AKD Securities Limited Market Roundup

Karachi, February 24, 2015 (PPI-OT): HBL: Poised to cross MCB in market cap terms!

Having posted robust 39%YoY growth in CY14, AKD Securities Limited believes HBL will continue on a double-digit growth trajectory going forward. In this regard, AKD Securities Limited raises AKD Securities Limited’s EPS estimates across CY15F-CY19F by 10% on average while upping AKD Securities Limited’s Dec’15 TP to PkR255/share (+16%).

AKD Securities Limited’s positive stance on HBL is underpinned by (i) continued focus on CASA (76%; +4ppt), (ii) significant room to grow loans (3yr CAGR of 15% appears plausible) and (iii) likely low credit costs (coverage has crossed 90%).

This should lead to Tier-I ROE averaging 23% over the next 3yrs, vs. previous 3yr average of 21%, with room for +ve earnings surprises on capital gains (unrealized PIB gains at ~PkR15bn) and core fee income.

HBL has gained a muted 0.7% since its CY14 result announcement to trade at a CY15F P/B of 1.5x, P/E of 8.4x and D/Y of 6.6% where AKD Securities Limited’s revised TP of PkR255/share offers 25% upside. In this regard, while the upcoming SPO could keep a lid on immediate-term price performance, AKD Securities Limited believes any dips should be availed to build positions from a long-term investment perspective.

CY14 Review: HBL posted NPAT of PkR31.73bn (EPS: PkR21.63) in CY14, up by a robust 39%YoY. Alongside the result, a PkR5.5 final DPS brought the full-year DPS to PkR12 (payout ratio: 55% vs. 5yr avg. payout of 43%).

Key result highlights included: (i) 25%YoY NII growth (BS growth + higher NIMs on PIB shift), (ii) modest 7%YoY increase in total provisions, (iii) strong 24%YoY non-interest income growth on fees, dividends and associates’ profits and (iv) 15%YoY increase in core admin expenses. In 4QCY14 alone, HBL posted NPAT of PkR9.94bn (EPS: PkR6.77), up by 58%YoY/36%QoQ, this being the bank’s highest quarterly profit on record.

Asset quality: HBL’s NPL stock at end-CY14 stood at PkR67.5bn (NPL ratio: 10.9%, coverage: 90%), lower by 3%YoY on a normalized basis. While the NPL stock is ostensibly up 66%QoQ, this is misleading as the bank has now chosen to club NPLs (greater than) 5yrs into reported figures (earlier these were being shown separately).

The net effect is an increase in both NPL ratio and coverage as these legacy NPLs were fully provided for anyway. Considering coverage has now crossed 90% and incremental infection over the medium-term should be marginal, if any, AKD Securities Limited expects HBL’s credit costs to average 20bps over the next 2-3 years vs. 30bps in CY14.

Outlook: Post a windfall CY14, earnings growth for HBL will likely come off but should still sustain in double-digits (projected 3yr CAGR: 12%+). This is underpinned by (i) continued focus on CASA (76%; +4ppt), (ii) significant room to grow loans (3yr CAGR of 15% appears plausible) and (iii) likely low credit costs.

AKD Securities Limited sees Tier-I ROE averaging ~23% across the next 3yrs vs. last 3yr average of 21%, with room for +ve surprises on capital gains (unrealized PIB gains at ~PkR15bn) and core fee income. Shareholders should also benefit from a consistently higher payout ratio (50%+ is sustainable given CY14 CAR of 16.2%).

Investment perspective: HBL has gained a muted 0.7% since result announcement, bringing its CYTD decline to 6%, where AKD Securities Limited attributes recent poor price performance to looming SPO concerns (GoP could divest a maximum of 41.5% stake in HBL).

While this could continue to keep a lid on immediate-term price performance, AKD Securities Limited believes any dips should be availed to build positions from a long-term investment perspective. HBL trades at a CY15F P/B of 1.5x, P/E of 8.4x and D/Y of 6.6% where AKD Securities Limited’s revised TP of PkR255/share offers 25% upside.

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