Taxes surge sequentially to wipe out the positive impact of margin strength and provision reversal; lending surges
HDBK 4Q19 standalone bottom line recorded EGP431 million (-4% q/q, and +86% y/y). Profits declined sequentially on higher effective tax rate, despite higher margins, higher non-interest income, and reversal of other provisions. However, FY19 net profit recorded a strong EGP1.95 billion (+20% y/y) which 10% higher than our estimates mainly on lower effective tax rate for the year which recorded 23% versus our estimates of 30%.
- NIM bounced back to 8.2% versus 7.9% in the previous quarter, on expansion of interest income which grew by 6% q/q.
- Treasury exposure to total assets surged by 9 ppts reaching 31% of total assets as of December-end 2019 up from 22% as of September-end 2019.
- Non- interest income expanded by 11% q/q, mainly supported by fees and commission income, bringing non-interest income to operating income to 23% (+20bps).
- The increase witnessed in operating revenue of 10% q/q was met by 21% increase operating expenses, resulting in operating income to inch up by only 2% q/q.
- Sizeable other provision reversal allowed the bank to book very high credit risk provisions where CoR recorded 9.4% in 4Q19, in tandem with slightly lower asset quality where non-performing loans recorded 8.7% (+65 bps q/q). Provisions coverage strengthened to 132% up from 107% in the previous quarter.
- Efficiency deteriorated where cost to income ratio dropped to 46% from 42% in the previous quarter.
- Effective tax rate surged to 36% in 4Q19 versus an average of 19% over the past 3 quarters, reflecting the increased treasury exposure that took place over the last quarter of the year.
- Lending portfolio grew in 4Q19 by 7% q/q, bringing FY19 expansion to 26%. Funding expanded by 6% q/q bringing FY19 growth to 21%, resulting in a higher loan-to-deposit ratio of 48%.
- Capital adequacy ratio strengthened, recording 20.9%, 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 EGP60.40 (53% commercial banking activities, 31% real estate, and 15% 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 far-fetched at this point.
HDBK is currently trading at P/E20 of 2.9x, and P/B20 of 0.6x versus Egypt peer group average of 4.2x P/E20 and 0.8x P/B20. The stock awaits two rounds of bonus shares (1:10 and 1:5), which could support share price performance. BoD proposed cash dividends of EGP2.50/share, which implies a dividend yield of 5.6%, in line with our estimates.