Elixir Securities Limited – Elixir Insight

Karachi, March 13, 2018 (PPI-OT): Bank AL Habib Limited – Detailed Financials Offer Multiple Surprises

BAHL has shown widespread improvement in 2017 with a 4.3ppt increase in ADR, 30% advances growth, 0.7ppt reduction in infection ratio and ~19% deposit growth.

BAHL is well positioned to capitalize on further rate hikes since most of its asset base is concentrated in corporate advances and market treasury bills, with PIBs making up just 16.9% of the investment book.

The stock looks promising despite trading at a decent 1.6x PBV primarily due to its aggressive branch expansion, potential for higher than forecasted deposit growth and conservative low risk asset base which should benefit in a rising interest rate environment.

We maintain BAHL amongst our top picks from Banking Universe, with a revised Dec-18 PT of PKR80/share, representing 24% total potential upside from last close.

Almost Every Aspect of Its Operations Have Improved in 2017: Bank Al-Habib (BAHL) declared 2017 earnings of PKR7.78/share, up 7%YoY. The modest performance in the bottom line belies widespread improvements within the bank. Within 2017 BAHL has managed to raise its ADR by 4.3ppt to 49.07%, decrease its infection ratio by 0.7ppt to 1.52%, achieve 30% advances growth and reduce its PIB/Investments ratio by 8.1ppt to 16.9%. On the deposits front, the bank managed 1.8ppt increase in its current account ratio (which has risen to 38.1%) while CASA is up 0.3ppt to 80.7%. Overall deposit growth came in at 18.6%. Capital adequacy was however slightly lower at 13.8% (down 0.2ppt) due to reduction in Tier 2 (which was partially made up by the PKR7bn ADT 1 issue).

BAHL Remains Primed to Benefit from Rising Interest Rates: During the year, BAHL reduced its outstanding PIB stock from PKR146bn to PKR117bn. Excess liquidity and new deposits were invested primarily within Market Treasury Bills (MTB) which constitute 69.2% of the overall investments book. This reduction in maturity of the investments book has however come at a price; the bank’s investments yield is down from 8.98% in 2016 to 7.4% in 2017. The reduction is primarily due to dilution of the investments book due as MTBs replaced PIBs. We however welcome this approach as the majority of BAHL’s investment book is now sensitive to interest rates. Based on disclosures of interest rate sensitivity almost 80% of the investments book is sensitive to changes in 1 year rates.

This maturity re-profiling on the investments side has been complemented with a dramatic 4.3ppt increase in the bank’s ADR. While we had some reservations on the impact of this growth on asset quality, the bank has also managed to reduce its infection ratio by 0.7ppt to 1.52%, which remains the lowest in the industry. On the flip side the advances yield remained at 6.0%, as the bank mainly focuses on corporate lending.

5 Year Forward ROE is Promising: We expect BAHL to average 17.7% ROE over 2018-22, the highest in our Banking Universe. The high ROE stems primarily from a highly leveraged deposit book with Deposits/Equity of 14.4x as of 2017. The two concerns in the investment case for BAHL however are its high P/B ratio of 1.6x and an unimpressive earnings performance next year. On the latter we highlight that earnings performance for the sector at large is expected to remain muted; while BAHL suffers slightly in 2018 due to the dilution of its investments yield and added cost of its ADT-1 issue, we believe this sets up the bank for double digit earnings growth in the longer term (which has always been the focus of the management).

On the P/B front the bank currently trades at 1.6x. However we believe the high P/B is justified on two accounts. Firstly the bank remains very interest rate sensitive, similar to Bank Al-Falah (BAFL), making it a prime beneficiary of rising rates. Secondly, unlike BAFL and the sector at large, BAHL’s asset base is primarily concentrated in risk free treasury bills and low risk corporate advances. In a rising interest rate scenario, rising infection ratios will remain a serious risk to bank earnings. This risk is relatively much lower at BAHL.

On an additional note, while we have factored in 12.4% average deposit growth over 2018-22, the bank has the capacity (and the history) of averaging much higher deposit growth keeping in mind the bank’s aggressive branch growth (45 branches opened in 2018). This adds another margin of safety to our investment case for BAHL. Therefore we slightly raise our Dec-18 PT for BAHL to PKR80/share, representing 24.0% total potential upside (including 4.5% leading dividend yield.


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