Earnings Report /

BRAC Bank: Slow banking business; bKash in line with our expectations - reiterate BUY

  • Opex growth driven by salary expenses and higher loan provisioning resulted into lower than expected earnings

  • No loan or deposit growth in this quarter; expects growth in second half when business activities resumes

  • bKash loss in line with our full year expectations; slow revenue growth due to new revenue recognition policy

Shopnil Paul
Shopnil Paul

Research Associate

IDLC Securities
20 May 2020
Published byIDLC Securities

Higher opex and loan provision resulted in NPAT fall: BRAC Bank reported consolidated NPAT of BDT 871mn (-32% YoY) in Q1 2020. This quarter’s consolidated earnings are 16% lower than our expectation. On Solo basis, BRAC NPAT was down by 14% YoY in Q1 2020 though operating income was up by 4% YoY. We estimate that in full-year BRAC consolidated NPAT will fell by 43% in 2020 driven by 41% fall in banking business earnings. 

We reiterate BUY with unchanged TP of BDT60.0Our 2020f TP of BDT 60.0 (based on 26.4x P/E and 1.8x P/B on 2020f) implies an ETR of 90.4 %, suggesting its trading cheap compared to its fundamentals. We favor BRAC in Bangladesh on account of the growth potential of its MFS wing. We believe bKash current opex is an investment for future growth as it is currently building the transaction ecosystem. We believe that bKash is adopting the right strategy and our BUY rating is based on bKsah’s upside potential. You can read the full MFS industry insight here.  Besides, we will see BRAC emerging as the most profitable bank in Bangladesh when this banking sector turmoil is over. Therefore, we reiterate our BUY rating. 

Maintained spread in Q1 but rate cap will squeeze it from next quarter: BRAC maintained its spread at 6.1% in Q1 2020. In this quarter, the average lending yield was 11.44% and the average cost of the fund was 5.34% Its banking business’s net interest income increased meagerly (2% YoY) in Q1 2020. On a consolidated basis, net interest income increased by 3% in Q1 2020. However, we will see a substantial decrease in interest income from Q2 due to the implementation of 9% rate cap. 

CIR deteriorated due to a substantial increase in salary expenses: Banking business salary increased by 22% YoY in Q1 2020 driven by fresh 800 salesperson recruitment. As a result, operating expenses increased by 15% YoY on a solo basis and 12% YoY on a consolidated basis. On the other hand, solo basis operating income increased by 4% YoY whereas on consolidated basis operating income was flat. All this resulted in a deterioration in CIR on both solo (55.8% against 50.5%) and consolidated basis (69.3% against 61.6%). 

Provision cost increased: BRAC took total provision charge of BDT 851mn in Q1 2020 compared to BDT 639mn of the same quarter previous year. Its annualized cost of risk was 130bps in 3m 2020 compared to 110bps of 3m 2019.

Both loan and deposit decreased in this quarter, we expect growth to resume in the second half: Loans and deposits both fell by 1.8% in Q1 2020. We expect further fall in Q2 2020 as well as nationwide lockdown started from March 26 and expected to continue till May 30. However, we expect the bank will get back its growth momentum in the second half of the year assuming all get back to normal. 

bKash loss in line with our expectations: bKash reported BDT 174.5mn loss in Q1 2020. We expect BDT 634.8mn loss in 2020 full year. bKash still prioritizing customer acquisition and eco-system building over short-term profitability. We could see revenue is only up by 5.2% in Q1 2020. This is due to the new reporting system. bKash is now reporting revenue net of promotional expenses. We expect to see substantial growth in the second half of the year due to the pandemic impact. People are getting used to using MFS due to fear of viruses from paper note usage. Moreover, the disbursement of salary and wages of export-oriented industry from govt stimulus package through MFS has led to increased active users of bKash. We expect faster adoption of MFS in this period. On the other hand, due to new reporting system of bKash, its marketing expenditure fell by 14% YoY in Q1 2020.