Analyst:

Md Mahirul Quddus
mmahirul.quddus@bracepl.com

BRAC EPL Flash Note BRAC Bank Limited

2019 Earnings Update Sector: Bank
May 02, 2020 DSE: BRACBANK; BLOOMBERG: BRAC:BD

BRAC Bank’s Profit Drops 10.7% in 2019

Event
BRAC bank reported a consolidated NPAT attributable to ordinary shareholders of BDT 4,951 million for
2019, which is 10.7% lower than that of 2018. Profit After Tax came at BDT 4,583 million, down by
19.2% YoY. On a solo basis, the bank reported a NPAT of BDT 5,646 million for 2019, which is 1.8%
higher than the NPAT of 2018. Slowdown in bKash’s fee income, high provision for both loans &
advances and capital market, rise in effective tax rates and huge marketing expenditure by bKash- all
contributed towards weak earnings for 2019.

Analyst Comments

• Net Interest Income (NII) saw a 13.3% YoY growth on a consolidated basis and 11.1% YoY on a
solo basis. The growth of NII was slower than the previous year because deposit growth (15.9%)
outpaced loan growth (13.5%), and spread declined from 6.1% in 2018 to 5.9% in 2019. The spread
declined by 20 basis points due to high fixed deposit rate in 2019 and to the bank’s de-risking
initiative to diversify the bank’s deposits away from riskier banks and NBFIs which were offering high
yields. bKash’s income from Trust Cum Settlement Account, which saw an increase of 30% YoY, is
included in the consolidated interest income which pulled the consolidated NII higher.
• The SME & Retail segments both showed a YOY growth of 12% in loan disbursement. Small
businesses contributed 60% of SME asset growth. According to the management, the primary focus
in loans and advances will be on SME and Retail. In the corporate segment, BRAC bank is being
cautious and focusing on trade generating corporate customers. The corporate term loan now
contributes towards only 25% of the total corporate loan portfolio and outstanding large loan
concentration has been reduced to 20%.
• CASA improved from 47.1% in 2018 to 49.2% in 2019. BRAC Bank has shifted from large corporate
and commercial deposit to retail deposits which now accounts for 54% of total customer deposit.
Retail customer deposit grew by 20% YoY, likely boosted by cross-sales by employee banking and
credit card segments (credit card portfolio grew by 37.0% YoY). Moreover, BRAC Bank continues to
expand its agent banking network, which has crossed 300 outlets covering 61 districts out of 64.
• Fee-based income/non-interest income showed a 2.9% YoY decline on a consolidated basis and
12.9% growth YoY on a solo basis. Investment Income increased by 9.5% YoY. BRAC bank
increased its investments in Government securities by 70% in 2019 and the yields on government
securities have increased in 2019 compared 2018. Thus the income from govt. securities increased
by 66% YoY. However, the income from capital market investments have suffered owing to weak
capital market performances (DSEX return of –17.3% in 2019). Commission, exchange & brokerage
showed growth of 22.4% YoY on a solo basis primarily on the back of increased fees and
commission of cards. bKash’s gross profit from fee income saw a decline of 32.8% YoY which
resulted in a decline of 8.9% YoY in BRAC Banks’ commission, exchange & brokerage income on a
consolidated basis.
• bkash’s gross margin reduced to 21.9% in 2019 from 27.1% in 2018. The gross margin was 26.1%
in 9M’19 but it turned into 6.4% in Q4’19. The significant decrease of gross margin in Q4’19 could
possibly have two reasons — decrease of revenue from merchant payment or increase in agents in
distributor commission. As there wasn’t much of cashback and other promotional activities offered
by bKash in Q4’19, the most possible explanation could be a decrease in merchant payment
revenue. An increase of MNO charge and free services offered to students as long term customer
acquisition plan may have negatively affected the margin in 2019 as well.
 Analyst:

Md Mahirul Quddus
mmahirul.quddus@bracepl.com

BRAC EPL Flash Note BRAC Bank Limited

2019 Earnings Update Sector: Bank
May 02, 2020 DSE: BRACBANK; BLOOMBERG: BRAC:BD

• OPEX witnessed a 13.5% YoY growth, mostly driven by bKash as the MFS continues to heavily
invest in technology and marketing activities to promote its retail payment system. The marketing
and promotional expense of bKash has increased by 16.2%. On a solo basis, OPEX growth came at
10.6% for BRAC bank with staff cost increasing by 22% YoY. Cost to Income ratio (CIR) has
increased from 63.9% in 2018 to 67.8% in 2019 on a consolidated basis due to bKash’s high
operating expenses. On a solo basis, CIR has remained on a similar level at 53%.
• Provision charges increased by 94.2% YoY and provision as a percentage of profit before provision
increased from 8.0% in 2018 to 16.3% in 2019. Total provision charge came at BDT 1.5 billion in
2019 which included diminution in value of investments of BDT 534 million (BDT 116 million in
2018), which relates to unrealized loss from capital market investments. Provision for loans and
advances increased by 60.3% YoY which was a result of increase in NPL ratio from 3.1% in 2018 to
4.0% in 2019. The increase in NPL is mainly caused by the corporate segment where NPL ratio
increased to 6.1% in 2019 from 4.2% in 2018, prompted by few clients that the bank on-boarded
many years ago. The NPL coverage ratio decreased to 97% in 2019 from 123% in 2018.
• Effective tax increased to 38.9% in 2019 compared to 34.4% in 2018. Provision on loans is not tax
deductible expenses. BRAC Bank suffered from a high provision charge this financial year which
caused high tax expenses.

