Earnings Report /
Egypt

Housing and Development Bank: 2Q22 – Another strong quarter although sequentially weaker

  • Robust margins fail to boost earnings as OPEX, provisions and effective tax rate surge sequentially

  • where gross loans expanded by 9% q/q, bringing YTD growth to 16%, while deposits grew by 12% q/q, and 25% YTD

  • HDBK is currently trading at 2022 P/E of 3.0x, and P/B of 0.5x based on our 2022 estimates of EPS 15% expansion in 2022

Al Ahly Pharos Securities Brokerage
21 August 2022

Robust margins fail to boost earnings as OPEX, provisions and effective tax rate surge sequentially; Lending grows

HDBK 2Q22 standalone bottom line recorded a healthy figure of EGP564 million (-12% q/q, +48% y/y), bringing 1H22 bottom line to EGP 1,204 million (+20% y/y).

Sequential decline was driven by: 1) lower investment income due to high comparable base, which limited the positive impact of strong margins, coupled with 2) higher OPEX, 3) higher provisions and 4) higher effective tax rate.

Annual growth was supported by robust margins that trickled down to bottom line amid lower provisions, and effective tax rate despite high OPEX.

1H22 reached EGP1,204 million (+20% y/y) driven by: 1) strong margins, 2) higher fees and commissions which limited the decline of non-interest income coming from lower investment income, 3) lower booked provisions, and 4) lower effective tax rate, while a growing OPEX was witnessed.

Balance sheet showed healthy growth where gross loans expanded by 9% q/q, bringing YTD growth to 16%, while deposits grew by 12% q/q, bringing YTD growth to 25%. Accordingly, LDR ratio recorded 40% (-1 pps q/q) as of Jun22.

2Q22 key takeaways were:

  • NIM expanded to record 6.2% (+17 bps q/q), despite lower treasury exposure of 8% to total assets (-1.2 pps q/q).

  • Non-interest income contracted on lower investment income, despite higher fees and commissions, to stand at 20% to operating income (-6 pps q/q).

  • The bank booked sequentially higher provisions (including other provisions that are not credit-related) during 2Q22 amounting to EGP 54 million versus EGP 40 million in the previous quarter. Asset quality deteriorated as non-performing loans recorded 8.8% (+170 bps q/q), with lower provisions coverage of 85% (-27 pps q/q).

  • Efficiency deteriorated, where the cost to income ratio declined to stand at 37% from 33% in the previous quarter and versus an average of 40% over the previous four quarters.

  • Effective tax rate recorded 33% in 2Q22 versus an average of 29% over the past four quarters.

  • Loans grew in 2Q22 by9% q/q, bringing YTD growth to 16%, while deposits grew by 12% q/q, bringing YTD growth to 25%. Accordingly, LDR ratio recorded 40% (-1 pps q/q) as of Jun22.

Trading at cheap multiples; Penalized 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 3.0x, and P/B of 0.5x based on our 2022 estimates of EPS 15% expansion in 2022 and ROAE of 19%.