Earnings Report /
Egypt

Housing and Development Bank: Bottom line declines despite improving margins and controlled costs

    Al Ahly Pharos Securities Brokerage
    14 November 2019
    Drop in non-interest income wipes out margin improvement; lending surges


    HDBK Q3 19 standalone bottom line was EGP448mn (-3% q/q, and +12% y/y). Profits declined sequentially on lower non-interest income, absence of provisions reversal, and higher effective tax rate despite margin improvement and controlled costs. However, 9M 19 net profit reached EGP1.5bn (+9% y/y) leaving the bank with only EGP163 million to achieve in Q4 19 profits to reach our estimates for 2019 full year of EGP1.7bn ( +8% y/y), which the bank will probably surpass. 

    Key highlights:

    • NIM bounced back to 7.9% versus 6.9% in the previous quarter, on better control of interest expense which declined by 16% q/q.
    • Treasury exposure to total assets continued to decrease by 5.8% reaching 22% of total assets as of September-end 2019 down from 27% as of June-end 2019. 
    • The increase witnessed in net interest income of 13% q/q and investment income of 21% q/q was completely wiped out by the decline in other operating income(-87% q/q), which was exceptionally high in the previous quarter. Filtering into a flat operating revenues q/q. 
    • An increase in non-performing loans to 9.3% (+40 bps q/q) coupled with sequentially lower COR of 1.4% versus 2.0% in 2Q19, led to a decrease in provisions coverage to stand at 107% down from 119% in the previous quarter.
    • Efficiency improved where cost to income ratio dropped to 42% from 46% in the previous quarter.
    • Effective tax rate bounced back to 20% versus 15% in 2Q19.
    • Lending portfolio continued expanding, surging in 3Q19 by 10.6% q/q, bringing YTD expansion to 17.2%, while funding expanded by 4.3% q/q bringing YTD growth to 14%, resulting in a higher loan-to-deposit ratio of 47% up from 45% as of June-end 2019.
    • Capital adequacy ratio strengthened, recording 20.7%, 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 penalised 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 far-fetched at this point. HDBK is currently trading at P/E19 of 3.0x, and P/B19 of 0.8x versus Egypt peer group average of 4.6x 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.