Reinstate with Buy; PO PRs213: We reinstate coverage on Habib Bank Limited (HBL), Pakistan’s largest commercial bank in terms of deposits, assets and profitability, with a Buy rating and a PO of PRs213. Our Justified P/B based PO represents target 2015E P/B of 1.6x and P/E of 8.8x.

1-Balance sheet profile transformed to improve earnings capacity: We consider HBL to be a transformational growth story and expect the bank to deliver 3-year earnings CAGR of 13% over 2014-17 despite an extraordinary 39% earnings growth already displayed in 2014. HBL has aptly leveraged its franchise value and, in the process, has transformed its growth and return profile in the past two years. This is evident in all-around improvement in key areas: (1) shift in liability mix (CASA ratio is up 10% in two years); (2) improved asset quality (provision cover up to 83% from 77% in 2012); (3) pick-up in earnings momentum in major associates; and (4) cost normalization as heavy investment cycle starts to ease off (cost to income down to 45% in 2014 from 48% in 2013).

2-Advantages from International footprint/Islamic Banking push: International operations in 28 countries comprising of 18%/29% of deposits/advances give HBL a key advantage of revenue/earnings diversification, which sync well with HBL’s local franchise when it comes to remittances, trade finance, cross-border funding and leveraging group synergies. The bank has shown keen interest in not only expanding scale in regional economies, but maintain growth in African and Central Asian countries through continued investment in associate banks. HBL’s renewed focus on Islamic Banking during 2014 led to 135% growth in Islamic deposits only in a single year to PRs113bn – making it the second largest Islamic Bank in the country.

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3-High duration/better liability mix to offset low PIB levels: HBL, citing strict internal risk management framework limits, decisively limited their exposure of PIBs to merely 33% of investments. While the concentration of PIBs in HBL’s B/S is relatively low compared to peers, the duration of HBL’s PIBs portfolio is on the higher side vs peer group, where we estimate 70% of PIBs having maturities post 2017. Overall, we project HBL’s NIM to range between 4.4%-4.6% during the forecast horizon (vs 4.6% in 2014). Downward pressure on NIM from monetary easing is likely to be countered by (1) a very different and efficient liability profile vs 2012 levels, and (2) 29% of advances driven by the international book (– delinked to falling local yields).