BAHL: Current multiples do not justify bank’s tall ROE, ‘Buy’ with TP of Rs105
CY18 yet another year with robust growth
Following another year of outperforming peers in balance sheet growth and return generation, we maintain Bank Al Habib (BAHL) as one of our top picks from the banking space. Given its 41% YoY growth in Advances during CY18 (ADR: 60%), vis-à-vis 21% YoY reported by the industry (29% YoY by mid-tier banks) and shorter investment portfolio duration, the benefits of the ongoing interest rate increases would likely be higher in BAHL’s case when compared to peers. Moreover, with higher contribution from trade income to the bank’s total Fee Income (64%, versus industry average of 20%), BAHL is also expected to benefit from the ongoing drive to boost country’s trade by the government.
During CY18, BAHL’s trade income increased by 41% YoY, as compared to industry average of 19% YoY.
Expanding NIMs and double-digit growth…
Going forward, we expect the bank to post 3-year earnings CAGR of 31%, where during CY19E the bank is expected to report an earnings growth of 47% YoY (EPS: Rs11.17). The growth stems from ~90bps YoY NIMs expansion, 15% YoY steady growth in Fee Income and average Cost to Income ratio of 53%. Moreover, our base case also incorporates uptick in credit cost resulting in ~Rs2bn provisioning expenses during CY19E and CY20F each and increase in Administrative expenses during CY20F assuming the bank brings its IT infrastructure expenses at par to peers. This is likely to result in Admin expenses growth to touch 20% YoY during CY20F, while remaining at 15% YoY during CY19E. On the balance sheet front, we expect Deposit growth to recede to 12% per annum for CY19E and CY20F, as compared to 23% CAGR witnessed during CY13-18, due to slower economic growth.
…to continue to support higher ROE
As a result, the bank is expected to report highest 5-year average Tier I ROE (24% vs. industry average of 17%) amongst conventional banks, driven by higher use of equity to build its total assets; while BAHL’s ROA remains at average to peers at 1.1%. Comparing to peers with a closer return generation potential, BAHL trades at par with MCB Bank (MCB) at CY19 P/B of 1.45x, while MCB’s average 5-year Tier I ROE computes to 20%. In addition to higher return generation, BAHL also boasts
(1) superior asset quality (Gross infection ratio: 1%) and
(2) solid track record of higher growth, that further endorse a premium on BAHL’s multiples. We maintain our ‘Buy’ rating with a Dec-2019 Target Price of Rs105, implying 30% total return from current levels.
A key risk to our investment case includes the low buffer on capital adequacy ratios that may limit the bank’s potential growth in coming years. To recall, BAHL cut its absolute dividend for the third consecutive year in CY18, which we believe was in order to support the CAR ratio without compromising on balance sheet growth. BAHL’s CET I ratio stood at 9% as at CY18 end (minimum requirement for CY18: 8.5%), while Tier II CAR stood at 13.4% (minimum requirement for CY18: 11.9%). Any potential Additional Tier I paper, similar to Rs4bn paper issued during CY18 would bring an incremental impact on the bank’s Tier I and II CAR only.
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