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Habib Bank (HBL): Earnings revised downwards; ‘Buy’ Stance maintained

• HBL recently announced its 1Q2018 earnings of Rs3.1/share (-49% YoY), which remained lower than expectations. After incorporating 1Q2018 financials, we revise down our earnings estimate for HBL by 28%/18%/17% for 2018/2019/2020 to Rs17.9/26.2/32.8 per share. This is mainly due to lower than expected Net Interest Income (NII), further exchange loss expectations, revision in our estimate for non-markup income and continuation of super tax. However, given stock’s underperformance (down 13% since its peak on Apr 6, 2018) and expected improvement in NII on up tick in policy rate, bank’s margins are anticipated to improve going forward. We thus maintain our ‘Buy’ call on the stock.
• HBL announced 1Q2018 earnings of Rs3.1/share, down 49% YoY primarily due to Rs2.2bn of one-time pension cost and net exchange losses of Rs657mn.
• NII of the bank during 1Q2018 stood at Rs19.9bn, which was down 5% YoY and was lower than our expectations. NIMs of the bank during 1Q2018 stood at 3.8%, flat on YoY basis.
• We expect NIMs of HBL to improve from 3.8% in 2017 to 4.4% by 2020 as we anticipate SBP to raise policy rate by 275bps by 2020.
• Non-markup income of HBL during 1Q2018 clocked in 38% lower compared to previous year due to 1) lower fee, commission & brokerage, 2) net exchange losses of  Rs657mn, & lower capital gains. 
• To recall, HBL had taken loan of US$196mn from China Development Bank in 2017 to payoff its fine against its US operations. As per the repayment schedule, the principal repayment was to start from Dec 2017, which was payable in six equal installments. However, the outstanding loan amount still stands at US$196mn as of 1Q2018 balance sheet which resulted into exchange losses as Pak rupee depreciated by 5%. We expect the bank to gradually pay off its US denominated loan by shedding some of its international business hence further exchange losses going forward can not be ruled out however the quantum may slowdown from 2019 once repayment starts.  
• NPL ratio of HBL remained flat at 8.2% in 1Q2018 on YoY and the bank booked reversals of Rs156mn. We anticipate this to continue going forward as recoveries from domestic assets could lead to further reversals.
• Beyond 2018, expected improvement in margins, absence of pension cost & slowdown in fx losses & increased focus on domestic operations will drive bottom-line of the bank, we believe.
• Key risks for the bank includes 1) lower than expected hike in interest rates, 2) lower than expected advances & deposit growth, and 3) any further regulatory action on international operations.