Equity Analysis /
Egypt

Housing and Development Bank: 1Q2019 – Strong bottom line despite pressured margins; lending grows slowly

    Non-interest income, lower provisions, and opex support earnings amidst weaker margins 

    HDBK 1Q19 standalone bottom line recorded a solid EGP612 mn (+161% q/q, and almost stable y/y, due to an exceptionally high base). Results came in strong despite a weaker topline where margins came under pressure on rate cuts. Bottom line support came from solid non-interest income, lower opex and provision reversals. Gross loans increased by 3.2% q/q, lower than the 2018 sequential average of 4%, while funding grew by 7% q/q mainly on sustainable non-NUCA deposits.

    Key takeaways

    • NIM declined from 8.3% in the previous quarter to 7.7%, which is still solid. The decline in margins was mainly attributed to lower interest income from inter-bank deposits amid rate cuts, coupled with a faster increase in interest expense from customer deposits.
    • Treasury allocation declined reaching 28% of total assets as of Mar-19 down from 32% as of Dec-18, in line with expectations that banks will offload treasury investments, post-the application of the amended tax law that received the president's signature in February 2019. 
    • Strong Investment income coming from subsidiaries and affiliates provided the main support to operating income compensating for the sequential decline witnessed in net-interest income and net fees and commissions. Non-interest income contribution to operating income rose to 30% from 21% a quarter earlier.
    • Reversal in credit risk provisions despite an increase in non-performing loans to 7.1% (+150 bps q/q), led to a decrease in provisions coverage to stand at 147% down from 232% in the previous quarter.
    • Improved efficiency where cost to income ratio declined to 31% from 47% in the previous quarter.
    • Lower effective tax rate in 1Q19, recording 21% versus 28% in 4Q19. 
    • Lending portfolio continued expanding at a slow pace, growing in 1Q19 by 3.2% q/q. While funding expanded by 7% q/q mainly on the back of sustainable customer deposits. CASA deposits’ contribution to total deposits increased from 59% in of Dec-18 to 60% in of Mar-19. 
    • Capital adequacy ratio waned on a sequential basis, recording 17.2%, but comfortably above the 2019 minimum requirement of 12.5%.

    Trading at cheap multiples; Penalized by being a blended play

    We continue to have an Overweight recommendation on HDBK with an unchanged FV of EGP70.48 (45% commercial banking activities, 39% real estate, and 16% 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 demerger continue to be unclear, and seem farfetched at this point. 

    HDBK is currently trading at P/E19 of 3.3x, and P/B19 of 1.0x versus Egypt peer group average of 4.8x P/E19 and 0.9x P/B19. The stock awaits two rounds of bonus shares (1:10 and 1:5), which could support share price performance.