Single-digit operating revenue growth translated into lower NPAT due to higher opex and effective tax rate. BRAC Bank reported consolidated NPAT of BDT1,228 mn (-6% yoy) in Q2 2019. On 6 months basis, NPAT stood at BDT 2,678mn against our expectation of BDT 2,820mn (10.1% lower). This deviation is mainly due to higher than expected effective tax rate. This quarter's effective tax rate was 43%, against 23% of last year and 29.0% average in the past 9 quarters. On a solo basis, BRAC NPAT was flat (1% YoY de-growth) because of higher effective tax expense, though profit before tax was 26% higher YoY.
Reiterate Buy. Our 2019f TP of BDT82.6 (based on 16.3x P/E and 2.5x P/B on 2019f) implies an ETR of 32%, suggesting it is trading cheap compared to its fundamentals. We favour BRAC in Bangladesh on account of its profitable operations denoted by high ROE, balance sheet strength, lower funding cost advantage and mobile money prospects (bKash).
Banking business NII grew 13% yoy. BRAC maintained its higher spread in Q2 amid a liquidity crunch, as a result NII increased by 13% on a solo basis. The gross asset yield increased by 30bps to 10.5% and deposit cost increased by 30 basis points to 5.3%. BRAC successfully passed through the increased cost of funds to its customers. However, on a consolidated basis, NII grew by only 2% due to a loss in the merchant bank operations.
Consolidated operating income grew by 9% against 17% opex growth. Non-interest income grew by 22%, driven by growth in bKash commission, while total operating income grew 9% yoy. Operating expenses were up 17% yoy (higher than forecast), reflecting the aggressive promotional activities of bKash undertaken during the year.
Despite higher capital market provisioning, cost of risk was very low. In the first quarter, cost of risk was higher than average, hence it was expected that in this Q2 cost of risk will be low. On a six-month basis, cost of risk stood at c30bps.
Loan growth and deposit growth slightly lower than expectation. Loans and deposits grew by 15.7% YoY and 16.5% YoY respectively against our expectations of 19% YoY for both. We expect this to pick up in the second half of the year.
bKash reported a loss. Though revenue grew by 18% but 6% YoY increase in opex and 16% increase in marketing and promotional expenditure resulted in a loss in Q2 2019. This is in line with the new strategy of aggressive market share acquisition after Ant Financial's inclusion on the bKash board. We expect this will result in long-term value at the expense of short-term profit.