Earnings Report /

BRAC Bank: CY21 — Spread improvement and higher commission income led bottom-line growth

  • BRAC reported BDT5,465mn in 2021, implying c24% YoY Growth. Its loan book size expanded by c18% YoY in CY21

  • The spread has improved by 24bps as the cost of deposit was brought down to 2.2% in CY21 from 4.3% in CY20.

  • We reiterate Buy as BRAC is currently trading at 0.5x of its banking business NAV adjusting our bKash valuation

Shopnil Paul
Shopnil Paul

Research Associate

S. M. Galibur Rahman
IDLC Securities
21 March 2022
Published by

BRAC Bank, our only recommended bank in Bangladesh, reported BDT 5465mn consolidated NPAT (excluding minority interest) in 2021 against BDT 4,418mn reported in 2020, implying c24% YoY growth. The bottom-line of its core-banking business (solo) increased by c22% in 2021. Interest rate spread which improved by 24bps in a year because of the bank’s conscious effort to bring down the cost of funds. Besides, higher commission and brokerage income owing to increased international trade in the country are the main contributors to the bank’s higher earnings.

If we adjust our bKash valuation (USD 1.6bn) from the current market price, BRAC is trading at 0.5x of its banking business NAV. Our target price of BDT 72 represents a c52% expected total return (ETR). Risk to our valuation includes- i. Systematic risk of the banking sector, ii. Continuation of SME loan rate cap for an extended period (we assumed no rate cap for SME from 2023), iii. bKash’s failure to make P2P or P2B business big.

Key Positives

  • The spread of BRAC Bank’s core banking business has improved by 24bps in 2021. BRAC substantially reduced its cost of deposit (COD). The COD of the core-banking business came down to 2.2% in CY21 from 4.3% in CY20. With a rate cap in place, there is very little scope to increase the lending rate. BRAC Bank is rather focusing on low-cost funds e.g. increasing the CASA ratio so as to improve the spread.

  • The gross loan of the banking business made astounding 18% growth YoY. Compared to the private sector credit growth of 10.68% YoY in December 2021, BRAC Bank’s growth of lending portfolio was impressive.

  • The commission, brokerage and exchange income of the banking business have increased by c34% YoY to BDT 3,440mn in CY2021. The international business (i.e. export, import activities) of the country increased substantially in 2021 (export growth c32%, import growth c51% in 2021). We expect high growth of international trade to continue for the next few quarters. 

  • The company booked higher loan loss provision in 2021 to protect itself from any negative impact on asset quality. The consolidated cost of risk increased by 12bps to 1.0% in 2021 from 0.88% in 2020. The bank booked BDT 3,129mn in net impairment charge in the year which is c72% higher than the amount charged in 2020.   

  • bKash's gross revenue in Q4 CY21 increased by c20% YoY to BDT 8,678mn. In the full year 2021, this leading MFS company registered c22% growth in top-line revenue. The prolonged pandemic has been a catalyst for people adopting digital media of transaction. bKash has recently adopted aggressive promotion campaigns to increase the customer base of the company further.

  • bKash reported BDT 1,234mn loss in 2021, continuing its aggressive customer acquisition investments. However, we believe this is a necessary investment for the MFS eco-system creation. The earnings of BRAC Bank’s capital market subsidiaries improved in 2021. The investment banking and brokerage wing of BRAC BANK made a total of BDT 505mn profit in CY2021 which is 146% higher than the earnings reported in 2020.

Key Concerns

  • The gross NPL ratio of the banking wing increased to 3.9% in 2021 from 2.9% in 2020, as the central bank’s classification policy tightened.

  • Brokerage business reported a loss of BDT 9.65mn in Q4 2021 due to market correction along with declining volume.