Equity Analysis /
Bangladesh

City Bank: Growing its loan book faster than industry; NPAT normalising

    S. M. Galibur Rahman
    IDLC Securities
    5 May 2019
    Published by

    Commendable net interest income growth coupled with controlled opex resulted in large earnings growth: City Bank reported consolidated NPAT of BDT 765 mn (107% YoY growth) against our forecasts of BDT 700 mn (9% higher than expectation) in Q1 2019. Net interest income grew by 19% YoY, riding on 24% YoY gross loan growth. Besides opex growth was only 3% YoY and impairment charge was also 17% lower in Q1 2019 compared to the same quarter last year. All these translated into 107% NPAT growth in Q1 2019.

    Trading at cheap valuation; 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 52%. The bank is currently trading at 0.9x of 2019E P/B and 6.4x 2019E P/E - trading cheap compared to its fundamentals. In the past few years, the bank has been cleaning its loan book aggressively, thus its profitability has been lower. We expect profit to return to its normal base from current year thus we expect 62% YoY NPAT growth in 2019.  

    19% YoY growth in NII and 24% growth in non-NII resulted into 21% YoY growth in operating income: Net interest income grew substantially by 19% mainly driven by 24% YoY gross loan growth and meagre improvement in spread (0.07%). The average lending rate increased by 74 bps to 9.8% and deposit cost increased by 68bps to 5.7%. Thus spread was 4.2% in Q1 2019. Non-interest income grew by 24% YoY driven by 62.5% YoY growth in foreign exchange gain and 19.6% YoY increase in credit card income, while total operating income grew 21% yoy, (0.2% above forecast). Operating expenses were up 3% yoy (7% lower than forecast), reflecting the cost control initiatives taken last year. It is to be noted that the bank’s CIR improved to 54% in Q1 2019 from 63% of Q1 2018.  

    Cost of risk in line with our expectation: Cost of risk stood at 80bps (annualized) similar to our annual expectation of 80bps.However, net impairment charge was 15% higher in absolute amount compared to our expectation due to higher loan growth.

    Higher loan growth and lower deposit growth compared to our expectation: Loans and deposits grew by 24% YoY and 14% YoY respectively against our expectation of 17% YoY growth for loans and 19% YoY growth for deposits. 

    Similar profit contribution from subsidiaries: Contribution from subsidiaries was BDT 164.5mn in Q1 2019 compared to BDT 164.0mn of last year same quarter. However, in percentage terms subsidiaries contributed 21% of consolidated earnings in Q1 2019 compared to 44.5% of Q1 2018.