Equity Analysis /
Bangladesh

BRAC Bank: Conference call feedback: We have more confidence in management; reiterate BUY

    S. M. Galibur Rahman
    IDLC Securities
    30 July 2019
    Published by

    Liquidity conditions improved with positive change in macro: Higher remittance inflow (9.6% growth in FY19), double-digit growth in exports (10.6% YoY in FY19) and lower import growth (2.6% Yoy in 11m FY19) have improved liquidity in the money market. In addition, reforms to the  National Saving Certificate (NSC) scheme will increase the flow in the money market. Besides, improvement in current account deficit (USD 5.2bn in 2019 against USD 9.8bn last year) has resulted in a stable currency outlook.

    Liquidation of one NBFI positively impacting BRAC: The liquidation of PLFSL has created awareness among the general population regarding the safety of their money and the quality of the financial institutions. Rather than just chasing higher interest rates, they are now more concerned about the safety and timely repayment of their money. This has positively impacted BRAC’s deposit mobilization process. Banks with a good reputation such as BRAC are getting money more easily, even at slightly lower deposit rates. 

    Maintained 6% spread in the first half amid pressure, and easing liquidity might increase its spread in the second half: BRAC maintained a spread of 6.0% in H1 2019 despite increasing funding cost. Funding cost increased by 50bps to 5.3% in H1 2019 from 4.8% of 2018 whereas their asset yield increased to 11.3% in H1 2019 from 10.9% of 2018. Unlike last year BRAC managed to pass through most of its increased fund cost. In 2018 their spread fell by 60bps whereas in the first half of 2019 it fell by only 10bps. According to management, in the second half they expect to improve the spread by 10-20bps, capitalizing on the easing of the liquidity crunch.

    Deposit increased across the segments whereas loan growth was dominated by SME: 21% YoY growth of deposit at the end of June 2019 was driven by 17% growth in SME deposits, 21% growth in Retail deposit and 22% growth in Corporate segment. On the other hand, 16% YoY loan growth at the end of June 2019 was driven by 22% SME loan growth, 15% YoY Retail loan growth and 11% YoY Corporate loan growth.

    Capital adequacy at a comfortable level for next couple of years; new dividend regulation might change current dividend policy: At the end of June, 2019, CAR stood at 16.8% which is significantly higher than regulatory limit of 12.5%. BRAC doesn’t need any further capital for maintaining growth momentum for the next couple of years. Besides, the introduction of new dividend regulation might change their current 100% retention policy. Our expectation is that BRAC will have at least 15% cash payout going forward to avoid a tax penalty. 

    BRAC opted not to release provision from NPL classification: BRAC had the option to release provision of BDT 760mn (40% of PBT of Q2 2019) due to change in NPL classification system. But the management didn’t release the provision rather decided to adhere to earlier strengthen classification system. In addition, BRAC does not need to reschedule any loan from new large loan rescheduling policy since it does not have exposure to those particular sectors which have got a special facility. 

    We feel more comfortable with management's decision to not take provision advantages: Management quality and superior asset quality are of two main investment themes of BRAC Bank. It was evident in management's decision to not release provisions on the back of the new reclassification guidelines. Besides, higher loan growth in SME also reflects its strength in SME business. However, we are concerned about loan growth in the second half as the industry’s loan demand has come down significantly.We like the medium-term strategic focus of BRAC: BRAC gave a few mid-term aims in their earnings call which we liked such as:

    1. BRAC is considering to scale up its small business. It plans to increase its sales force to 7,000 from the current level of 2,200 with a portfolio CAGR target of 50% from the current level of 27% in the next 3 years; 
    2. They want to scale up their agent banking. Plans to have 1,500 agents by 2021; 
    3. They want to introduce more digital initiatives such as digital agent banking. 

    We reiterate Buy with an unchanged TP of BDT82.6: BRAC’s long-term value drivers are: 

    1. Higher concentration on SMEs and higher consumer loan growth; 
    2. High current and savings account (CASA) ratio; 
    3. Low cost of deposit; 
    4. Higher technological investment in digital banking; 5) agent banking initiatives; and 
    5. Benefits of leveraging the network effect of Mobile Financial Services (MFS) pioneer, bKash. 

    Risks to our investment thesis includes the systematic risk of the sector.