January 15, 2015 BAHL PA Bank Al-Habib Limited Commercial Banks Rerating due on strong return Pakistan generation – Buy with TP of Rs62 Coverage Buy Initiation Initiating coverage: ‘Buy’ with a Target Price of Rs62 We initiate our coverage on Bank Al-Habib Limited (BAHL) with a ‘Buy’ rating. Our December 2015 Target Price of Rs62 offers an upside of 24%, with a forward 12-month D/Y of 11% (2015F: 6%). Our Target Price has been derived from the Justified P/B methodology, where the bank’s expected sustainable ROE is computed at 22.7%. BAHL trades at 2015F P/B of 1.58x vs. industry’s average of 1.83x. We believe these discounted valuations are unjustified given (1) low risk compared to peers and (2) higher than industry’s average earnings growth. Our 2015F earnings growth expectation for the bank stands at 18% YoY, driven by (1) improving NIMs and (2) lower infected books. Recommendation: Current Price: Buy Rs50.07 Rs62 Target Price: Amreen Soorani [email protected] + 9221 111-574-111 Efficient operations leading growth BAHL has historically adopted a prudent approach with strong return generation. Monetary tightening that begun in mid-2013 further expanded BAHL’s spreads, leading to recovery in NIMs at a faster pace than its peers. BAHL has witnessed (1) a 5-year deposit CAGR of 22%, (2) expansion in NIMs by 68bps vs. 39bps expansion of the same of JS Banking Universe, (3) increase in CASA to 78.2% in September 2014 from 71.8% in December 2012 and (4) lowest infection ratio amongst peers. Strong ROE on robust growth BAHL boasts an impressive 5-year (2009-13) average ROE of 26.3%, despite declining yields during the period. Strong return generation has been led by (1) robust growth in deposits & market share and (2) controlled costs. We forecast BAHL’s sustainable ROE at 22.7% (2015-19F), incorporating replacement of maturing PIBs with relatively lower yielding assets from 2017 onwards. KATS Code: BAHL Bloomberg Code: BAHL PA Reuters Code: BAHL.KA Market Price: Rs50.07 Market Cap: Rs56bn, US$553mn 1-yr Avg. Daily Volume: 0.6mn shares, Rs29mn, US$0.3mn 1-yr High/Low: Rs50.52/34.63 Estimated free float: 667mn shares (60%) Interest rate cut to hardly impact BAHL P/E (x) P/B (x) NIMs Return on equity - Core 2012A 2013A 2014E 2015F 2016F 10.22 2.33 4% 28% 10.79 2.20 3% 23% 9.09 1.81 4% 24% 7.68 1.58 4% 25% 6.80 1.39 4% 24% 140% 130% 120% 110% BAHL 100% 2016F 15,362 10% 5,446 4.90 20% 3.00 14,263 -7% 5,157 4.64 -5% 2.00 18,758 32% 6,124 5.51 19% 2.50 21,665 15% 7,249 6.52 18% 3.00 23,581 9% 8,178 7.36 13% 3.50 Completed on Jan 14, 2015 – Distributed on Jan 15, 2015 All prices are as of Jan 14, 2015 KSE-100 90% Aug-14 2015F Jun-14 2014E Apr-14 2013A Feb-14 Net Interest Income NII growth Net Profit (Rs mn) Diluted EPS (Rs) EPS growth (YoY) Diluted DPS (Rs) Source: JS Research 2012A Dec-13 Y/E: Dec Dec-14 Y/E: Dec BAH L rel ativ e to KSE- 100 Oct-14 Our calculations suggest bank’s earnings to be marginally hit by any downward movement in interest rates. On every 50bps cut in policy rate, we expect an annualized negative earnings impact of 0.12% on our base case earnings given the bank has raised fresh deposits in low and zero cost accounts. In addition, fixed income from investments in PIBs will also mute the impact of declining interest rates. Source: KSE, based on adj. prices Research is available on Bloomberg, Thomson Reuters, CapitalIQ & www.jsgcl.com.pk Please refer to the important Disclaimer on the