Rerating due on strong return generation – Buy with TP of Rs62

Transcription

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
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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
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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
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
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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)
…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
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
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
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