HBL to shut down New York branch as US department seeks $630 mn penalty

As per a notice issued at the Pakistan Stock Exchange (PSX), the State Department of Financial Services (DFS) has sent a notice to Habib Bank Ltd (HBL) in which DFS seeks to impose civil monetary penalty of up to US$630mn on the bank. The said penalty is much higher than street expectations, which was around US$100-300mn. The bank has stated that it will contest the penalty.


The bank has decided to close its New York operations. As per the notice, it will have no material impact on HBL’s business outside of the US and HBL will continue to service the requirements of its domestic and international customers including US Dollar business.

To recall, the action is with regards to significant breakdowns of risk management and compliance identified in the bank’s New York branch in 2015, where US regulators highlighted deficiencies in the risk management and Bank Secrecy Act (BSA)/anti-money laundering (AML) compliance in the branch.

This computes to an earnings and book value impact of up to Rs45/share. We place the stock ‘Under Review’ on the back of significant impact on the bank’s BV. Assuming a P/B of 1.5x, it can potentially erode our valuation of the bank by Rs68/share (or 22%). The stock is limit down (-5%) as a result of this announcement.

We also highlight risk on the country’s foreign exchange reserves on the back of potential outflow from this penalty.