An Undervalued Pakistan Bank: Habib (HBL)


Recent possible blunder could be avoided in the future by a prudent management

Stock: Habib Bank (ticker HBL.KA)

The largest bank in Pakistan, HBL or formerly known as Habib Bank Limited, has been consistently trading at very low valuations in recent years.

The oldest bank in Pakistan that was founded in 1941 traded at price-earnings ratio 8.1 times, price-book ratio 1.4 times, and price-sales ratio 2.4 times.

In addition, the bank has an attractive dividend yield of 7.6%.

**1 USD equals 105.39 Pakistani Rupee

Meanwhile, HBL may be fined $630 million for “grave” compliance failures relating to anti-money laundering rules and sanctions at its only U.S. branch.

**This article consists of the company’s operations and figures. For quicker reading jump ahead to the conclusion part.**

Should a fine be implemented and just half of the said fine at about $315 million would translate into 33.2 billion in Pakistani Rupee (PKR). This penalty would be certainly handled well by HBL as it had about 214.4 billion PKR in cash as of June 2017.

In review, HBL also grew its book value by 2.2% year over year as of June to 196.4 billion PKR having had its debt increase by 95 billion PKR at a debt-equity ratio of 1.98 times compared to 1.53 times a year earlier.

Quarterly performance

Six months into HBL’s operations this year, the bank grew its revenue by 9.4% year over year to 54.2 billion PKR and a contrasting 2.7% decline in profits to 15.49 billion PKR in profits at a margin of 28.6% compared to 32% a year earlier.

Among its expenditures, HBL recorded 11.4% higher in administrative expenses resulting in lower profits in the period.

Total returns

HBL, meanwhile, has returned poorly to its shareholders so far this year having generated 28.44% total losses compared to the Global X MSCI Pakistan ETF (ticker PAK) 15.8% total losses (Morningstar).

Habib Bank

Established in 1941, HBL has a rich legacy spanning over 75 years and is an integral part of the country’s economic progress.

According to filings, HBL is Pakistan’s largest bank with a global reach, operating over 1700 branches and 2000 ATMs and with more than 10 million relationships.

In 2016, Habib derived 97.6% of its profits before tax from Pakistan and 2.5% in Asia and Africa. The bank generated losses of 48.3 million in the regions Europe, Middle East and America.

Habib has six segments.

1 Branch banking

This segment consists of loans, deposits, and other banking services to individuals, agriculture, consumer, SME and commercial customers.

In the recent half, total income in the branch banking business grew 13.4% year over year to 30 billion (52% of all incomes) and generated profit before tax margin of 37.7% compared to 33.8% a year earlier.

2 Corporate banking

Corporate banking consists of lending for project finance, trade finance and working capital to corporate customers. This segment also provides investment banking services including services provided in connection with mergers and acquisitions and the underwriting / arrangement of debt and equity instruments through syndications, Initial Public Offerings and private placements.

Total income was flat in the first half to 4.39 billion (8% of total income) and had margins of 84.7% compared to 85.2% a year earlier.

3 Treasuries

Treasuries consist of proprietary trading, fixed income, equity, derivatives and foreign exchange businesses. Also includes credit, lending and funding activities with professional market counterparties.

In the first half, total income for Treasuries fell 20.9% year over year to 9.98 billion (17% of total income) and had margins of 87.5% compared to 95.2% a year earlier.

4 International banking

International banking is considered as a separate segment for monitoring and reporting purposes and consists of the Group’s operations outside of Pakistan.

Total income in international banking business grew 1.1% to 7.3 billion (13% of total income) and had losses of 81 million compared to 243 million in losses a year earlier.

5 Asset management

This represents HBL Asset Management Limited.

Total income in Habib’s asset management grew 12.8% to 369 million (1% of total income) and generated 42.3% margin compared to 22.9% a year earlier.

6 Head office

This includes corporate items and business results not shown separately in one of the above segments.

Total income for the head office grew 21% to 5.76 billion (10% of total income) and generated margins of 67% compared to 79% a year earlier.

Sales and profits/performance metrics (three-year average; Morningstar)

Revenue growth: 14.2%

Profit growth: 14.2%

Profit margin: 33%

Return on assets: 1.64%

Return on equity: 20.5%

Cash flow

In the first half, Habib’s cash flow from operations declined by 90% year over year to 8.5 billion. The bank recorded much higher cash outflow in relation to its lending to financial institutions, net investments in held-for-trading securities, advances, and other assets among others.

Capital expenditures were 15.3 billion leaving Habib with -6.9 billion in free cash outflow compared to 80.8 billion a year earlier.

Nonetheless, dividend payouts were 7.07 billion and raised 52 million in financing activities.

The cash flow summary

In the past three years, Habib allocated 14 billion in capital expenditures (net), raised 7.16 billion in debt (net repayments), generated 565.8 billion in free cash flow, and provided 56 billion in dividend payouts at an average payout ratio of 11%.


Taking such reckless risk and getting entangled in possible wrongdoings in the United States resulting in marked penalties is just as plain as having a group of rotten apples in Habib’s US’ bank. In simple terms, the region (including the Middle East and Europe) has by far generated losses for the bank in recent years and there could be no other prudent reasons for the largest Pakistan bank to partake in such.

Meanwhile, the bank’s profitability has suffered in recent first-half operations brought by higher operating expenses despite overall growing revenue.

Habib’s branch banking business (52% of total income) has consistently grown and remained profitable in the recent period, while the bank’s international operations (13% of business) has delivered consistent losses.

Habib also has grown its book value and had even more leveraged balance sheet in the recent period, while having maintained good and for what it seemed conservative dividend payouts to its shareholders in recent years.

Applying five-year book value growth and a 20% margin indicated a per share figure of 196.36 PKR per Habib share vs. 185 at the time of writing.

In summary, Habib is a hold with 195 PKR target price.

Disclosure: I do not have shares in any of the companies mentioned.

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