its pension fund in 2QCY18 and is compliant with Supreme Court judgments at EPS (PkR) 5.34 12.45 19.44 25.39
this time. EPS Growth -77.0% 133.2% 56.2% 30.6%
PER (x) 30.18 12.94 8.29 6.35
Ripple effect from the NY fine to hurt near-term performance P/B (x) 1.25 1.24 1.13 1.00
The fine on NY operations in CY17 has had a ripple effect through the bank, which will P/B Tier I (x) 1.44 1.39 1.26 1.13
impact not just CY18F performance but also extend into CY19F. On the costs front, (i) HBL ROE 4.1% 9.6% 14.2% 16.7%
faces losses on its fx borrowing each time the PKR depreciates (estimated c.PKR1bn hit for ROE (Tier-I) 4.7% 10.9% 15.9% 18.7%
every 5% depreciation), (ii) remediation costs continue in relation to the NY branch which DPS (PkR) 8.00 6.00 10.00 12.00
is now purely a cost center (estimated c. PKR2bn cost in 1HCY18), and (iii) a major business DY 5.0% 3.7% 6.2% 7.4%
transformation project is underway (1HCY18 cost: PKR1.4bn). This is reflected in HBL’s NIMs 3.9% 3.7% 4.1% 4.4%
international segment contributing a large loss of PKR6.1bn on a pre-tax basis in 1HCY18 Source: IMS Research
vs. breakeven in the same period last year.
Asset quality and rising CAR are positives
Notwithstanding the pressures arising from the international side, HBL’s domestic HBL – Price performance
operations remain strong. In particular, we flag: (i) domestic loan growth of more than
25%yoy (partly due to seasonal commodity finance but overall loan growth should remain 10%
in double-digits in our view), (ii) continuing NPL recoveries which is resulting in net 0%
provisioning reversals and (iii) lifting NIMs particularly as international exposure has -10%
reduced. While we see credit costs rising to 70-80bps over the next few years, they should -20%
not negate the impact of rising NIMs, in our view. Improving capital strength – on the back
-30%
of RWA efficiencies is also a positive where HBL’s Tier-1 and CAR are now at 12.8% and
17.1% respectively (vs. 12.0% and 16.0% in Dec’17). We believe HBL can maintain a 40% -40%
Jul-18
Sep-17

Jan-18
Feb-18
Dec-17
Aug-17

Jun-18

Aug-18
Oct-17

May-18
Nov-17

Apr-18
Mar-18

cash payout ratio over the long term. It does not appear to need additional capital but
could look at an ADT-1 issuance, in our view, in case management feels the need to
enhance CAR buffer following D-SIB requirements.
KSE100 Index HBL
Normalization will take time Source: IMS Research
HBL will likely see a poor CY18 while CY19 earnings may also be below in our view. That
said, we do see gradual normalization where, over a 5yr horizon, we project (i) 12% overall
loan CAGR and 8% fee CAGR. Together with phase-out of extraordinary costs and likely Raza Jafri, CFA
focus on cost reduction (we see C/I coming off from almost 70% in CY18F to less than 50%
raza.jafri@imsecurities.com.pk
by CY23F), HBL should post strong earnings momentum over the medium-term. This
should take ROE (including surplus) from high single digits this year to more than 20% by Yusra Beg
CY22F. However, we reiterate that near-term challenges are likely to keep a lid on share yusra.beg@imsecurities.com.pk
price performance for now. We would wait for further dips before adding HBL. +92-21-111-467-000 Ext: 305
ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 3,4 &5
Intermarket Securities is the Local Research Partner of Exotix Capital
www.jamapunji.pk
 Market
Pulse

KSE100 Index & Volume Earnings yield vs. T-bill spread

54,000 1,000 8.0%
50,000
750 6.0%
46,000
42,000 500 4.0%
38,000
250 2.0%
34,000
30,000 - 0.0%

Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

Feb-18

Apr-18

Jun-18

Jul-18

Aug-18
Jan-18

Mar-18

May-18
Aug-17

Sep-17

Nov-17

Dec-17

May-18

Jun-18

Jul-18
Jan-18

Mar-18

Vol. Shares (mn) - Rhs KSE100 Index pts. Earnings Yields - 12m Tbills Spread
Source: PSX Source: Bloomberg, IMS Research

