Earnings Report /

Dutch-Bangla Bank: Significant margin improvement where others suffer; Hold on valuation

    IDLC Securities
    13 November 2019
    Published byIDLC Securities

    Bottom-line growth from interest income growth (driven by margin improvement), controlled opex and lower provisioning. Dutch Bangla reported consolidated NPAT of BDT1,449mn (EPS BDT2.9, 40.3% yoy) in Q3 19 compared to BDT1,033mn (EPS BDT 2.07) in Q3 18. In 9M 19, NPAT stood at BDT3,363mn (EPS BDT 6.73) against the previous year 9M NPAT of BDT2,658mn (26.5% yoy growth). This quarter’s consolidated earnings are 47% higher than our expectations. Higher operating income growth (22% yoy), controlled opex growth (12% yoy) and lower provisioning (70% yoy – de-growth) resulted in 40% yoy NPAT growth.

    Spread improved by 120bps: Dutch spread improved to 7.5% in 9M 19 from 6.5% of 9M 18. Its average lending rate increased to 10.0% in 9M 19 from 8.7% of 9M 18 and the deposit rate increased to 2.5% from 2.4% in the same period. This is the highest spread among all the PCBs. Because of this higher spread, Dutch net interest income increased by 26% yoy in Q3 19. Dutch has the highest CASA among all PCBs. It helped the bank in the liquidity crunch condition. We expect this spread will come down to 6% in the next  five years, which will still be one of the highest in the industry.

    Consolidated CIR improved, but still one of the highest: Dutch CIR in Q3 19 improved to 59.6% compared to 65.2% in the same quarter last year. Dutch has the highest ATM network (5605 including fast track), which helps the company maintain high CASA, but it requires continuous maintenance. So, this retail-focus business model reduces the funding cost, but comes at a higher CIR ratio. In 9M 2019, CIR stood at 61.3% improvement of 192bps compared to 9M 18. Note that Dutch loan loss charge of BDT2399.1mn is reported under opex, which we have adjusted.

    Lower provisioning this quarter: Dutch had only BDT286mn provisioning in Q3 19 compared to BDT980mn in Q3 18. In 9M 19, the cost of risk (annualised) stood at 1.1% compared to 1.2% of the same period the previous year, implying an improvement of 10bps. It is to be noted, loan loss charge has been adjusted.

    No loan growth this quarter; we revise down our loan growth expectation for 2019: Loans grew 6.1% YTD and 13.1% yoy, respectively, reflecting the private sector credit growth slowdown. We lowered our earlier loan growth expectation of 15% to 10% for FY 19. Overall the country’s corporate loan growth was very low in this period as private sector credit growth hit a five-year low point of 10.7%. On the other hand, deposit growth (12.0% YTD, 16.0% yoy) was higher than loan growth. Dutch maintain the highest CASA ratio (70% in September 2019) among all PCBs.

    NPL increased to 5.58%: At the end of September 2019, Dutch NPL deteriorated to 5.58% from 4.14% in Dec 2018. Because of this increase, provision coverage dropped to 56% in September 2019 compared with 85.7% in December 2018.

    We maintain Hold with an upward revision in TP: We expected that this liquidity crunch will be a blessing for Dutch and their spread will increase to 6.8%, but it actually increased to 7.5%, beating our expectations significantly. We have revised up our price target to BDT80.0 from the current level of BDT71.2 implying an upward revision of 12.4%. Considering limited upside potential of 10.8%, we maintain our Hold recommendation. However, Dutch Bangla Bank remains one of our favourite banks in Bangladesh considering its strong franchise in liability side.