JS Securities Limited – Morning Briefing

Karachi, September 13, 2018 (PPI-OT): HMB: ‘Hold’ maintained on limited upside

We maintain ‘Hold’ on Habib Metropolitan Bank (HMB), following availability of 1H2018 accounts.

HMB currently trades at Jun-2019 P/B of 1.07x, offering limited upside to our exit P/B of 1.1x.

As the bank’s Tier II CAR has improved to 15.4% as at Jun-2018 (Mar-2018: 14.7%), we maintain our dividend expectations for 2018 translating into a D/Y of 7%.

Higher costs pulled down the bank’s NIMs to 2.56% during 1H2018 (-14bps YoY).

Nonetheless, Net Interest Income (NII) on absolute basis has witnessed a double-digit growth of 13% YoY during 1H2018, driven by asset growth.

Current growth likely priced in, merits Hold despite 7% D/Y

We maintain a ‘Hold’ stance on Habib Metropolitan Bank (HMB), following availability of 1H2018 accounts. HMB currently trades at Jun-2019 P/B of 1.07x, offering limited upside to an exit P/B of 1.1x. We expect the sustainable Tier I ROE to average at 17%, while earnings for 2018E/19F may witness an annual growth of 17%. However, as Tier II CAR has improved to 15.4% by end of Jun-2018 (Mar- 2018: 14.7%), we maintain dividend expectations for 2018 translating into D/Y of 7%. Key risks to our investment thesis include (1) delay in interest rate increase, and (2) sharper increase in PIB yields (which could hurt the bank’s BV). By Jun- 2019 end, HMB had 41% of its investment book parked in PIB investments (sector average: ~30%). Moreover, deficit on Revaluation Reserves has further expanded during 2Q2018 (Rs892mn, +3x QoQ) with Rs1.7bn loss under PIB investments, compared to Rs968mn profit as at December 31, 2017.

1H2018: NII improves but NIMs decline

HMB’s earnings yield registered an uptick, potentially due to higher Advances (+14% YoY). Simultaneously, the bank is continuously improving asset quality, which is reflected in a downward trending NPLs. The bank currently has 93% of infected loans covered, where we point out that our estimates include ~Rs875mn per annum of provisioning expenses. Conversely, the bank’s zero-cost deposits ratio remains low (27%), compared to peer average (35%), while at the same time the deposit mix has deteriorated on the back of fixed deposits’ share increasing to 42% (+16bps YoY), spurred by 16% YoY growth in the same during 1H2018. Higher costs pulled down the bank’s NIMs to 2.56% during 1H2018 (-14bps YoY). HMB’s ADR currently stands at 37%, while IDR stands at 69%. Nonetheless, Net Interest Income (NII) on an absolute basis has witnessed a double-digit growth of 13% YoY during 1H2018, driven by asset growth.