Sector wise FIPI Flows (US$mn) Portfolio Flows

07-Aug-18 MTD CYTD FYTD (US$mn) Current WTD* MTD 12M FYTD CYTD
Others 0.36 (1.2) 50.7 (4.0) Total FIPI (3.9) (15.2) (15.2) (307.4) (78.9) (212)
Banks 0.13 (4.8) (132.1) (35.9) Individuals 1.3 11.5 11.5 67.5 76.9 78.4
OMCs 0.13 (1.4) (12.9) (5.2) Companies 0.2 0.6 0.6 120.4 18.3 46.1
Fertilizer 0.05 4.4 4.8 12.6 Banks / Dfi (0.1) (2.3) (2.3) (38.6) (11.5) (76.2)
Food (0.02) (0.1) (0.5) (1.0) NBFC 0.0 0.5 0.5 (7.4) 0.2 (0.5)
Telecom (0.10) (0.2) (1.1) (3.0) Mutual Funds (1.1) (4.5) (4.5) (77.0) (46.8) (30.3)
Power (0.17) 0.2 (15.8) (0.8) Other Organization 0.5 1.9 1.9 81.5 8.2 38.8
Textile (1.04) (2.3) (15.7) (5.4) Broker Trading (0.2) 1.7 1.7 (39.2) (4.2) (22.3)
E&P (1.62) (5.1) (76.9) (27.1) Insurance Companies 3.3 5.9 5.9 200.3 37.8 178.6
Cement (1.64) (4.8) (12.7) (9.1) Source: NCCPL
Total (3.9) (15.2) (212) (78.9) *Last 5 working days
Source: NCCPL
World Indices Commodity Prices
Last Close DoD Δ DoD Δ (%) CYTD Δ (%) FYTD Δ (%) Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%)
Pakistan 42,760.1 -48.5 -0.11% 5.7% 2.0% Gold - US$/oz 1,210.97 3.33 0.3% -3.7% -7.0% -3.3%
China 2,779.4 74.2 2.74% -16.0% -2.4%
Oil- US$/bbl 69.17 0.16 0.2% 40.2% 14.5% -6.7%
Hong Kong 28,248.9 429.3 1.54% -5.6% -2.4%
Cotton US₵/lb 87.90 -0.50 -0.6% 24.6% 11.8% 4.7%
India 37,665.8 -26.1 -0.07% 10.6% 6.3%
Coal - US$/MT 103.30 0.30 0.3% 20.0% 8.5% -0.9%
Indonesia 6,091.3 -9.9 -0.16% -4.2% 5.0%
CRY Index 194.49 0.56 0.3% 7.5% 0.3% -2.9%
Malaysia 1,791.1 11.3 0.64% -0.3% 5.9%
Source: Bloomberg
Japan 22,662.7 155.4 0.69% -0.4% 1.6%
Singapore 3,340.0 54.7 1.66% -1.8% 2.2% Forex & Money Market
Korea 2,300.2 13.7 0.60% -6.8% -1.1% Close DoD Δ YoY Δ bps CYTD Δ bps FYTD Δ bps
Taiwan 10,983.4 -40.7 -0.37% 3.2% 1.4%
6m Tbill yield (%) 7.85 0.00 1.85 1.85 0.95
Bangladesh 5,381.9 28.5 0.53% -13.8% -0.4%
10Y PIB yield (%) 9.91 0.00 1.70 1.52 0.88
Sri lanka 6,117.6 -25.0 -0.41% -4.0% -1.2%
6m Kibor (%) 7.92 0.00 1.78 1.76 1.00
Philippines 7,725.9 -91.5 -1.17% -9.7% 7.4%
Thailand 1,707.3 11.0 0.65% -2.6% 7.0%
Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%)
Vietnam 956.8 -3.4 -0.36% -2.8% -0.4%
USA 2,858.5 8.0 0.28% 6.9% 5.2% PKR/US$ 124.24 0.02 0.02% 17.9% 12.5% 2.3%
UK 7,718.5 54.7 0.71% 0.4% 1.1% PKR/EUR 143.98 0.37 0.26% 15.8% 8.9% 1.7%
Germany 12,648.2 50.0 0.40% -2.1% 2.8% PKR/JPY 1.117 0.00 0.04% 17.5% 13.9% 1.8%
Source: Bloomberg Source: Bloomberg
Market
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We, Raza Jafri, CFA & Yusra Beg, certify that the views expressed in the report reflect our personal views about the subject
securities. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific
recommendations made in this report. We further certify that we do not have any beneficial holding of the specific
securities that we have recommendations on in this report.

Ratings Guide* Upside

Buy More than 15%
Neutral Between 0% - 15%
Sell Below 0%
*Based on 12 month horizon unless stated otherwise in the report. Upside is the percentage difference between the Target Price and Market
Price.

Valuation Methodology: We use multiple valuation methodologies in arriving at a Target Price including, but not limited
to, Discounted Cash Flow (DCF), Dividend Discount Model (DDM) and relative multiples based valuations.

Risks: (i) Another fine on NY operations and longer than estimates possible after-effects, (ii) continued charges pertaining
to the pension fund, (iii) greater than expected asset quality deterioration, and (iv) continued pressure on fee income
lines.

Disclaimer: Intermarket Securities Limited has produced this report for private circulation only. The information, opinions
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