Habib Bank Limited share offering will re-rate valuation – Topline Research
By: Zeeshan Afzal,
Topline Securities (Private) Limited
Last week board members of newly constituted Privatization Commission (PC) of Pakistan have approved secondary public offering of some listed companies including Pakistan’s largest commercial bank Habib Bank (HBL). Govt. is the 2nd largest owner of this bank with 41.5% holding after its sponsor Agha Khan Fund for Economic Development, with 680mn (51%) shareholding while only 7.5% is with the general public.
Yet not decided but the govt may offer 5-20% (67-267mn shares) to local and foreign investors this year. We feel that additional liquidity in the stock will not only result into better trading activity and efficient price discovery but will also re rate the value of HBL.
HBL’s fundamentals as good as MCB
In terms of branch network and deposit size, HBL is largest commercial bank in Pakistan. At present, bank’s deposits stand at Rs1.2tn while its low cost CASA deposits are estimated to be around 75% of total deposits as of Sep 30, 2013. In last 5 years (2008-13), deposits of the banks have grown at 18% CAGR, which is much higher than 13% annualized growth for MCB. Though HBL’s deposits are more than double of MCB’s Rs584bn (as of Sep 2013), CASA deposits of MCB are much higher at 88%. This has result into higher NIMs for MCB, which are estimated to be around 5.7% in 2014 versus 4.5% for HBL. On NPLs (Non Performing Loans), HBL enjoys infection ratio of about 2% slightly higher than MCB’s 1.2% (All listed banks avg at 3.5%).
At present, MCB is trading at 2014E PE 11.5x and PBV 2.x which is much higher than HBL’s 10.1x and 1.8x, respectively. We believe that some discount of 5-10% on HBL’s price multiples versus MCB is justified due to high margin of MCB. That said, HBL multiples can re-rate. Moreover, competent management of HBL is another plus point favoring potential re-rating for HBL.
Low multiple due to limited share float
Compared to other large banks, trading activity is thin in HBL because of limited free float. At present, bank’s free float comprise of 133mn shares which is much lower than other big banks like MCB (405mn shares), NBP (505mn shares) & UBL (306mn shares).
With low trading activity, because of low available float, average daily traded volume had remained limited to Rs39mn (US$0.38mn) in 2013. Comparing with others, avg traded value in MCB, NBP and UBL had remained at Rs193mn (US$1.9mn), Rs296mn (US$2.9mn) and Rs107mn (US$1.1mn), respectively.
We believe that despite good fundamentals and better management, limited float was the main reason for the low price multiple and poor price discovery. The bank is trading at 2014E PE & PBV of 10.1x and 1.8x which has the potential to be re-rated to 11.0x and 2.25x, respectively. Assuming this, HBL may touch Rs200-225 per share market at KSE. At current levels, we maintain ‘Hold’ stance on the stock.