Outlook

• Due to Covid-19, most businesses in the country are not running fully; this will affect the banking
industry’s asset growth. The balance sheet size will not probably show much growth in the upcoming
quarters. However, the central bank has increased ADR and reduced CRR to soften the blow of the
pandemic.
• As the virus spreads across the country, BRAC Bank is one of the few financial institutions that are
operational at a satisfactory level (83 out of 187 branches are operative). For this reason, many
Multinational FMCGs and other businesses are opening cash management and other service
accounts with BRAC Bank to keep their operation running. This will start a long term relationship
with some outstanding clients for the bank.
• BRAC Bank has offered a large number of its SME and Retail clients a 3 month moratorium period
to help these clients get a breathing space during this tough time. 65%-70% SME customers have
taken up the offer and 41% of retail customers have taken up the offer. This will work in improving
the relationship with the bank’s clients.
• Bangladesh Bank has put a cap of 9% on lending rate on all loans except credit cards. As long as
this circular remains effective, we will see a decline in spread of BRAC Bank. BRAC bank has been
working successfully on generating CASA, and fixed deposit rates have already been reduced due
to the lending rate cap. So, the bank may be able to cushion the blow to a small extent.
• BRAC Bank’s focus on digital platform will certainly be a value generating attribute in the future. A
few of the initiatives are — SME “Bondhu” which is a digital helpline for SME, CorpNet which is a
cash management solution and a new banking app which will be launched later in 2020. These will
increase both operational efficiency and customer satisfaction and put the bank ahead of most of its
peers.
• As banking hours are limited, the MFS industry is going through a tremendous growth phase. The
salaries of RMG workers are being transferred through MFS providers. This has resulted in a lot of
new customers. Even though the lockdown may have decreased merchant payment revenue,
retention of the new customers will generate revenue for bKash in the long run.

Valuation

As BRAC EPL Stock Brokerage Limited is a subsidiary of BRAC Bank Limited, we do not publish a
target price for BRAC Bank Limited. Based on the stock price of March 25, 2020 (last trading day),
BRACBANK was trading at a P/B multiple of 0.97x and had a YTD return of - 44.1%.
 Analyst:

Md Mahirul Quddus
mmahirul.quddus@bracepl.com

BRAC EPL Flash Note BRAC Bank Limited

2019 Earnings Update Sector: Bank
May 02, 2020 DSE: BRACBANK; BLOOMBERG: BRAC:BD

Important Metrics (Consolidated)

2017 2018 2019

CIR (consolidated) 60.2% 63.9% 67.8%
Loan–Deposit spread 6.7% 6.1% 5.9%
CASA 54.7% 47.1% 49.2%
Effective Tax 33.6% 34.4% 38.9%
AD Ratio 81.8% 82.6% 82.2%
CAR 12.0% 15.7% 16.2%
LTM ROA 1.8% 1.7% 1.3%
LTM ROE 21.3% 17.9% 13.1%
Source: Financial Statements, Earnings Disclosures & BRAC EPL Research

Notable Quarterly changes of Balance Sheet Items

MM BDT Q3 2019 Q4 2019 QoQ GR
Loans & Advances 251,550 264,870 5.30%
Deposits 273,352 297,755 8.93%
Source: Financial Statements

Loans and Advances Breakdown (BRAC Bank Solo)

2017 2018 2019
SME 81,510 102,320 114,910
Growth 25.5% 12.3%
Retail 40,740 42,310 47,560
Growth 3.9% 12.4%
Corporate 80,310 93,370 101,620
Growth 16.3% 8.8%
Aggregate 202,560 238,000 264,090
Growth 17.5% 11.0%
Source: Earnings Disclosures

NPL ratio breakdown

2017 2018 2019
SME 2.9% 2.4% 2.9%
Retail 2.0% 2.3% 2.1%
Corporate 5.1% 4.2% 6.1%
Aggregate 3.6% 3.1% 4.0%
Source: Earnings Disclosures
 Analyst:

Md Mahirul Quddus
mmahirul.quddus@bracepl.com

BRAC EPL Flash Note BRAC Bank Limited

2019 Earnings Update Sector: Bank
May 02, 2020 DSE: BRACBANK; BLOOMBERG: BRAC:BD

Financial Highlights of BRAC Bank (Consolidated)

