Halyk Bank - Set for Another Profitable Year

Halyk Bank's 1Q21 results lay a solid foundation for another profitable year. We see net income on track to top the KZT400 bln guidance for this year, for 26% ROE, and we think 25% or so ROE is sustainable over the next couple of years. Efforts at digitalization are starting to bear fruit, albeit coming from a low base. Increasing dividends also remain an important part of the investment case, and we model a 15% 2021 dividend yield. Halyk Bank trades on just a 1.1 2021 P/BV and 4.3/4.0 2021/22 P/E, offering good value, in our view. We raise our target price to $20.50 per GDR (from $15.50) and retain our BUY recommendation. > What we learned from 1Q21 results. The first quarter marked a strong start to the year, with over 25% ROE, driven by continued low risk costs (0.4%), healthy net F&C income growth (29% y-o-y, albeit versus the low 1Q20 base) and a moderate NIM recovery (to 4.8% adjusted). Loan growth was slow, but should pick up in subsequent quarters, according to the management. Overall, Halyk Bank looks on track to top the KZT400 bln net income guidance this year. > Kazakh economy recovering. We expect 3% GDP growth this year as the Kazakh economy recovers from the impact of the Covid pandemic (GDP shrank 2.6% in 2020). We see inflation falling to 6% by the year-end, which should allow the NBK to start cutting the policy rate (to 8.5% by year-end). > Updated 2021-23 assumptions. We have rolled our model forward to 2023, and expect KZT413/446/480 bln net income in 2021/22/23, implying 25% ROE in 2023 and an 11% net income CAGR in 2021-23. We see a 12% gross loan CAGR, 0.9% cost of risk, 20% fee CAGR, NIM declining to 4.7% and 9% opex CAGR for 2021-23. > Low multiples, high dividend, improving operations make Halyk a BUY. Halyk Bank is a different beast than Kaspi.kz, and we think the local market is big enough for both to prosper for a while to come. For valuing Halyk Bank, we see Sber as a more appropriate direct peer. Halyk Bank now trades on an over 40% discount on 2022 P/E (using the Sber Bloomberg consensus), and we think its current multiples, generous dividend yield and improving operational delivery all add up to an attractive investment case. In terms of risks, there remains overhang from a possible further sale by controlling shareholder Almex (it owns 65%) - although ultimately a bigger free float and more liquidity would be positive for investors - while we would also mention that gaining traction in ecosystem services will be challenging. We use a GGM valuation to obtain our 12m target price of $20.50 per GDR, including a 16% COE, 22.9% long-term ROE and 5% long-term growth. At our target price, Halyk Bank would trade at a 5.7 2022 P/E.