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Habib Bank (HBL): 3Q2018 EPS of Rs1.15 (-50% QoQ); DPS Rs1/share (Below expectations)

• Habib Bank Limited (HBL) reported earnings of Rs1.15/share, compared to LPS of Rs9.70/share in the same period last year. However, normalizing earnings for New York Sate Department of Financial Services (NYDFS) penalty, profitability declined by 82% YoY.
• The earnings are below expectations due to significant provision for diminution in value of investments as well as sharp increase in Admin expenses and lower non-interest income. 
• Net interest income of the Bank remained flat YoY despite the rising interest rate environment due to lag in re-pricing of assets, in our view.
• The Bank booked a provision charge of Rs1.7bn due to provision for diminution in value of investments amounting to Rs1.8bn. This is in comparison to a provision reversal of Rs83mn in the same period last year. The provision for investments charge is much higher than that booked by other big banks.
• HBL also reported significantly lower non-interest income, down by 52% YoY, mainly due to 34% decline in fee and commission income as well as Rs3.1bn lower capital gain realized compared to same period last year.  
• Non-interest expense of the bank rose sharply to Rs20bn, up by 29% YoY, as costs associated with NYDFS penalty continue to inflate expenses, we believe.
• Earnings were further dragged down by effective tax of 50% due to some adjustment in deferred tax asset created by international operations, in our view. However, we await further clarity on the subject by the management.
• During 9M2018, the Bank reported a 61% decline in normalized profits mainly due to 41% decline in non-interest income and 28% increase in non-interest expense.
• Key risks for the stock includes: 1) delay in expected hike in interest rates, 2) lower than expected advances growth, 3) deterioration of Pakistan macros, and 4) Further penalties on international operations.