Earnings Report /

Eastern Bank: Q3 19: Loss from stock market subsidiaries drag NPAT; reiterate Buy

    IDLC Securities
    6 November 2019
    Published byIDLC Securities

    Weak capital market performance result in NPAT fall: EBL reported consolidated NPAT of BDT 716mn (EPS BDT 0.88) (-4% YoY) in Q3 2019 compared to BDT 746mn (EPS BDT 0.92) of Q3 2018. During 9M, NPAT stood at BDT 2,299mn (EPS BDT 2.83) against the previous year 9M NPAT of BDT 1,997mn (15% YoY growth). This quarter’s consolidated earnings are 28% lower than our expectation. However, solo banking business NPAT grew by 14% YoY in Q3 2019 to BDT 795mn (EPS BDT 0.98). Due to the negative contribution from capital market subsidiaries, consolidated NPAT fell by 4% YoY in Q3 2019. 

    Spread improved by 20bps: EBL spread improved to 4.2% in 9M 2019 from 4.0% of 9M 2018. Its average lending rate increased to 9.8% in 9M 19 from 9.3% of 9m 18 and the deposit rate increased to 5.6% from 5.3% in the same period. We expect the margin to increase further in the coming quarters. However, net interest income fell by 4% YoY due to 8% YoY loan growth and 18% YoY deposit growth. 

    Consolidated CIR deteriorated, but still one of the lowest: Though banking business (solo) CIR improved to 42.8% in Q3 2019 compared to 43.2% of Q3 2018, consolidated CIR deteriorated by 90bps to 43.8% in this quarter. Opex growth was 3% YoY in Q3 2019 compared to consolidated operating income growth of 1%. However, it is one of the lowest in the industry as only five banks have lower CIR than EBL in 9M 2019.

    High cost of risk due to stock market provision: EBL had to take BDT 302.5mn stock market provision in a single quarter in Q3 2019 whereas in H1 2019 stock market provision was BDT 163mn. EBL consolidated exposure to the stock market is c25% of its equity as of Dec 2018. Its annualised cost of risk was 111bps in 9m 2019 compared to 125bps of 9M 2018. 

    No loan growth in this quarter; we revised down our loan growth expectation for 2019: Loans grew 4.6% YTD and 7.7% YoY respectively reflecting the private sector credit growth slowdown. We lowered our earlier loan growth expectation of 17% to 13% for 2019 full year. Overall the country’s corporate loan growth was very low in this period as private sector credit growth hit 5 years lowest point of 10.7%. On the other hand, deposit growth (13.1% YTD, 18.0% YoY) was higher than loan growth implying a strong focus in deposit collection.

    Negative contribution from subsidiaries: In Q3 2019, contribution from subsidiaries was negative BDT 79mn compared to previous year same quarter contribution of BDT 50mn. Foreign subsidiary EBL Finance (HK) made profit but stock market subsidiaries' loss resulted in this negative subsidiary contribution. 

    We reiterate Buy with an unchanged TP: Our TP is BDT 39.4 (based on 8.1x P/E and 1.2x P/B on 2020f). At the current market price, it offers 19% total return(including 5.4% dividend yield), thus we are maintaining our BUY rating.