Habib Bank Limited (HBL) reported 1Q2020 result today posting consolidated Profit after Tax (PAT) of PkR4.1bn or EPS of PkR2.79/sh, up 34%Y/Y. Along with this, HBL paid out PkR 1.25/sh as dividend. The result is below market consensus and KASB estimates of PkR 3.37/sh and PkR 3.47/sh, by 17% and 19%, respectively. We expect the stock to remain under pressure due to lower than expected earnings driven by sharp decline in the non-interest income and increase in the operating expenses.
Net Interest Income increased 20%Y/Y to PkR28bn. We expect NII to decline and NIMs to shrink going forward due 425bps cut in the policy rate, the impact of which will be seen in the next few quarters. Moreover, the readjustment of interest rate corridor and early repricing of advances to SME, Agri and consumer will negatively impact the core income of the bank.
Non-interest income, on the other hand, declined 13%Y/Y to PkR5.8bn. Within non-interest income fee income declined 11%Y/Y to PkR4.7bn, dividend income declined 21%Y/Y to PkR80mn, and share of profit from associates declined 71% to PkR255m. Moreover, loss of PkR1.2bn and PkR280mn was recorded from dealing in foreign currency and derivatives, respectively. This loss is offset by the gain of PkR2.3bn on sale of securities.
Provisioning expense came in at PkR625mn against a reversal of PkR83mn recorded in 1Q2019. We are modelling HBLs infection ratio to increase from 6.6% in 2019 to 7% in 2020. The management will provide more detail on the numbers ahead on its conference call.
We think the key factor that market was concerned about was the increasing operating costs. Operating expenses increased by 20%Y/Y to PkR26bn. Consequently, the C/I ration for 1Q2020 shot up to 77% compared to 66% in 4Q2019.We expect operating expenses to start tapering off in 2020 as HBL announced to voluntarily close its New York operation in March 2020.
We think the key questions to ask management are: 1) reasons for surge in the operating cost 2) expected cost reduction after closure of NY branch 3) expected decline in fee income due to lockdown and 4) asset quality of loan book.
HBL is currently trading at one year forward P/Bv of 0.63x. We have “Outperform” rating on the stock with TP of PkR147/sh providing an upside of 45%.