Habib Bank: Target Price raised to Rs190 – Maintain ‘Hold’

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HBL

  • Habib Bank has been a pick of investors lately where the stock has rallied by 23% in YTD 2014, outperforming the KSE-100 index by 8%. Investor interest has not only been generated due to the government’s privatisation plans but also due to improving fundamentals of the bank, in our view.
  • We factor in HBL’s (1) shift in deposit mix to current accounts from savings deposits and (2) heavy investments made in PIBs (offering a higher yield), which are likely to add to its growing revenue base and result in higher Net Interest Margin for the bank.
  • At the same time, lower provisions and write offs are likely to provide stimulus to the bottom line. To recall, HBL’s NPL stock declined by 4%QoQ in 1Q2014 and its asset quality improved to 7.9% in March 2014 from 8.1% in December 2013.
  • Going forward, we expect HBL to post earnings of Rs16.91, +13%YoY. We revise our Target Price for HBL to Rs190 and maintain our ‘Hold’ call on the stock. HBL is currently trading at 2014E PE and PBV of 10.9x and 2.0x compared to JS Banking Universe’s PE and PBV of 11.1x and 1.8x.

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HBL: pick of investors

With a successful Secondary Public Offering (SPO) of United Bank Limited (UBL), government also plans to offload its shareholding in Habib Bank Limited (HBL) and  Allied Bank Limited (ABL). HBL has been the pick of investors where the stock has  rallied by 23% in YTD 2014, outperforming the broader index by 8% on the back of  bank’s improving fundamentals. Asset quality of HBL has been improving continuously where HBL reported 89%YoY decline in cumulative provisions and write offs in 1Q2014. Moreover, NPL stock of HBL declined by 4%QoQ in 1Q2014  while the NPL ratio improved to 7.9% as of March 2014 compared to 8.1% in  December 2013. At the same time, bank’s (1) shift in deposit mix to current  accounts from savings deposits and (2) heavy investments made in PIBs (offering  a higher yield) are likely to bolster bank’s earnings going forward. Incorporating (1)  better NII via lower credit cost and (2) lower provisions going forward, we project a  5-year PAT CAGR of 8% for HBL. For 2014, we now expect earnings to clock in at  Rs16.91 per share, +13%YoY, up 4% from our earlier estimates.

Target Price revised to Rs190 – Maintain ‘Hold’

HBL is currently trading at 2014E PE and PBV of 10.9x and 2.0x compared to JS Banking Universe’s PE and PBV of 11.1x and 1.8x. We believe valuations seems  stretched at current levels for HBL and the stock only offers a potential return of 3%  to our revised target price of Rs190. Hence, we maintain our ‘Hold’ call on the  stock.

2Q2014E EPS to grow by 5%QoQ

After an impressive 1Q2014, our preliminary estimates suggest HBL’s 2Q2014 profitability is likely to grow by 5%QoQ and 19%YoY in 2Q2014. YoY growth is anticipated to be led by growing earning assets (higher investment in PIBs) and  shift in deposit mix to current accounts. That said, support is also likely to come  from subdued provisions against bad loans and investments. With this we foresee 1H2014 earnings to clock in at Rs7.67, a growth of 19%YoY.

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