Earnings Report /

BRAC Bank: Well-positioned to overcome pandemic and rate cap challenge; reiterate BUY

  • BRAC declared BDT 1tk and 5% stock dividend for the year 2020 with NPAT of BDT 4.4bn (c11% down from 2019)

  • Pandemic has been a blessing for bKash as both transactions and merchant businesses increased substantially

  • We reiterate our BUY rating with unchanged TP of BDT 66. At current market price it offers c59% return potential

Shopnil Paul
Shopnil Paul

Research Associate

IDLC Securities
23 April 2021
Published byIDLC Securities

BRAC Bank, our only recommended bank in Bangladesh, reported BDT 4.4bn NPAT in 2020 against BDT 4.9bn of 2019 implying c11% decline (excluding minority interest). However, the decline in earnings is attributable to mainly two factors – i) squeezed interest spread stemming from the lending rate cap and ii) higher provision in anticipation of bad loans surge due to the ongoing pandemic. At BDT 42.6, the shares trade at 1.1x PB. If we adjust our bKash valuation (USD 942mn) from the current market price, BRAC is trading at 0.4x of its banking business NAV. Our unchanged target price of BDT 66 represents a c59% expected total return (ETR). Risk to our valuation includes- i. continuation of pandemic lockdown for a prolonged period, ii. Continuation of SME loan rate cap for a long period (we assumed no rate cap for SME from 2022), iii. bKash failure to make P2P or P2B business big.

Key Positives

  • BRAC capitalized the money market liquidity in the best way possible to change its deposit mix. As a result, the share of CASA improved significantly. CASA balances now account for 55% of the total deposit while it was 43% in 2019. The increasing share of low-cost deposits in the deposit mix shows promises of improving the spread further from the existing.   

  • BRAC took a specific provision of BDT c3,600mn in 2020 in anticipation of asset quality deterioration due to the pandemic. The recorded specific provision is about 4.6% of the moratorium volume. It is more than double of 2019 total loan provision. It is to be noted that the central bank has relaxed the loan classification policy, hence BRAC could have kept no specific provision. However, the total provision charge was BDT 1.8bn due to provision release from stock market investment and general provision. The cost of credit was 1.12% in 2020 in comparison with 0.77% of the previous 2 years average.

  • BRAC substantially brought down the volume of loans that are availing moratorium facilities. At the end of December 2020, 29% of the BRAC bank’s loans were under moratorium facilities in comparison of 53% in June 2020.  

  • SME business gradually recovering from rate cap shock. It's cost to income ratio improved to 80% in Dec 2020 compared to 170% of Apr 2020. We expect further improvement in 2021.

  • Pandemic has been a blessing for bKash in almost every aspect. bKash’s net revenue increased by c41% in Q4 2020 (highest in last nine quarters). Besides, Its merchant numbers have increased to 200,000, active customers stood at 22mn with 75% market share at the end of Dec 2020.

  • The revenue composition of bKash has been changing in the right direction. Revenue contribution from cashout charge was c95% in 2019 which decreased to c75% in 2020. Thus, the contribution of merchant business, P2P and others improved significantly. As a result of that, gross margin (exc interest income) improved to 14.6% in 2020 compared to 11.0% of 2019. However, it is still low due to different cashback campaigns.

  • Contribution from stock market subsidiaries increased substantially. Two stock market subsidiaries added BDT 160mn in 2020 which was negative BDT 430mn in 2019. As a result, consolidated NPAT degrowth was 11% compared to banking business degrowth of 25% in 2020.

 Key Concerns

  • The interest rate spread of the banking business dropped to 4.6% in 2020 from 6.0% in 2019. The decline is attributable mainly to the 9% lending rate cap which brought the loan yield to 8.9% in 2020 from 11.3% in 2019.

  • Though BRAC decreased the moratorium loan volume substantially, it is still high. The impact of these moratorium loans is still uncertain.

  • Country’s private sector credit growth is subdued. Hence, BRAC will not have a high loan growth in the next year as well.

  • bKash’s revenue growth is yet to be converted into NPAT. However, bKash is still in the growing stage so this kind of investment is necessary for the next phase of transformation.

BRAC numbers in charts

bKash number in charts