Habib Bank Limited (HBL) reported 2Q2020 result today, posting consolidated Profit after Tax (PAT) of PkR 11.04bn (EPS of PkR7.53/sh), up 16xY/Y and 1.7xQ/Q. The result is above market consensus (PKR 4.7/sh) and KASB estimates (PKR 4.26/sh) by 60% and 77%, respectively. Moreover, as per SBP’s directive, the bank did not declare any interim cash dividends. We expect the stock to perform on the back of above expectation result driven by sharp NII and NFI income growth and lower operating expenses.

Net Interest Income (NII) increased 44%Y/Y and 25%Q/Q to PkR35bn. The sharp growth in NII was witnessed due to early repricing of deposits. We expect NII to decline and NIMs to shrink as advances reprice going forward due to 400bps cut in the policy rate to 7% during the quarter.

Non-interest income surged 7.2xY/Y and 88%Q/Q to PkR10.8bn. Within non-interest income, fee income declined 22%Y/Y and 12%Q/Q to PkR4.2bn. On the other hand, gain on sale of securities came in at PKR4.4bn against a loss of PkR1.2bn in 2Q2019. Moreover Share of profits from associates was up 1.2xY/Y and 2.8xQ/Q to PkR972mn. Income from dealing in foreign currency and derivatives came in at PkR451mn and 539mn, respectively against realized losses of PkR2bn and 1.7bn in 2Q2019. 

We think the key factor that market was concerned about was the credit quality. Provisioning expense came in at PkR4.8bn up 7xY/Y and 6.7xQ/Q. The management is expected to provide more detail on said numbers in its conference call.

Operating expenses declined by 5%Y/Y and 14%Q/Q to PkR22.3bn as the bank has already booked cost of closure of its New York branch in 1Q2020. C/I ration for 2Q2020 declined to 49% compared to 77% in 1Q2020 and 92% in 2Q2019.

We think the key questions to ask management are: 1) quantum of loan book under stress, 2) amount PIB gains on the investment portfolio, 3) decline in fee income going forward, and 4) expected level of operating expenses, going forward.

HBL is currently trading at one year forward P/Bv of 0.65x. We have “Outperform” rating on the stock with TP of PkR138/sh providing an upside of 16%.

Please find attached the detailed report.


Regards,
Kasb Research
+92 21 35171465