HBL’s cheap offering

Pakistan’s largest bank is up for grabs. Expect Ishaq Dar and company to be boasting of another success pretty soon. Just how selling one of your best assets at hefty discounts is a matter of pride can be left to another day. But the government is now on its way to offload its entire 41.5 percent holding in HBL, at a floor price of Rs166/share.
Although listed at the bottom in the primary purposes list, generating sale proceeds for the government of Pakistan is surely the sole purpose of the whole exercise. Should the government go ahead in exercising the upsize option of an additional 359 million shares, it will have offloaded its entire stake in HBL. The determined floor price at Rs166/share has taken many by surprise, as the market at large was expecting the floor price to be in the range of Rs180-190 per share.
“The floor price tells it is a distress sell,” said a top equity broker at the KSE. His sentiments were echoed by a number of banking sector analysts BR Research spoke to. And why not? You have to go back to March 2014 to find a lower market share price for HBL. The consensus fair value estimates for HBL hover around Rs200/share. It certainly could have been better priced and better timed than this.
HBL itself is a sound bank, with the largest asset base, widest footprint and profitability ratios to be envious. The spreads have resisted well despite pressures from return on deposits. The cost to income ratio has improved continuously, the CASA ratio is going in the right direction. The NPLs are on the mend. There is hardly a blip you would find in HBL numbers – which is why such a low floor price is perplexing, if not disappointing.
Mind you, HBL is a constant dividend paying company, having paid Rs12/share in cash dividend in 2014. With earnings expected to grow sizably, assuming a constant payout ratio, the government of Pakistan can easily fetch around Rs7-8 billion annually in dividends. Letting go of such a revenue stream for a one-off gain, that too, when smarter thinking could have helped to fetch money from alternative avenues (See BR Research piece titled: Irrational HBL divestment plan? published on Feb 10, 2015) simply lacks rationale.
The only justification to be selling stake at such rates is the absence of any long-term agenda. It is just about today. Why bother about future revenue streams when you have more to sell to finance the fiscal deficit. Hand it over to whoever comes next without any revenue streams and pass the blame. Here is hoping, more sense prevails and the government does not go beyond selling 17 percent of its stake. Easier said though!