Profits surge sequentially on improved margins, lower opex, provisions, and effective tax rate; LDR contracts
HDBK 1Q22 standalone bottom line recorded EGP640 million (+62% q/q, +3% y/y). Limited annual growth comes on the back of higher OPEX and booked provisions versus provisions reversals in the comparative quarter.
Robust sequential performance is driven by 1) strong topline growth on improved margins, 2) support coming from dividends from subsidiaries and affiliate companies which compensated for the drop in fees and commission, 3) lower OPEX, 4) lower provisions, and 5) a plunge in effective tax rate recording 24% in 1Q22 versus an average of 30% over the past four quarters. L
Gross loans expanded by 6.2% q/q while deposits expanded at a faster pace (+11% q/q) bringing LDR ratio down to 40.8% as of Mar-2022 (-2 pps q/q).
1Q22 key takeaways:
NIM expanded to record 6.0% (+50 bps q/q), on lower treasury exposure of 9% to total assets (-3.0 pps q/q).
Non-interest income contracted on lower fees and commissions despite higher investment income to stand at 26% to operating income (-8 pps q/q).
Net operating income grew by 17% q/q as a result of an expansion in operating revenues of 5% q/q (triggered by interest income) coupled with contracting OPEX (-12% q/q).
The bank booked sequentially lower provisions (including other provisions that are not credit-related) during 1Q22 amounting to EGP 40 million versus EGP 174 million in the previous quarters. Asset quality improved as non-performing loans recorded 7.1% (-2.9 bps q/q), with rising provisions coverage to 112% ( +28 pps q/q).
Efficiency improved, where the cost to income ratio declined to stand at 33% from 40% in the previous quarter and versus an average of 40% over the previous four quarters.
Effective tax rate recorded 24% in 1Q22 versus an average of 30% over the past four quarters.
Loans grew in 1Q22 by 6.2% q/q while deposits grew at a faster pace of 11%, bringing the loan-to-deposit ratio to 41% (-2 pps q/q).
The capital adequacy ratio continued to record a solid figure of 22.47%, comfortably above the minimum requirement of 12.5% (+120 bps q/q).
Trading at cheap multiples; penalised by being a blended play
We continue to have an Overweight recommendation on HDBK, with a FV of EGP54.00 (64% commercial banking activities, 25% real estate, and 11% other equity investments). However, we believe that the stock price is penalized by the mix between commercial banking and real estate operations, especially since the developments regarding the stock de-merger continue to be unclear and seem far-fetched at this point.
HDBK is currently trading at 2022 P/E of 3.1x, and P/B of 0.5x based on our 2022 estimates of EPS 15% expansion in 2022 and ROAE of 19%.