Margins supported by strategy
Net interest margin will continue to be strong, driven by:
1. Unchanged investment strategy of continued investments in government treasuries
2. High exposure to high-yield retail and SME segments
3. Continued participation in the government initiatives which provides the bank with cheaper cost of funds and yield and average spreads of around 3.5-4.5%
The bank is not intending to list any of its subsidiaries
HDBK was one of the few banks in Egypt to achieve the SMEs target, which was set by the CBE to reach 20% of total loan portfolio by 2019.
HDBK is number two or three in market share in the 3%, 5% and 8% mortgage finance initiative by CBE despite having a smaller number of branches compared to the National Bank of Egypt.
Asset quality and provisions
The NPLs spiked starting 2019/2020 to reach 10% in 2021 from a historical average of 5%, for two reasons:
1) HDBK was one of the few banks that reached the 20% SME’s financing initiative, which are relatively lower in quality compared to retail and corporate loans.
2) In 2Q2021 the CBE requested banks to classify certain industries as stage three because of the huge risks they hold. However, it doesn’t require banks to take provisions against them so that pressured coverage ratios.
Real estate business
RE contribution to bottom line is currently at 7% versus a 30-40% 5-6 years ago. Core banking operations are representing the majority of the banks revenues.
100% owned RE under the commercial bank will be developed and monetized very soon and the bank is not allowed to buy again any land as per the current commercial banking license. It will then become 100% commercial bank with an investment portfolio of 17 subsidiaries and sister companies that the bank is a shareholder in with ownership % ranging between 16% up to 92%.
HDBK won’t have an issue with its 100% owned RE, since:
1) Offerings are more twisted towards the C and D classes, where demand is high and so is demand for financing.
2) Most of the banks’ land or available units are built at historical cost, almost 90% progress on site.
Regarding the subsidiaries and sister companies like Hyde Park and City Edge (which has ETAPA Residence and ETAPA Square), and HDREC (which has Moonwalk project behind AUC) might suffer but they are separate legal entities
Capital and Dividends
HDBK is seeking the approval of the CBE to increase capital to EGP5 billion, financed from internal sources of the bank. Already the board approved on 30 Dec 2021 increasing the bank’s paid in capital by EGP 3.795 billion financed from general reserves (86.5%) and retained earnings (13.5%), pending the approval of the CBE.
HDBK plans to distribute cash dividends in addition to the capital increase which will be financed through bonus shares.
2022 targets and demerger
The board has not yet approved 2022 budget which should happen by next week. However, management is very optimistic on 2022 especially the first half of the year before global slowdown in markets hit Egypt.
A preliminary guidance for bottom line growth in 2022 is 10% on standalone basis, and balance sheet growth north of 10%.
2022 target NPL ratio of 7% or less.
2021 will end the year above communicated budget.
The demerger request is with the CBE awaiting approval.