By: Jehanzaib Zafar
BMA Capital Management Ltd.
(9221) 111 262 111
We initiate coverage on Bank Al-Habib Limited (BAHL) with a TP of PKR60/sh, offering an upside of 25% on last closing. Our conviction on the stock stems from i) a healthy CAGR of 18% in NII between CY14F-CY17F, ii) 3 year CAGR of 13% in the non funded income between CY14F-CY17F and iii) muted provisioning expense due to impressive asset quality. Resultantly, we expect the bank to post strong earnings growth of 29%YoY in CY14F at PKR6.65bn (EPS: PKR5.97) as against earnings of PKR5.15bn (EPS: PKR4.62) in CY13. Going forward, we expect growth momentum in earnings to continue with CY14F-CY17F earnings CAGR of 11%. BAHL is also expected to park PKR142bn in high yielding PIBs by Dec’14 thereby locking in higher returns thus keeping the NII of the bank robust. Also given the ultra conservative lending approach (gross ADR: 41% in 9MCY14) that the bank adheres to and resultantly impressive book quality (infection ratio 2.35%), we expect the provisioning expense of the bank to remain muted. Finally, with a CAR ratio of 14.6% against statutory requirement of 10%, we expect the bank to maintain its payout profile where we have assumed the bank to maintain a long term payout of ~45%. At current levels, the scrip trades at a forward P/E and P/B of 8.0 and 1.72, respectively.
Healthy uptick in profitability: Bank Al Habib (BAHL) is on course to depict a robust growth in earnings of 29% in CY14 where we expect the bank’s PAT to clock around PKR6.66bn (EPS of PKR5.97) against earnings of PKR5.15bn (EPS of PKR4.62) in CY13. This healthy upturn in profitability will be underscored by i) stellar growth of 31%YoY in NII due to better asset pricing and PIB subscription (PIB subscription expected to reach PKR142bn or 32% of deposits), ii) 5%YoY growth in non-funded income and iii) improving cost efficiencies (cost-to-income ratio to improve to 55.2% from 57.5% in CY13).
Conservative approach yielding fruits: BAHL has operated on very conservative lending policies over the past 5 years with ADR steadily heading southwards post the banking crisis of CY08. BAHL’s infection ratio currently stands at only 2.35% which is best in the industry (against the BMA universe average of 10.4%). Bank’s ADR ratio currently stands at 42% which is also lower than that of BMA universe, 46%. At the same time, bank’s coverage ratio stands at 144% while the industry’s coverage stands at only 82% which sheds light on the overly conservative approach of the bank. Going forward, we expect the bank’s ADR to pick up to 48% by CY20 with infection ratio only slightly deteriorating to 2.89% over the same period.
Best in class cost to income ratio: Bank Al Habib’s cost to income ratio stood at only 58% in 9MCY14 against the peer average (tier II banks) which is standing at 71% over the same period which is a testament to the bank’s prudent operating policies. Given the low inflationary outlook in CY15, we expect the cost to income ratio of the bank to remain on the lower side thus providing another growth impetus to the bank’s earnings.
Investment perspective: Based on our blended valuation technique (justified PBV and DDM), our TP for BAHL is computed at PKR60/sh offering a healthy return of 25% on last closing. Bank’s CAR ratio stood at 14.6% in CY13, comfortably above the CY19 requirement of 12.5%. We expect the CAR ratio to improve even further in CY14 on back of heavy subscriptions of risk free government securities coupled with revaluation gains following DR cut expected in CY15F. We expect the bank to maintain a payout of 45% over the investment horizon, with full year dividend expected at PKR2.5/sh, translating into a dividend yield of 5.2% – ‘BUY’