Halyk Bank - Dividend Decision Pending, But A Strong Business Irrespective

Halyk Bank is due to announce its 2019 dividend recommendation very soon. Given how fast-changing the situation is around Covid-19, oil prices and economic growth, the decision could go either way, but we are inclined to the view that Halyk Bank will pay out 60% of 2019 earnings, which would imply a bumper 21% dividend yield at the current exchange rate. Beyond the dividend, we think Halyk has a rock-solid balance sheet and capital position to weather the current storms, and we reiterate our BUY recommendation, with a reduced target price of $13.00 per ADR.> Rock-solid fundamentals support decent payout ... Halyk Bank is due to announce its 2019 dividend recommendation shortly, prior to its April 24 AGM. Having adopted a new dividend policy last June and stated an intention to pay 50-100% of earnings as dividends, Halyk Bank last week successfully concluded consent solicitation with bondholders to enable it to pay out more than 50% of earnings. There is obviously a huge amount of uncertainty at the current time, but more importantly for the longer-term investment case, we think Halyk Bank has the balance sheet and capital strength to pay out sizable dividends (just as Sberbank in Russia has recently approved doing) and also manage the current highly challenging environment. First off, Halyk Bank has an extremely robust capital position: its CET1 under Basel 3 at end-2019 was 20.6% (with 67% RWA density, an average EM level), which puts it among the best capitalized banks globally, and this comes after successfully passing the NBK's AQR with minimal additional provisions required. It also has a highly liquid balance sheet, with a just 59% loan/deposit ratio and half of its assets in cash and securities. > ... but there are obvious risks. Given that Kazakhstan is an oil-driven economy, the tenge has unsurprisingly been hit hard, depreciating by around 20% against the dollar YTD, but our economists see it as more or less fairly valued at the current oil price. The tenge's depreciation will clearly bring some strains to local banks, and the FX effect could have a negative impact on CAR of around 1 pp. According to Halyk Bank, 15% tenge depreciation from the end-2019 level would have a KZT5 bln positive annualized impact on P&L. However, this excludes potential changes in credit risks. As for these, Halyk Bank's cost of risk in the 2014-16 oil price and tenge shocks (during which time the tenge halved in value) peaked at around 1.5%. Halyk Bank guides 0.7% cost of risk for 2020, but another 1 pp on top of that would only take about KZT40 bln off earnings, or around 10% of 2020 guidance. We don't think Halyk Bank has material unhedged FX corporate lending exposure. Its retail lending has typically been pretty conservative. As for the Kazakh economy, the current situation is highly challenging, with both Almaty and Nur-Sultan in lockdown, and there will certainly be an economic hit, as elsewhere, but our economists point to sizable FX reserves that can be spent on cushioning the economic fallout.> Earnings assumption changes. With so little visibility, we have made some obvious model changes. These include lower loan growth, which we cut to 2% in 2020, and higher cost of risk, which we raise to 1.5% for 2020, rather than wholesale changes at this stage. As a result, we cut our 2020 and 2021 earnings estimates by 14% and 7%, respectively, to KZT285 bln and KZT320 bln. > Remains a BUY, albeit on a reduced target price. We have updated our exchange rate to 445 KZT/USD (from 380) and raised our cost of equity by 2 pp to 18%. This gives us a $13.00 per ADR target price (down from $18.25). We retain our BUY recommendation. While a cancellation or postponement of the dividend would probably be a near-term negative for the stock, it feels largely priced in to us at not much above $7 per ADR. With the very solid fundamentals that we think leave Halyk Bank well placed to weather the current storms, we like the stock on a 2020E P/E of 3.2 and a 2019E P/BV of 0.7.