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HBL: Looking past the challenges

Reflective of the fundamental challenges faced by the bank, HBL’s price performance has remained wary. While the entire banking sector has been feeling the pinch (additional capital controls, regulatory challenges), HBL has prominently lagged behind (down 35% in the last 12M) on account of operational hiccups particularly on its foreign business. In this regard, the most apparent consequence has been on the bank’s non-interest income stream (down 37.1%YoY in 1QCY18) with lower fee income and capital gains inhibiting earnings recovery. That said, CY19 should be better off with growth becoming more visible thereon (CY18-21F NPAT CAGR of 20%). In this regard, HBL’s domestic presence remains strong enabling it to maintain its focus on current accounts (+12%YoY avg. growth in the next 3yrs) while at the same time grow its loan book (+13% avg. growth in the next 3yrs). Having undergone steep correction, HBL’s valuations have become increasingly appealing with the stock available at a CY19F PB/PER of 1.0x/6.6x – the lowest in last 5 yrs. In this backdrop, we advise stock accumulation from a long term perspective where swifter than anticipated interest rate hikes can catalyze performance.

CY18F to be a consolidation period: CY18F is most likely to be another challenging year with the bank solely focusing on consolidating its financial position under the new leadership, managing its capital adequacy ( additional 2% capital requirement under the new SBP framework) and  tackling compliance irregularities. Consequently earnings are also expected to lag behind on account of slowdown in non-interest income growth (-8.5%YoY growth expected in CY18F) and increase in operating expenses (one-off pension related cost of PkR2.2bn raising 1QCY18 C/I to 70.1% from 50% in 1QCY17). 

Domestic business strength to come to rescue post CY18F: That said, post CY18F HBL’s strong domestic presence will continue to play a prominent role in shaping the bank’s earning trajectory going forward. NIMs are likely to improve deriving thematic support from speedy interest rate hikes while CA accumulation (avg. 12%YoY growth in the next 3yrs) and pick up in loan growth should further help in driving our 3yr NPAT CAGR of 20%.

Investment Perspective: Undergoing steep correction, HBL's stock price is currently hovering around levels last seen in Dec’17. While market weakness has had its role to play, concerns over bank’s fundamental recovery in the backdrop of slowdown in foreign operations and additional capital controls have further dented sentiments. With CY18F turning out to be another slow year where we advise stock accumulation from a long term perspective as valuations become increasingly appealing. Our TP of PkR223.9/sh offers 41.7% upside.

AKD Research