last page Bank Al-Habib Limited | January 15, 2015 Investment Case – Bank Al-Habib Limited Company Description BAHL P/B band 1.6 50 1.4 40 1.2 1 30 0.8 20 0.6 Market price 10 Jan-09 Apr-09 Jul-09 Nov-09 Feb-10 Jun-10 Sep-10 Dec-10 Apr-11 Jul-11 Oct-11 Feb-12 May-12 Aug-12 Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 May-14 Aug-14 Dec-14 0 Bank AL Habib Limited is owned by the Dawood Habib Group with 5% family stake in the bank. In 1991, post nationalization, the group was amongst the first to be granted permission from the private sector to establish a commercial bank. It operates 445 offices with 3 overseas branches and has a deposit base of Rs436bn as at Sep-14, occupying 5.43% market share of the country’s deposits. The banks holds an 66.67% owned subsidiary, AL Habib Capital Markets (Private) Limited, that is engaged in the business of brokerage services, with three associated companies namely Habib Insurance Company Ltd., Habib Sugar Ltd. and Habib Asset Management Ltd. BAHL holds a CAR of 14% as while it’s BV as Sep-14 stood The bank’s ADR/IDR stands at respectively, while 9MCY2014 25%. Target Price & Rating Our ‘Buy’ rating on BAHL is premised on our Justified P/B based Target Price of Rs62, including Surplus to Revaluation of Rs3/share (as at Sep-2014). Our cost of equity of 17.3% is based on a risk free rate of 9.5%, an equity beta of 1.0 and 6% equity premium. Our Target Price implies an exit 2015F P/B multiple of 1.96x. We believe BAHL trades at a discount to its justified P/B offering attractive valuations against peers trading on a higher P/B. Shareholding Pattern 5% 2% 7% Banking scrips in the JS Universe trading at a higher P/B 2015F P/B 2015F EPS growth 2014E ROE 38% Infection 5 yr CAGR in CASA ratio Deposits BAHL 1.56 18% 24.2% 2.4% 78% 22% HBL 1.82 11% 20.7% 8.4% 77% 19% MCB 2.74 13% 23.9% 7.1% 91% 14% JS Banking Universe 1.83 12% 21.3% 9.1% 78% 15% 48% Source: JS Research We pitch BAHL on the back of (1) improving NIMs, (2) stable balance sheet and (3) low cost deposits, which are expected to support the bank’s strong ROE generation going forward. We believe the stock would generate a total return of 35% to our investors in the next twelve months. Estimates Current PAT (Rs mn) Current Dividend (Rs mn) Current DPS (Rs) Source: JS Research Directo rs/Spo nso rs A sso ciate Co mpanies Financial Institutio ns Individuals Other Why a ‘Buy’ rating? Current EPS (Rs) at Dec-13 end at Rs26.22/sh. 40% and 66%, ROE stood at 2014E 2015F 2016F 6,124 7,249 8,178 5.51 6.52 7.36 2,779 3,334 3,890 2.5 3.0 3.5 Potential catalysts Robust EPS growth and return generation High PIB investments High CASA Potential risks Regularity change for the banking sector Slowdown in economic expansion Aggressive monetary easing Page 2 Bank Al-Habib Limited | January 15, 2015 Financial Summary – Bank Al-Habib Limited Income Statement (Rsmn) Net Mark up 2012A 2013A 2014E 2015F 2016F 15,362 14,263 18,758 21,665 23,581 Non Mark Up Income 2,966 3,906 3,794 4,136 4,591 Total Non Mark Up Expense 8,994 10,175 12,761 14,401 15,305 Profit Before Tax 8,869 7,515 9,320 10,924 12,329 Profit after Tax 5,446 5,157 6,124 7,249 8,178 Balance Sheet (Rsmn) 2012A 2013A 2014E 2015F 2016F Investments 249,754 239,425 294,178 321,561 350,944 Advances 147,869 167,579 176,631 193,208 210,968 Other Assets 6,116 6,736 9,936 10,860 11,853 Total Assets 453,106 460,396 531,468 581,074 634,276 Deposits and Other Accounts 340,393 