MM BDT 2017 2018 2019 YoY GR`18 YoY Gr`19
Interest Income 21,734 27,478 32,623 26.4% 18.7%
Interest paid (8,201) (11,660) (14,698) 42.2% 26.0%
Net interest income 13,533 15,817 17,925 16.9% 13.3%
Income from investments 2,915 2,791 3,057 -4.2% 9.5%
Commission, exchange and brokerage 6,882 7,227 6,582 5.0% -8.9%
Other income 371 173 255 -53.5% 48.0%
Fee based income/non-interest income 10,168 10,190 9,895 0.2% -2.9%
Total operating income 23,701 26,008 27,819 9.7% 7.0%
Operating expense (14,279) (16,614) (18,859) 16.4% 13.5%
Operating Profit 9,422 9,393 8,960 -0.3% -4.6%
Non-Operating Income/Expenses 14 2 1 -86.5% -24.9%
Profit before provision (PBP) 9,437 9,395 8,962 -0.4% -4.6%
Provision (1,152) (752) (1,461) -34.7% 94.2%
Provision as a % of PBP 12.2% 8.0% 16.3% -34.4% 103.6%
Pre-tax Profit 8,284 8,643 7,501 4.3% -13.2%
Tax provision (2,786) (2,973) (2,918) 6.7% -1.8%
Profit after tax 5,498 5,670 4,583 3.1% -19.2%
Profit attributable to Shareholders 5,193 5,546 4,951 6.8% -10.7%
EPS 4.21 4.50 4.01 6.8% -10.7%
MMBDT 2017 2018 2019 YoY GR`18 YoY Gr`19
Total assets 308,317 358,005 414,855 16.1% 15.9%
Loans & Advances 203,431 238,400 264,870 17.2% 11.1%
Deposits 216,930 259,961 297,755 19.8% 14.5%
Borrowing from banks 34,196 31,303 37,223 -8.5% 18.9%
Balance with Other banks 55,548 60,372 62,701 8.7% 3.9%
Investments 26,889 35,133 55,952 30.7% 59.3%
Shareholder's Equity 26,600 35,250 40,582 32.5% 15.1%
BVPS 21.57 28.58 32.90 32.5% 15.1%
Source: Financial Statements
 Analyst:

Md Mahirul Quddus
mmahirul.quddus@bracepl.com

BRAC EPL Flash Note BRAC Bank Limited

2019 Earnings Update Sector: Bank
May 02, 2020 DSE: BRACBANK; BLOOMBERG: BRAC:BD

Financial Highlights of bKash

MM BDT 2017 2018 2019 YoY Gr’18 YoY Gr'19
Net Revenue 15,516 19,272 21,281 24.2% 10.4%
Gross Profit 4,108 5,230 4,669 27.3% -10.7%
Operating and administrative Expense 2,331 3,236 3,965 38.8% 22.5%
Marketing and promotional expense 1,075 1,862 2,163 73.3% 16.2%
Operating Profit 703 132 (1,458) -81.2% -1203.8%
Net Finance Income 128 456 825 256.7% 81.0%
Profit before contribution to WPPF 830 588 (634) -29.2% -207.8%
Profit before tax 791 558 (634) -29.4% -213.5%
Total comprehensive income 488 204 (625) -58.1% -405.8%
MMBDT 2017 2018 2019 YoY Gr’18 YoY Gr'19
Non-current assets 1,231 1,840 2,698 49.5% 46.6%
Trust cum settlement accounts 21,986 27,690 32,653 25.9% 17.9%
Investment in fixed deposits 2,122 9,204 7,214 333.8% -21.6%
Current assets 26,655 41,056 46,607 54.0% 13.5%
Total Assets 27,886 42,896 49,305 53.8% 14.9%
Total Equity 3,080 10,709 10,084 247.7% -5.8%
Current liabilities 24,722 32,145 38,989 30.0% 21.3%
Total Liabilities 24,806 32,187 39,221 29.8% 21.9%
Total equity & liabilities 27,886 42,896 49,305 53.8% 14.9%
Source: Financial Statements of bKash

Consolidated Profit After Tax—By Entity

MM BDT 2019 2018 Growth
Subsidiary/Associate
BRAC EPL Investment Ltd. (368) (218) -69%
BRAC EPL Stock Brokerage Ltd. (85) 24 -455%
BRAC SAAJAN Exchange Ltd. 29 50 -42%
bKash Limited (625) 185 -438%
Sub-Total (1,050) 40 -2697%
BRAC Bank Ltd. 5,646 5,547 2%
Others (13) 82 -116%
Consolidated PAT 4,583 5,670 -19%
Source: Financial Statements , Earnings Disclosure
 IMPORTANT DISCLOSURES
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name appears herein certifies that the recommendations and opinions expressed in the research report
accurately reflect their personal views about any and all of the securities or issuers discussed therein that are
within the coverage universe.

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BRAC EPL Stock Brokerage Limited

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Ayaz Mahmud, CFA Head of Research ayaz.mahmud@bracepl.com 01708 805 221
Sadman Sakib Research Associate sadman.sakib@bracepl.com 01730 727 939
Md. Rafiqul Islam Research Associate mrafiqulislam@bracepl.com 01708 805 229
Md Mahirul Quddus Research Associate mmahirul@bracepl.com 01709 636 546

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