Successfully reported this slideshow.

Team Finomenal || CFA Institute Research Challenge 2018 Bangladesh Finale || Brac Bank

2

Share

Loading in …3
×
1 of 41
1 of 41

Team Finomenal || CFA Institute Research Challenge 2018 Bangladesh Finale || Brac Bank

2

Share

This presentation was created by Team Finomenal from University of Dhaka (consisting of Kausar Ahmed Pranto, Arif Abdullah, Md. Abdul Mukit, Taj-E-Nur, Fahmid Chowdhury) for the grand finale of the CFA Institute Research Challenge 2018 Bangladesh. First, we prepared a equity note with a buy recommendation and this presentation was created by us as a sell side analyst.

We issued a buy recommendation on Brac Bank with an upside potential of 11.03%.

Disclaimer:
This presentation is created solely for the purpose of participating in the CFA Institute Research Challenge 2018 Bangladesh Round. We analyzed the industry and company for that purpose only. We won’t be held liable for any investment decision made based on the recommendation in this presentation.

This presentation was created by Team Finomenal from University of Dhaka (consisting of Kausar Ahmed Pranto, Arif Abdullah, Md. Abdul Mukit, Taj-E-Nur, Fahmid Chowdhury) for the grand finale of the CFA Institute Research Challenge 2018 Bangladesh. First, we prepared a equity note with a buy recommendation and this presentation was created by us as a sell side analyst.

We issued a buy recommendation on Brac Bank with an upside potential of 11.03%.

Disclaimer:
This presentation is created solely for the purpose of participating in the CFA Institute Research Challenge 2018 Bangladesh Round. We analyzed the industry and company for that purpose only. We won’t be held liable for any investment decision made based on the recommendation in this presentation.

More Related Content

Related Books

Free with a 14 day trial from Scribd

See all

Related Audiobooks

Free with a 14 day trial from Scribd

See all

Team Finomenal || CFA Institute Research Challenge 2018 Bangladesh Finale || Brac Bank

