Provisions reversal and non-interest income fail to compensate for weak margins; Loan to deposit ratio improves
HDBK 2Q20 standalone bottom line came in weak, recording EGP386 million (-37% q/q, -16% y/y). The sequential decline was mainly attributed to 1) a strong comparable base that was fueled by provisions reversal and non-core revenues, 2) continued topline weakness despite a shift in treasury allocation that supported margins sequentially, 3) declining non-interest income partially affected by the CBE’s decision of removing all fees on bank transactions from mid-March until mid-September, 4) increased opex, and lastly, 5) surging effective tax rate; all combined offset the positive effect of provisions reversal that took place during the quarter. Healthy loan growth continued through 2Q20 (+2.9% q/q) bringing YTD growth to 8.6% while deposits continued to contract by 3.2% in 2Q20 reaching -7% in YTD.
2Q20 key takeaways:
NIM remained weakened on annual basis but improved sequentially by 20 bps to stand at 6.4%, higher treasury exposure of 36% to total assets (+3.8% pps q/q).
Non- interest income failed to support earnings as it declined by 32% q/q to stand at 24% to operating income (-8 pps q/q).
The decline witnessed in operating revenue of 9% q/q was met by an increase in operating expenses of 4% q/q to result in net operating income dropping by 17% q/q.
Provision reversal continued through 2Q20, recording a small figure of EGP52 million, 67% lower q/q. CoR recorded -0.1% in 2Q20, despite slightly lower asset quality where non-performing loans recorded 7.5% (- 30bps q/q). Provisions coverage recorded a strong 130%, down from 139% in the previous quarter.
Efficiency deteriorated where cost to income ratio rose to 42% from 36% in the previous quarter.
Effective tax rate surged to 30% in 1Q20 versus an average of 22% over the past 4 quarters.
Lending portfolio grew in 2Q20 by 2.9% q/q, bringing YTD growth to 8.6%, while funding contracted further in 2Q20 by 3.2% q/q, resulting in a higher loan-to-deposit ratio of 56% (+3.3 pps q/q).
Capital adequacy ratio continued to record a solid figure of 21.62%, comfortably above the minimum requirement of 12.5%.
Trading at cheap multiples; Penalized by being a blended play
We continue to have an Overweight recommendation on HDBK at a FV of EGP60.40 (53% commercial banking activities, 31% real estate, and 15% other equity investments). However, we believe that the stock price is penalized by the mix between commercial banking and real estate operations, especially that the developments regarding the stock de-merger continue to be unclear and seem far-fetched at this point.
HDBK is currently trading at 1H20 standalone annualized multiples of 2.4x P/E20 and 0.6x P/B20 with ROAE of 29% where bottom line grows at 3% in 2020. The stock awaits two rounds of bonus shares (1:10 and 1:5), which could support share price performance.