Operating profit growth couldn’t translate into bottom line due to higher provisioning: BRAC Bank reported consolidated NPAT of BDT1,306 mn (-5% yoy) against our forecasts of BDT1,294 mn (0.9% higher than expectation) in Q1 2019. The result is line with our expectation. On a solo basis, BRAC's PBTP (profit before provision) grew by 43% YoY, but due to higher provision NPAT grew by 2% to BDT 1,247mn in the quarter. Solo ROE was 16.8% against our full year expected ROE of 17.7%.
Reiterate Buy: Our 2019f TP of 82.6 (adjusted to account for the 15% bonus shares) is based on 16.3x P/E and 2.5x P/B on 2019f. It implies an ETR of 34%, suggesting the stock is trading cheap compared to its fundamentals. We favour BRAC in Bangladesh on account of its profitable operations denoted by high ROE, balance sheet strength, lower funding cost advantage and mobile money prospects (bKash).
NII grew 14% yoy driven by a 30 basis points improvement in spread. Average lending yield improved by 100 basis points compared to a 70 basis points increase in deposit costs in Q1 2019. We also expect 30 basis points increase in spread for 2019 full year.
Operating income grew by 21%, higher than expected: Non-interest income grew by 31.5% driven by growth in bKash commission, while total operating income grew 21.4% yoy, (10.4% above forecast). Operating expenses were up 20.0% yoy (10% above forecast), reflecting the aggressive promotional activities of bKash undertaken during the year. It is to be noted, solo banks CIR improved to 50% in Q1 2019 from 57% of Q1 2018.
Cost of risk returned to normalized level: Cost of risk stood at 1.2% (annualized) against our annual expectation of 70 basis points. We expect cost of risk will be lower in the coming quarters.
Loan growth in line and deposit growth slightly lower than expectation: Loans and deposits grew 19.1% YoY and 16.9% YoY respectively against our expectation of 19% YoY for both.
bKash reported 92.6% YoY lower profit due to higher opex and promotional activities: 30% YoY increase in opex and 114% increase in marketing and promotional expenditure resulted in a significant dent in profit in Q1 2019. This is in line with the new strategy of aggressive market share acquisition after Ant Financial's inclusion in the bKash board. We expect this will result in long-term value at the expense of short-term profit.