386,157 446,176 487,708 532,271 Other Liabilities 5,480 5,493 7,113 6,748 6,281 429,175 435,369 500,689 545,824 594,182 Net Assets 23,931 25,027 30,779 35,250 40,094 Share Capital 10,104 10,104 11,114 11,114 11,114 Total Liabilities Unappropriate Profit Total Equity Surplus on Revaluation Ratio Analysis 4,606 5,554 7,757 12,228 17,072 21,175 23,227 27,291 31,762 36,606 2,756 2,053 3,488 3,488 3,488 23,931 25,280 30,779 35,250 40,094 2012A 2013A 2014E 2015F 2016F EPS 4.90 4.64 5.51 6.52 7.36 DPS 3.00 2.00 2.50 3.00 3.50 BVPS 21.53 22.75 27.69 31.72 36.07 PER 10.22 10.79 9.09 7.68 6.80 P/BV 2.33 2.20 1.81 1.58 1.39 Dividend Yield 6.0% 4.0% 5.0% 6.0% 7.0% Core ROE 27.9% 23.2% 24.2% 24.6% 23.9% ADR 43.4% 43.4% 39.6% 39.6% 39.6% IDR 73.4% 62.0% 65.9% 65.9% 65.9% Infection Ratio - Gross Coverage Ratio NIMs CASA Deposits ROA 2.4% 2.1% 2.3% 2.4% 2.5% 151.0% 164.4% 152.8% 145.6% 139.3% 3.6% 3.0% 3.7% 3.9% 3.9% 71.8% 78.6% 78.2% 78.2% 78.2% 1.2% 1.1% 1.2% 1.2% 1.3% Source: Company accounts & JS Research Page 3 Bank Al-Habib Limited | January 15, 2015 Improving operations to lead double-digit earnings growth We expect Bank Al-Habib (BAHL) earnings to grow at a 5-year CAGR of 12%, despite building in conservative expectations for (1) market share and (2) declining asset yields post PIB maturity. In 2015F, we anticipate BAHL’s earnings to clock in 18% YoY higher at Rs6.52/share led by (1) 15% YoY growth in NII, (2) subdued provisioning and (3) 9% YoY growth in Non-Core Income. Amongst small size conventional banks, BAHL’s NIMs clocked in at an impressive 3.72% in 9M2014, which we expect to improve further to 3.89% in 2015F, with a base case Discount Rate assumption of 9.5%. Costs are expected to remain controlled with Admin to Deposit ratio sustaining at 2.7%. With a secure CAR at 14%, we believe the bank has potential to increase its dividend payouts in the future. BAHL NIMs recovery 5.0% 4.5% 4.0% BAHL 3.5% Top 6 Banks 3.0% Mid-tier banks 3Q2014 2Q2014 1Q2014 4Q2013 3Q2013 2Q2013 1Q2013 4Q2012 3Q2012 2Q2012 1Q2012 2.5% Source: Company accounts Strong ROE on robust growth BAHL boasts an impressive 5-year (2009-13) average ROE of 26.3%, despite declining yields during the period. Strong return generation has been led by (1) robust growth in deposits & market share and (2) controlled costs. We forecast BAHL’s sustainable ROE at 22.7% (2015-19F), incorporating replacement of maturing PIBs with relatively lower yielding assets from 2017 onwards. Strong Return on Equity 30% 25% 20% 15% 10% 5% 0% MCB UBL BAHL Sustainable ROE ABL HBL BAFL NBP 9M2014 Core ROE Source: Company accounts Impressive branch expansion building market share BAHL has depicted an impressive growth in deposits with a 5-year CAGR clocking in at 22% (vs. industry’s deposit growth of 15%), given expansion in branch network. BAHL has opened 192 branches in the past five years, taking its total branches to 445 as of September 2014. It has translated in a higher market share of Page 4 Bank Al-Habib Limited | January 15, 2015 5.4% as at September 2014, +133 bps compared to five years ago. We expect the bank to sustain its current market share building in a conservative deposit growth expectation of 10% (at par with industry’s growth). That said a higher deposit growth of 12% by 2015-end, would lift our BAHL’s 2015F earnings expectations by 2% to Rs6.65/share. 