  1. 1. ` December 08, 2018 BUYRECOMMENDATION
  2. 2. Existing Deposit & Loan Portfolio of BRAC Bank 20% 32% 48% SME Corporate Retail 41% 39% 20% SME Corporate Retail DEPOSIT PORTFOLIO (2017) LOAN PORTFOLIO (2017) Retail F O C U S Corporate Corporate F O C U S SME Source: Annual Report, 2017
  3. 3. SNAPSHOT OF FUTURE In Mid-2018 Inaugurated Agent Banking Service 2018 Launching Agent Banking App for agents & clients by January & April respectively 2019 2019 2023 Focusing on agent baking services aiming to reach 500 agents Spreading Geographically Across the Country Increasing SME Loan Portfolio to 50% Targeting 5000 Agents in Agent Banking Corporate Segment restructuring Source: Earning Disclosure
  4. 4. 35 50 65 80 95 BDT 69.40 Closing Price 18th November, 2018 BUY RECOMMENDATION 11.03% UPSIDE BDT 76.94 Target Price Outlier in The Industry Significant Balance Sheet Growth Strong Operating Performance Outstanding Growth Potential in bKash
  5. 5. INVESTMENT THESIS Outlier in The Industry Significant Balance Sheet Growth Strong Operating Performance Outstanding Growth Potential in bKash 1 2 3 4
  6. 6. Increase in Deposit Growth even in distressed situation Deposit Growth 19.53% 21.32% 12.12% 16.22% 11.70% 13.59% 2017 2018H1 Outlier in The Industry 7Outstanding Growth Potential in bKash Strong Operating Performance Significance Balance Sheet Growth BRAC Bank Average of Peers Industry Average 1.67xGrowth of Industry Average In 2017 1.57xGrowth of Industry Average In 2018 Still BRAC Bank maintains 25% to 26% NATIONAL SAVINGS CERTIFICATE Savings flow to NSC creates pressure on bank deposit growth SAVINGS Source: Earning Disclosure, Peer’s Annual Reports, Bangladesh Bank Financial Stability
  7. 7. BRAC Bank Outperforms Industry & Peers in Asset Quality 6.49% 5.90% 3.56% 8.90% 8.80% 9.30% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 2013 2014 2015 2016 2017 BRAC Bank Indsutry NPL: BRAC Bank vs. Industry 3.56% 5.23% 9.30% 2017 NPL in 2017 BRAC Bank Average of Peers Industry Average R ATION A LES: • CREDIT POLICY • RECOVERY SYSTEM • CORPORATE GOVERNANCE Outlier in The Industry 8Outstanding Growth Potential in bKash Strong Operating Performance Significance Balance Sheet Growth Source: BRAC Bank Annual Report, Peer’s Annual Reports, Bangladesh Bank Financial Stability
  8. 8. 21.30% 17.56% 13.81% 12.83% 10.40% 9.30% 2017 2018H1 Optimum Loan Portfolio Mix Ensures Superior Profitability 1.77% 1.53% 1.04% 0.89% 0.70% 0.60% 2017 2018H1 ROE ROA NIM 6.65% 6.89% 3.65% 4.09% 2.00% 3.2… 2017 2018H1 Outlier in The Industry 9Outstanding Growth Potential in bKash Strong Operating Performance Significance Balance Sheet Growth BRAC Bank Average of Peers Industry Average PEER Companies Source: BRAC Bank Annual Report, Peer’s Annual Reports, Bangladesh Bank Financial Stability
  9. 9. THE OUTLIER BRAC Bank is the Outlier in the Industry Outlier in The Industry 10Outstanding Growth Potential in bKash Strong Operating Performance Significance Balance Sheet Growth NON PERFORMING LOAN RETURNONEQUITY 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0%5%10%15%20%25% PEER INDUSTRY Source: Team Assessment
  10. 10. Outlier in The Industry Significant Balance Sheet Growth Strong Operating Performance Outstanding Growth Potential in bKash Strong Deposit Growth Low NPL High Profitability 1 2 3 4 INVESTMENT THESIS
  11. 11. Positive GDP Growth, Financial Inclusion & Remittance will drive Savings 25.00% 26.00% 27.00% 28.00% 29.00% 30.00% 31.00% 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Gross National Savings (As a % Of GDP) 2.6 1.7 -1.7 1.3 0.2 -0.7 0.1 2.1 2.6 2.4 3.1 3.6 2 2.4 2.8 4.1 6 3.4 2.9 2.8 3.5 -3 -2 -1 0 1 2 3 4 5 6 7 Bahrain UAE Kuwait Qatar Oman Saudi Arabia GCC 2017 2018 2019 GCC’s Economic Growth (GDP) outlook Real GDP Growth Expectation of BD (2018-19E) ADB 7.5% 7th 5 Year Plan 7.8% 59%of the people are FINANCIALLY EXCLUDED Outlier in The Industry 12Outstanding Growth Potential in bKash Strong Operating Performance Significant Balance Sheet Growth Source: Oxford Economics, BBS
  12. 12. SME, Retail & Agent Banking will drive both deposit & CASA Ratio 40.80% 41.80% 42.80% 43.80% 44.80% 45.80% 2018 F 2019 F 2020 F 2021 F 2022 F 2023 F CASA Ratio Projection 500 Agents 2019E 5000 Agents 2023E AGENT BANKING 300 SME Office Agent banking transfer 20mn BDT Portfolio each Real time digitalized solution Agent’s APP Customer’s APP 28% SME 36% Retail -4% Corporate Deposit Growth in 2016 Q3 - 18 Q3 50.86% In Agent Banking 40.15% In Overall Banking Industry 10.71% Higher in Agent Banking Comparison of CASA Ratio Lender Banker SME Division Rationale Outlier in The Industry 13Outstanding Growth Potential in bKash Strong Operating Performance Significant Balance Sheet Growth Source: Earning Disclosure, Bangladesh Bank
