Margins continue to decline on higher cost of funds; other income provides support; lending grows at a slower pace
HDBK 2Q19 standalone bottom line recorded EGP460 mn (-25% q/q, and +21% y/y,). Sequential decline was due to an exceptionally high base triggered by provisions reversal and dividends income, coupled with lower operating income in 2Q19 on weaker margins as well as higher booked provisions and a surge in OPEX. Other income and healthy growth in fees and commission were the only positive signs this quarter, along with balance sheet expansion. The bank continued to achieve a high annualized ROAE in 2Q19 of 36%.
- NIM continued to decline from 7.7% in the previous quarter to 6.9%, which is still solid. The decline in margins was mainly attributed to higher cost of funds as CASA deposits fell to 55% to total deposits, from a high of 60% in the previous quarter.
- Treasury exposure to total assets continued to decrease by 90 bps reaching 27% of total assets as of June end 2019 down from 28% as of March end 2019 and 32% as of December end 2018, 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.
- Fees and commissions witnessed healthy growth of 23% q/q, along with other operating income of EGP110 (+487 q/q, +602% y/y) compensated for the sequential decline witnessed in net-interest income of -8% q/q.
- Booked provisions came in at EGP83 mn after provisions reversal of EGP175 mn in the previous quarter. In line with an increase in non-performing loans to 8.9% (+184 bps q/q), which led to a decrease in provisions coverage to stand at 119% down from 147% in the previous quarter.
- Efficiency deteriorated where cost to income ratio surged to 46% from 31% in the previous quarter.
- Effective tax rate came in very low at 15% versus 21% in 1Q19.
- Lending portfolio continued expanding at a slower pace, growing in 2Q19 by 2.8% q/q, bringing YTD expansion to 6.1%. While funding expanded by 2% q/q bringing YTD growth to 9%.
- Capital adequacy ratio strengthened on a sequential basis, recording 17.3%, comfortably above the 2019 minimum requirement of 12.5%.
Trading at cheap multiples; penalised by being a blended play
We continue to have an Overweight recommendation on HDBK at a 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 de-merger continue to be unclear, and seem farfetched at this point.
HDBK is currently trading at P/E19 of 3.4x, and P/B19 of 0.9x versus Egypt peer group average of 4.5x 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.