5-year CAGR of deposits in conventional banks 25% 20% 15% 10% 5% BAFL NBP UBL MCB HMB Industry ABL SNBL HBL FABL BAHL 0% Source: Company accounts, JS Research Muted asset risk… BAHL has prudently maintained its ADR at around 40%, well below industry’s ADR of 53%. The bank’s balance sheet reflects preference of asset deployment in investments (IDR of 64% vs. industry’s IDR of 55%), with dominance of risk free government papers. We flag one of the highest PIBs investments (Rs126bn) by BAHL amongst mid-tier banks, where PIBs amount to 29% of its total deposits. Also, it’s PIB/Equity (4.34x) is the highest in JS Banking Universe. However with major portion of its investments in PIBs classified under Held-to-maturity, we do not expect any gains to be reflected in the bank’s equity or income statement. Asset deployment towards risk free investments (Rsbn) 350 80% 300 70% 250 60% 50% 200 40% 150 30% 100 20% 50 10% 2009 PIBs 2010 T-Bills 2011 2012 Other investments 2013 IDR (RHS) 0% 3Q2014 ADR (RHS) Source: Company accounts …plus low costs deposits BAHL has been able to raise fresh deposits essentially through Savings and Non Remunerative Current accounts. The bank has raised 60% of its deposits through these accounts, improving its CASA by 640bps to 78.2% in September 2014 from 71.8% in December 2012. Note that during the same period, industry’s CASA improved by 360bp to 72.7% from 69.1%. BAHL currently holds the highest current account portion in deposits in JS Banking Universe, while the highest CASA amongst mid-tier banks. Page 5 Bank Al-Habib Limited | January 15, 2015 Soft Infection ratio with high coverage 2013: BAHL Advances & NPLs breakup BAHL’s conservative approach has led to constant decline in its ADR over the years. The bank has replaced corporate lending with investments, with ADR coming down to 39.6% as at September 2014 from 56% in December 2009. 40% of BAHL’s corporate loan book is directed towards the Textile sector, while 70% of its extremely low Infection ratio is fueled by the said. The bank has already covered its NPLs to the extent of taking its Coverage ratio to 150% as at Sep-14, where BAHL is yet to witness any reversals despite this aggressive provisioning strategy. We would like to highlight possibilities of reversals from the textile sector have improved given improving sector outlook on (1) increase in gas supply, (2) soft cotton prices and (3) declining interest rates. Any reversals would be an addition to our base case earnings. Impact of interest rate movement and why 100% 90% 31% 80% 60% 70% 60% 22% 50% 40% 17% 30% 20% 14% 7% 7% 3% 13% Advances NPL 10% 0% Our calculations suggest bank’s earnings to be marginally hit by any downward movement in interest rates. On every 50bps cut in policy rate, we expect an annualized negative earnings impact of 0.12% on our base case earnings given the bank has raised fresh deposits in low and zero cost accounts. In addition, fixed income from investments in PIBs will also mute the impact of declining interest rates. BAHL’s income from Held-to-Maturity (HTM) investments contributes 29% to the total topline (16% in 2013) where we highlight 98% of the bank’s HTM investments are parked in PIBs. 27% Ready-made garments Weaving Composite Spinning Others Source: Company accounts Valuation Our Justified P/B based Target Price stands at Rs62, offering a 24% upside along with forward 12-month D/Y of 11% (2015F: 6.0%). The stock currently trades at 2015F P/B of 1.58x against Banking sector P/B of 1.83x. Going forward (1) reversals in