Halyk Bank - Upbeat Outlook, Dividend Back in Play; BUY Reiterated

We retain our BUY recommendation on Halyk Bank and raise our target price to $15.50 per GDR. This follows an impressive set of 1Q20 numbers and a broadly benign operating outlook from the management, which also firmly placed paying out dividends in 2H20 back on the table. We model a 50% payout based on 2019 earnings, implying a 12% dividend yield. As for our 2020/21 earnings numbers, we have made only minor changes (+1%/-1% at KZT287 bln/KZT315 bln, respectively) and see Halyk Bank's ROE remaining over 21% this year and next. Our TP increase is driven mainly by a stronger USD/KZT rate in our valuation (415 versus 445 previously) and trimming the cost of equity by 1 pp to 17% to reflect a lower risk-free rate. > Economic impact of Covid-19 not too severe. Our economists and the Kazakh government expect a 0.5-1.0% GDP decline this year, a far better outcome than for many countries. This reflects a modest impact from Covid-19 itself on the country, helped by an early lockdown and sizable government support for the economy (about 9% of GDP). With the oil price back at $40/bbl, the tenge has also erased most of its 1Q20 losses. Since most of the economy reopened in May, the management struck a cautiously upbeat note on the 1Q20 conference call, saying the current situation if anything looked better than the assumptions behind the macro inputs in 1Q20 that accounted for two thirds of the quarter's 1.7% cost of risk. We expect risk costs to fall to 1% for the remainder of 2020. > Dividends back in play. Another key takeaway from the call was the CEO's comment that the decision not to pay dividends for 2019 was made at the start of the pandemic alongside advice from the regulator to withdraw dividend recommendations. She added that as of now the mood is more positive and that it is possible that in 2H20 the bank will make a decision on dividends. We expect a payout at the bottom of the 50-100% of earnings range according to the dividend policy, implying a just over 12% dividend yield at the current exchange rate, with the payout ratio rising to 70% for 2020, implying an almost 15% dividend yield. > Digital transformation gathering pace. Another interesting part of the 1Q20 update was the details provided on the bank's digital transformation. Halyk has been talking about its efforts in this area for a few quarters now, and it believes the lockdown came at the right time for it to benefit, with 0.5 mln new Homebank clients added following the launch of remote onboarding. We will see whether this starts driving a turnaround in the bank's still-weak fee income. > Our target price implies a 2021 P/E of just 6; still a BUY. Halyk Bank trades on a 4.3 2021 P/E, while at our new $15.50 target price it would trade at just 6, which is not far above the historical average and seems good value for one of the very few global banks that looks on track to post above 20% ROE (and above 3% ROA) this year.