JS Securities Limited - JS Research.

Karachi -- November 15, 2022 (PPI-OT)

BAHL: Superior ROE ignored in current multiples, Buy

Following 8% underperformance vs KSE100 Index over FY23TD, we believe Bank Al Habib provides an attractive opportunity as current multiples ignore (1) recurring Tier I ROE at 23% (conventional banks: 19%) and (2) superior asset quality.

In light of management comments shared in BAHL's Corporate Briefing session yesterday, we leave relatively higher deposit growth estimates intact, albeit with higher admin expense growth.

As management targets slower branch expansion from CY23F, a potential higher growth in revenues compared to expenses i.e. 'positive operating jaws' impact would further support its ROE, currently not a part of our base case.

Underperformance provides opportunity at current levels

We re-iterate Buy on Bank Al Habib Ltd (BAHL) with a TP of Rs130, offering 2x upside from current levels. Following 8% underperformance vs KSE100 Index over FY23TD, we believe the stock provides an attractive investment opportunity. We believe BAHL's current multiples are undervalued owing to (1) recurring Tier I ROE at 23% (conventional banks: 19%) and (2) superior asset quality of the bank. The stock currently trades at a CY22E P/B of 0.65x. Nonetheless, focus on growth may keep the stock's D/Y lower than peers, along with limited cushion to minimum adequacy ratios (CET I: 9.6%, Tier II: 13.4%). We expect the bank to continue maintaining a higher leverage (assets as a multiple of equity at 21x vs 17x for peers). Hence, despite ROA at par to peers, BAHL is likely to keep generating higher ROE.

Asset mix tilted to variable rate instruments

The Investment book is broadly parked in Government Securities with 62% in PIB Investments and 21% in T-Bills as at Sep-2022. More than half of the PIB Investment book is estimated to be parked in PIB floaters; while remaining in fixed PIB papers that has a duration of around 2 years. On the Advances front, BAHL continued higher lending book expansion, keeping Gross ADR at 52%. While CY22E/23F is expected to continue with macro challenges on the...