Double-digit operating revenue growth translated into only 6% YoY NPAT growth due to higher provisioning: City Bank reported consolidated NPAT of BDT1,021mn (EPS BDT 1.12) in Q2 2019 implying 6% YoY growth. Though operating profit was 16% higher in this quarter, higher provisioning (compared to the same period the previous year) resulted in this single digit NPAT growth. On a 6-month basis, NPAT stood at BDT 1,846mn (EPS BDT 1.9) against our expectation of BDT 1,979mn (6.8% lower). This half-yearly NPAT deviation is mainly due to higher than expected effective tax rate.
Banking business NII grew 23% YoY. Bank’s net interest income grew by 23% driven by 16% growth in interest income and 11% growth in interest expense. Bank’s average lending rate increased to 9.6% in H1 2019 compared to 9.2% of H1 2018. On the other hand, deposit cost increased to 5.5% in H1 2019 compared to 5.4% of previous year same period. As a result, the bank’s spread increased to 4.1% in H1 2019 compared to 3.9% of H1 2018.
Consolidated operating income grew by 16% against 8% opex growth: Non-interest income grew by 12% YoY mainly because of low investment income, while total operating income grew 16% YoY. Investment income was 9% lower in this quarter. However, operating expense was only 8% YoY higher in this quarter which resulted operating profit growth of 31% YoY. Cost to income ratio also improved to 58.7% in Q2 2019 from 63.2% of Q2 2018.
Low cost of risk in this quarter but there was provision release in the same quarter previous year: Though the annualized cost of risk was only 22bps in this quarter but on 6 months basis it was 57bps. However there was provision release of BDT 104mn in previous year same quarter.
Continued to grow books at higher than the industry average; CASA improved to 37%: Loans and deposits grew 11.6% YTD and 12.8% YTD respectively. With the industry suffering from a liquidity crunch, City bank managed to grow its deposits by 12.8% YTD and growth was mostly driven by CASA portfolio. Its CASA improved to 37% in June 2019 from 34% of June 2018. Loan growth was dominated by corporate segment as it grew by 13.8% YTD. It was mostly the power sector that dictated this corporate loan growth. Bank’s ADR stood at 82.9% at the end of June 2019.
NPL improved to 5.2%: City Bank’s NPL improved to 5.2% from 5.3% of 2018. NPL was 7.6% in 2015 which is gradually decreasing. We expect NPL to come down below 5% at the end of this year. On the other hand provision coverage is increased to 68.4% in June 2019 from 61.9% of June 2018.
Reiterate BUY: Our 2019f TP of 41.4 (based on 9.6x P/E and 1.3x P/B on 2019f) implies an ETR of 56%, suggesting its trading cheap compared to its fundamentals. In the last couple of years, City Bank had to do a good amount of provisioning to clear its problem loan. As it is over now, city bank returning to its previous higher profit level. It reported a profit of BDT 3,594mn, BDT 4,063mn and BDT 3,459mn in 2015, 2016 and 2017 respectively. But its profit fell to BDT 2,225mn in 2018. We expect 2019 full year NPAT to be BDT 4,167mn and half-yearly NPAT (BDT 1,846mn) is in line with our estimation. Though earlier there were few one-off events, this time earnings grew based on core banking income. Besides, the recent change in management and IFC board, we have seen the following developments take place: 1. NPL improved to 5.2%, 2. Provision coverage increased to 68%, 3. CASA improved to 37%. Considering all these, we recommend Buy for CITYBANK with a target price of BDT41.4.