  13. 13. SME will be at the core of Loan Portfolio 20.00% 30.00% 50.00% Retail Loan Corporate Loan SME Loan Loan Portfolio Mix (2023E) 31 76 87 2015 2016 2017 New Corporate Customers Geographic Expansion Cross-selling Loan Products More focus on trade transaction & Non- funded income Customer centric Product Relationship Based Banking Approach Small ticket corporate clients SME 1 2 3 Retail Corporate Outlier in The Industry 14Outstanding Growth Potential in bKash Strong Operating Performance Significant Balance Sheet Growth Source: Earning Disclosure, Team Assessment
  14. 14. Outlier in The Industry Significant Balance Sheet Growth Strong Operating Performance Outstanding Growth Potential in bKash Positive Macro Outlook CASA Ratio Growth Outstanding Loan portfolio mix 1 2 3 4 INVESTMENT THESIS
  15. 15. Growing CASA ratio & SME-Retail Loan will increase NII 13,130 15,919 18,988 22,554 27,161 32,554 - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 2018E 2019E 2020E 2021E 2022E 2023E BDTinMillion Projected NII 2019E 2020E 2021E 2022E 2023E Spread 6.24% 6.44% 6.46% 6.61% 6.72% NII Growth 21.24% 19.28% 18.78% 20.43% 19.86% Spread & NII Growth Rate 19.91% CAGRCost of Fund CASA Ratio Cost of fund is approximately 400 basis points lower in CASA than the fixed deposits Interest Rate Income SME & Retail Loan Interest yield can be 400-500 basis point higher in SME loans Net Interest Income Drivers: Outlier in The Industry 16Outstanding Growth Potential in bKash Strong Operating Performance Significant Balance Sheet Growth Source: Team Assessment
  16. 16. Transaction & Trade Based Customer will increase Non-funded Income 3,294 3,561 3,908 4,317 4,795 2019 F 2020 F 2021 F 2022 F 2023 F BDTinMillion Projected Commission, Exchanges & Brokerage 13.82% CAGR Vanilla Lending Strategy Transaction & Trade Based Customer Export-Import Growth Credit Card Growth 518 725 915 1200 261 436 586 658 779 1161 1501 1858 0 200 400 600 800 1000 1200 1400 1600 1800 2000 2014 2015 2016 2017 USDMillion Import Export Total Trade Business of BRAC Bank 25% 347 mn 32% 265 mn 15% 81 mn Growth Rate Outlier in The Industry 17Outstanding Growth Potential in bKash Strong Operating Performance Significant Balance Sheet Growth Source: Earning Disclosure, Team Assessment
  17. 17. Digitalization & decrease in salaries growth will reduce Cost to Income Ratio Projected Cost to Income Ratio 50.74% 49.74% 48.45% 46.64% 45.01% 42.00% 43.00% 44.00% 45.00% 46.00% 47.00% 48.00% 49.00% 50.00% 51.00% 52.00% 2019E 2020E 2021E 2022E 2023E 11.85% 31.22% 13.40% 11.24% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 2016 2017 2018 2019 E 2020 E 2021 E 2022 E 2023 E Salaries Growth Rate Will reduced to 45% from 50% Decrease in Salaries Growth rate DIGITALI ZATION INTRODUCING APPS Core Banking App Agent Banking App System Automation Loan Origination Cash & Document Management Universal Banking System Outlier in The Industry 18Outstanding Growth Potential in bKash Strong Operating Performance Significant Balance Sheet Growth Source: Team Assessment
  18. 18. 7.1% 4.8% 5.6% 4.0% 2.7% 3.2% 2.8% 2.0% 5.2% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% SME Retail Corporate 2015 2016 2017 Strong Recovery System & Lowering Large Customer Concentration will keep NPL low Expected NPL 3.5% Segment wise NPL Corporate Asset Quality – KPI for SME Relationship Officers Collection team works with the recovery team & the business team Lower large customer concentration Retail SME Recovery team & Legal team working together 15 years of experience Outlier in The Industry 19Outstanding Growth Potential in bKash Strong Operating Performance Significant Balance Sheet Growth Source: Earning Disclosure, Team Assessment
  19. 19. Outlier in The Industry Significant Balance Sheet Growth Strong Operating Performance Outstanding Growth Potential in bKash NII & Non-funded income Growth Cost to Income Ratio Decrease Net Profit Increase 1 2 3 4 INVESTMENT THESIS
  20. 20. NFIS will ensure MFS Subscriber Growth 59%Of the people are FINANCIALLY EXCLUDED 17%Have Bank Accounts MALE 52% Have MFS Accounts FEMALE 7% Have Bank Accounts 27%Have MFS Accounts Outlier in The Industry 21Outstanding Growth Potential in bKash Strong Operating Performance Significant Balance Sheet Growth NATIONAL FINANCIAL INCLUSION STRATEGY High MFS Penetration Source: NFIS
