Housing and Development Bank: 1Q21 – Strong start to the year despite lower margins; Balance sheet grows
- Sequential growth driven by non-interest income, lower opex and provisions reversals.
- Bottom line annual growth was limited by lower provision reversals and higher comparative effective tax rate.
- Loans grew in 1Q21 by 3% q/q while deposits grew at a faster pace of 8%, bringing loan-to-deposit ratio to 43%.
Sequential growth driven by non-interest income, lower opex and provisions reversals; LDR declines
HDBK 1Q21 standalone bottom line recorded EGP620 million (+65% q/q, +1% y/y). The strong sequential increase was driven by 1) robust non-interest income on dividends from subsidiaries and affiliate companies, 2) lower opex, 3) provisions reversal, 4) lower effective tax rate. Although margins fell sequentially, they remained healthy on annual basis. Annual bottom-line growth was limited by lower provision reversals and higher comparative effective tax rate.
1Q21 key takeaways:
NIM weakened by 70 bps q/q to stand at 6.7%, despite stable treasury exposure of 17% to total assets (+80% bps q/q).
Non- interest income provided main support to earnings as it increased by 63% q/q to stand at 31% to operating income (+9.7 pps q/q) driven by dividends from subsidiaries and affiliates that always get distributed during the first quarter.
The expansion witnessed in operating revenue of 13% q/q, which was driven by non-interest income, was further supported by a decline in operating expenses of 16% q/q to result in net operating profit growing by only 34% q/q.
Provision reversal resumed after coming to a stop in the previous quarter. CoR recorded -0.3% in 1Q21, with improving asset quality where non-performing loans recorded 7.0% (-0.9 bps q/q). Provisions coverage rose to 132% ( +11 pps q/q).
Efficiency improved, where the cost to income ratio fell to 31% from 42% in the previous quarter and versus an average of 39% over the previous four quarters.
Effective tax rate recorded 28% in 1Q21 versus an average of 29% over the past four quarters.
Loans grew in 1Q21 by 3% q/q while deposits grew at a faster pace of 8%, bringing the loan-to-deposit ratio to 43% (-2 pps q/q).
Capital adequacy ratio continued to record a solid figure of 20.59%, comfortably above the minimum requirement of 12.5% but sequentially lower 1.6 pps.
Trading at cheap multiples; Penalized by being a blended play
We continue to have an Overweight recommendation on HDBK at a FV of EGP59.14 (45% commercial banking activities, 39% real estate, and 16% other equity investments). However, we believe that the stock price is penalized by the mix between commercial banking and real estate operations, especially that the developments regarding the stock de-merger continue to be unclear and seem far-fetched at this point.
Management announced increasing paid-in capital by EGP253 million reaching EGP1,518 million through the distribution of 1:5 bonus shares as per the EGM meeting dated 20 Dec 2017, with June 16 marking the record date while June 17 marking the distribution date.
HDBK management announced 2021 targets, which include:
Bottom line to grow by 11% versus our conservative estimates of 3% decline. It’s worth adding that management had always surpassed communicated targets for the past 4 years
Customer deposits to grow by 17% versus our estimates of 16% (excluding land deposits)
Loans to expand by 26% versus our estimates of 20%
HDBK is currently trading at 2.9x P/E21 and 0.5x P/B21 with ROAE of 17% with a bottom-line decline of 13% in 2021 (which is very conservative given management guidance of a bottom-line increase of 11% in 2021).
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