Earnings Report /

BRAC Bank: Q3 19: Stock market provisions and bKash opex hit hard; Buy on valuation

    IDLC Securities
    29 October 2019
    Published byIDLC Securities

    Higher bKash opex to build transaction ecosystem and stock market provision resulted in NPAT fall. BRAC Bank reported consolidated NPAT of BDT 866mn (-34% yoy) in Q3 19. In 9M 19, NPAT stood at BDT3,400mn from BDT3,986mn in 9M 18 (15% yoy lower). This quarter’s consolidated earnings are 34% lower than our expectations. On a standalone basis, BRAC NPAT was down by 12% yoy in Q3 19 though operating profit was up by 3% yoy. We estimate that if there were no stock market provisioning and significant bKash loss, consolidated NPAT would have shown c8% yoy growth in this quarter. 

    We reiterate Buy with an unchanged TP of BDT82.6 (based on 17.0x P/E and 2.4x P/B on 2020f), which implies an ETR of 52% and suggests that it is trading cheap compared to 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). In addition, we believe bKash's current opex is an investment for future growth as it is currently building the transaction ecosystem. We believe that BRAC is adopting the right strategy. Therefore, we reiterate our Buy rating. 

    Spread improved to 2018 level. BRAC recovered its spread to 6.1% in 9M 19 from 6% of H1 19. Its average lending rate increased to 11.4% in 9M 19 from 10.6% in 9M 18 and the deposit rate increased to 5.3% from 4.7% in the same period. Its banking business net interest income increased by 8% yoy in Q3 19. However, on a consolidated basis, net interest income fell by 5% in Q3. 

    Consolidated CIR deteriorates from bKash opex. Though banking business (solo) operating profit grew by 3% in Q3 19, higher opex from bKash made the consolidated operating profit 20% lower in this period compared to the same period the previous year. Opex was up by 21% yoy compared with 7% yoy growth in operating revenue on a consolidated basis in Q3 19. As a result, consolidated CIR deteriorated to 75.6% in Q3 19 (68.7% in 9M) compared to 67.2% of Q3 18 (64.7% in 9M). Banking business CIR stood at 54.8% in Q3 19. 

    High cost of risk due to stock market provision: BRAC had to take BDT209mn stock market provisions in a single quarter in Q3 19 whereas in H1 19, the stock market provision was BDT240mn. BRAC's exposure to the stock market is less than 12% of its equity as of Dec 2018. Its annualised cost of risk was 61bps in 9M 19 versus 41bps in 9M 18. 

    No loan growth in Q3 and we revise down our loan growth expectation for 2019. Loans and deposits grew 5.4% YTD and 7.1% yoy, respectively reflecting the slowdown in private sector credit growth. We lowered our earlier loan growth expectation of 19% to 13% for 2019 (full year). Overall the country’s corporate loan growth was very low in this period as private sector credit growth hit the lowest point of 10.7% in five years. On the other hand, deposit growth was higher than loan growth, implying a renewed focus on deposit base enhancement following the recent liquidity crisis. 

    bKash reported significant loss at BDT434.1mn in 9M 19, whereas it was only BDT 27.8mn in 6M 19, reflecting a loss of BDT406.3mn in Q3 19. Though revenue increased by 16%, higher administrative and marketing expenditure contributed to the loss. Still, we think the opex is paying off because its gross margin improved by 50bps. Going forward, we may see higher revenue contributions from the P2B business, which will increase margins further.