provisioned expenses and (2) gains realized from PIBs redemptions would be an addition to our base case future earnings growth. Key Valuations 2014E 2015F 2016F Net Markup Income 23,581 18,758 21,665 NIMs 3.7% 3.9% 3.9% Non Markup Income 3,794 4,136 4,591 5.51 6.52 7.36 18.8% 18.4% 12.8% 2.50 3.00 3.50 27.69 31.72 36.07 EPS EPS growth DPS BVPS P/BV Dividend Yield Core ROE 1.81 1.58 1.39 5.0% 6.0% 7.0% 24.2% 24.6% 23.9% Source: JS Research Page 6 Bank Al-Habib Limited | January 15, 2015 ANALYST CERTIFICATION I, Amreen Soorani, the author of this report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. DISCLAIMER This report has been prepared for information purposes by the Research Department of JS Global Capital Limited. The information and data on which this report is based are obtained from sources which we believe to be reliable but we do not guarantee that it is accurate or complete. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors who should seek further professional advice or rely upon their own judgment and acumen before making any investment. This report should also not be considered as a reflection on the concerned company’s management and its performances or ability, or appreciation or criticism, as to the affairs or operations of such company or institution. JS Global does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Warning: This report may not be reproduced, distributed or published by any person for any purpose whatsoever. Action will be taken for unauthorized reproduction, distribution or publication. Research Team Syed Atif Zafar, CFA Strategy, Economy, Politics & Energy (92-21) 111574111 (ext. 3118) [email protected] Amreen Soorani Banks & Consumer (92-21) 111574111 (ext. 3099) [email protected] Umair Vayani, CFA Cements & Autos (92-21) 111574111 (ext. 3103) [email protected] Raheel Ashraf Technical Analyst (92-21) 111574111 (ext. 3098) [email protected] Adeel Jafri Database Manager (92-21) 111574111 (ext. 3098) [email protected] Muhammad Furqan Librarian (92-21) 111574111 (ext. 3105) [email protected] Equity Sales Ovais Ahsan (92-21) 32799511 [email protected] Fahad Ali (92-21) 32799516 [email protected] Faran Rizvi (92-21) 32799516 [email protected] Arhum Ghous Khalil Usmani (92-21) 32799516 [email protected] Sabahuddin Rizvi (92-21) 32800117 [email protected] Irfan Iqbal (92-21) 32799502 [email protected] [email protected] (92-21) 32462567 [email protected] Muhammed Mobeen (92-21) 32462567 Ahmed S. Khan (92-21) 32799516 [email protected] Veer Bajaj (92-21) 32799502 [email protected] Ahmed Razzak [email protected] Irfan Ali (92-21) 32462567 [email protected] (92-21) 32462567 Head Office KSE Office Lahore Office Islamabad Office 6th Floor, Faysal House 6th Floor, Room No.634, Plot 4, Bl-R, M.M.Alam Road, Room No.413, 4th Floor Main Shahra-e-Faisal Karachi Stock Exchange main Boulevard, Gulberg-III, ISE Towers, 55-B, Jinnah Avenue, Karachi, Pakistan Stock Exchange Rd, KHI Lahore Islamabad. Tel: +9221 111-574-111 Tel: +9221 32425692 Tel: +9242 111-574-111 Tel: +9251 111-574-111 Hyderabad Office Faisalabad Office Multan Office Office M-7, Rabbi Center, adj. Belair Hospital, Ground Floor, Meezan Executive Tower, Office 608-A, 6th Floor, The United Mall, 74 Cantt. Saddar, Hyderabad Liaquat Road, Faisalabad Abdali Road, Multan Tel: +9222 111-574-111 Tel: +9241 254 1900 Tel: +9261 457 0260-9 website: www.js.com Page 7
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