Earnings Report /
Bangladesh

City Bank: Soft Q3 results, but improving margin; reiterate Buy, trim TP

    S. M. Galibur Rahman
    IDLC Securities
    23 October 2019
    Published by

    NPAT lower than our expectation, TP revised down by 15%. City Bank reported consolidated NPAT of BDT776.0mn (EPS BDT 0.76) in Q3 19 implying 10% yoy fall. Though operating profit was 14% higher in this quarter, higher provisioning (compared low base of the same period previous year) resulted in NPAT fall. On a 9 months basis, NPAT stood at BDT 2,622mn (EPS BDT 2.6) against our expectation of BDT 2,890mn (9.1% lower). This 9-month NPAT deviation is mainly due to higher-than-expected effective tax. Considering the current private sector credit outlook, we are lowering down our loan and deposit growth expectation by 100bps. As a result, our TP was reduced by 15.0% to BDT 35.0. 

    Reiterate Buy with trimmed TP. Our 2019f TP of BDT 35.0 (based on 9.6x P/E and 1.3x P/B on 2019f) implies an ETR of 54.2. For the past few years, the bank has been cleaning its loan book aggressively, thus its profitability has been lower. We expect the bank’s earnings to return to its normal base this year and increase gradually. In line with our expectation, City bank managed to increase its margin, improve its ROE; thus returning to a normal profit base. 

    Margin improvement resulted in core revenue growth. The bank’s net interest income grew by 13%, driven by 17% growth in interest income and 15% growth in interest expense. The bank’s average lending rate increased to 9.9% in 9M 19 compared with 9.5% in 9M 18. On the other hand, deposit cost decreased to 5.6% in 9M 19 compared with 5.7% in 9M 18. As a result, the bank’s spread increased to 4.3% in 9M 19 compared to 3.8% of 9M 18. 

    Cost/income ratio continues to improve. Operating expense was higher by 9% yoy in this quarter compared with 11% yoy growth in operating income. Thus, the cost/income ratio improved to 56.1% in Q3 19 from 57.2% of Q3 18. We expect full-year CIR will be 55% against 9 months CIR of 55.9%. 

    Normalised cost of risk in this quarter; higher effective tax rate. Though the annualised cost of risk was 83bps in Q3 19, it was only 46bps in Q3 18. Hence, 11% yoy growth in PBTP converted to flat (0.3% yoy growth) PBT. The effective tax rate for 9M 19 was 39.7% compared with the last 10 quarters average of 30.9%.

    No growth in loan portfolio in Q3 19; CASA improvement continues. City didn’t grow its loan portfolio (-0.7% qoq) in Jul-Sep 2019 period as its loan growth was 11.6% in H1 19. However, loans and deposits grew 10.9% YTD and 16.9% YTD, respectively. Deposit growth was mostly driven by the CASA portfolio. CASA improved to 35% in September 2019 from 33% of Sep 2018. As part of their new strategy, City grew its commercial and SME loan book faster than corporate accounts. Bank’s ADR stood at 81.9% at the end of Sep 2019 against an 85% regulatory limit. 

    Higher NPL due to SME focus, but provision coverage increased. City Bank’s NPL deteriorated to 5.7% at the end of Q3 19 from 5.3% of 2018. NPL was 7.6% in 2015, which is gradually decreasing. We expect NPL to come down to 5.3% at the end of this year. The retail segment had the lowest NPL of 2.0% whereas SME had 20% NPL. On the other hand, provision coverage has increased to 65.5% in Sep 2019 from 61.9% of Sep 2018. It is to be noted, provision coverage was 68.4% in H1 19.

    ROE improves riding on core income. Annualised 9M 19 ROE improved to 13.9% on a consolidated basis compared to 8.7% of 2018 full-year ROE. We expect a 14.0% consolidated ROE for 2019f, gradually increasing to 17.0% by 2022f.

    Downside risks to our target price and recommendation are the failure to capitalise on the IFC involvement by improving overall governance, including credit administration and risk management. Other risks include – 1) Systemic risks from governance/macro mismanagement by government, 2) Dilution risk from internal capital generation and balance sheet growth mismatch.