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Bank Al Habib Limited (BAHL): Earnings Revised up, ‘Buy’ maintained

• We are revising up our earnings estimates for Bank Al Habib Limited (BAHL) by 4-14% over 2020E-2022F. Our earnings revision primarily stems from (1) higher-than-expected deposit growth due to the expanding branch network and (2) timely buildup of the investment book.
• In 2Q2020, the bank posted a strong core performance with 40% QoQ increase in Net Interest Income (NII), which was driven by 19% QoQ decline in Interest Expense. Additionally, Interest Earned increased by 2% QoQ, whereas the sector’s Interest Earned as a whole depicted a decline of 4% QoQ.
• We maintain our ‘Buy’ rating on BAHL with a revised Target Price of Rs82, providing a total return of 31%. The bank trades at 2020E P/B of 1.1x, P/E of 6.2x and offers a ROE of 18%.

Branch Galore – The Driving force

• The bank since 2018 has added 90 branches, with 56 of them coming in 1H2020. The number is all the more impressive given the lockdown imposed for ~4months from Mar-2020. As a result, the deposits have grown at 15% YTD and 20% YoY versus sector growth of 11% YTD and 12% YoY.
• Pertinently, the growth has been led by Current Accounts (CA), which grew by 17.1% YTD constituting 36% of total deposits versus sector’s constitution of 32% and YTD growth of 12%.
• Fixed accounts have remained stagnant QoQ, resulting in reduction in overall deposit mix from 37% in 1Q2020 to 35% in 2Q2020.
• The focus on improving deposit mix is expected to bode well for the bank going forward with declining ratio of interest bearing deposits to ~61% versus sector’s 65%.
• Over the past 5-years, deposit growth has averaged at 15.2%, while we expect the bank to close at 19% in 2020E based on the performance to date.

Investments – Rs13.3bn Revaluation Surplus

• Investment book of the bank has made some major inroads with IDR improving to 76% in 2Q2020 from 52% last year for the same period. Government securities constitute 97% of overall investments. The move towards the PIB portfolio buildup has been timely, in our view.
• This is further evident from the fact that the revaluation surplus, which stood in at a deficit of Rs2.5bn in Jun-2019, is now standing at a surplus of Rs13.3bn.
• Lastly, its important to note that to date the bank has not recorded any capital gains. With the re-pricing on the asset side due, certain portion of the revaluation surplus may be recorded in order to provide buffer to the bottom line.

Non Funded income – COVID-19 affected all

• Slowdown in economic activity, and one of the relief measures announced by SBP on waiving transaction charges (IBFT charges) on all mediums affected Fee Income (-15% QoQ) in addition to branch closures during lockdown.

Strong Asset Quality

• For the past 3-years, the average infection ratio of the bank is 1.4% much lower than the industry.
• The coverage of the bank stands at 143%, highest in the industry. 

Operating expenses increase to slow down

Despite the aggressive expansion, the Cost to Income ratio for the bank is expected to clock in at the 56% mark for 2020E. The current quarter saw Cost to Income drop to 49% due to the increase in revenue sequentially from 62% in 1Q2020.