  21. 21. Need for digitalization & Service Improvement in MFS 0 10 20 30 40 50 60 70 80 0 1 2 3 4 5 6 7 8 2014 2015 2016 2017 2018 (sept.) No. of Daily Average transaction (mn) No. of registered clients (mn) Registered Clients Total No. of Transactions 66.7 Millions 6.87 Millions MFS Growth 0 50 100 150 200 2014 2015 2016 2017 2018 Internet (mn) Mobile (mn) Mobile Phone & Internet Subscriber Growth Outlier in The Industry 22Outstanding Growth Potential in bKash Strong Operating Performance Significant Balance Sheet Growth Mobile Phone Subscriber Internet Subscriber 155 Millions 91 Millions 106 Age: 15 – 64 Years mn people Source: BTRC, Bangladesh Bank
  22. 22. High Market Share, ALIPAY Partnership & Technical capabilities will drive growth Outlier in The Industry 23Outstanding Growth Potential in bKash Strong Operating Performance Significant Balance Sheet Growth Strategic Partnership Large Retail Network Market Share Capturing Value from future MFS growth Best Financial Service Technology Hidden Value from Additional New Services 80% 16% 4% bKash Rocket Others 1 2 3500+ Outlets 350+ Brands Competitive advantage will help maintain footprint in payment system Source: Bangladesh Bank, bKash, Team Assessment
  23. 23. Outlier in The Industry Significant Balance Sheet Growth Strong Operating Performance Outstanding Growth Potential in bKash MFS Growth ALIPAY Partnership Future Hidden Value 1 2 3 4 INVESTMENT THESIS
  24. 24. BRAC Bank has a high Upside Potential RELATIVE VALUATION 10% SUM OF PARTS VALUATION 90% BDT 76.94 BUY Blended Target Price 11.03% Upside Potential Source: Team Assessment
  25. 25. BRAC Bank is the biggest value driver with Intrinsic Value of 63.11 Risk Free Rate (20 Year T-Bond) 7.94% Liquidity Risk 1.00% Business Risk 2.00% Technological Risk 1.00% Regulatory & Political Risk 2.00% COST OF EQUITY 13.94% Cost of Equity (Build up Method) Bangladesh: 5% till 2050 Developed Country: 2-3% Average GDP Growth Rate 13.94% Cost of Equity BDT 63.11 Value of BRAC Bank (Solo) 3% Terminal Growth Cost of equity derived from CAPM is lower than that of 10 Year T-Bond RESIDUAL INCOME VALUATION Source: Team Assessment
  26. 26. bKash bearing a value of BDT 13.09 per share Peer Multiples 14.24% Cost of Equity Residual Income 14.55 Relative Valuation 50% 50% 11.63 13.09 Determination of Value 4.00% Terminal Growth RESIDUAL INCOME Relative Valuation Source: Team Assessment
  27. 27. Profitability of BESL and BRAC Saajan reflected in their valuation BDT 2.65 Free Cash Flow to Equity BDT 0.38 Book Value to Equity BDT 1.78 Free Cash Flow to Equity Source: Team Assessment
  28. 28. Sum of Parts Valuation BDT 63.11 BDT 13.09 BDT 2.64 BDT 1.78BDT 0.38 BDT 81.00 INTRINSIC VALUE Source: Team Assessment
  29. 29. Relative Valuation 1.03 1.15 1.35 1.75 1.13 P/BV Multiple 0.15 0.15 0.40 0.15 0.15 WEIGHT Weighted Average P/BV Multiple BRAC Bank BV 31.1 BDT 40.40 RELATIVE PRICE 1.299 Source: Peer’ s Annual Reports, DSE Team Assessment
  30. 30. Impressive Growth Metrics & Different Business Model Results in High Premium 1.13 1.75 1.15 1.35 1.03 2.79 0 0.5 1 1.5 2 2.5 3 City Bank MTB EBL DBBL Bank Asia BRAC Bank 18.35% 13.20% 11.41% 15.90% 10.21% 21.30% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% City Bank MTB EBL DBBL Bank Asia BRAC Bank -1.89% 20.39% 3.14% -9.84% -8.99% 53.28% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% City Bank MTB EBL DBBL Bank Asia BRAC Bank Premium Behavior on P/BV multiple ROE Net Profit Growth CAGR (Last 2 Years) P/BV Multiple Cannot Capture bKash’s Value Source: Peer’ s Annual Reports, DSE Team Assessment
  31. 31. BRAC Bank has a high Upside Potential RELATIVE VALUATION 10% SUM OF PARTS VALUATION 90% BDT 76.94 BUY Blended Target Price 11.03% Upside Potential Source: Team Assessment
  32. 32. Less Downside Risk Related to Changes in Cost of Equity & Terminal Growth Rate 12.94% 13.44% 13.94% 14.44% 14.94% 15.44% 4.00% 88.27 83.48 79.14 75.19 71.57 68.24 3.50% 86.60 82.09 77.99 74.23 70.78 67.58 3.00% 85.10 80.84 76.94 73.36 70.04 66.97 2.50% 83.75 79.70 75.99 72.55 69.37 66.41 2.00% 82.52 78.67 75.11 71.82 68.75 65.89 1.50% 81.40 77.72 74.31 71.14 68.18 65.40 Cost of Equity Terminal Growth Rate SENSITIVITY ANALYSIS Source: Team Assessment
  33. 33. Favorable Growth Variables & Efficiency can further increase the value of BRAC Bank BDT 92.49 [+ 20.21%] BDT 66.97 [- 12.96%] BDT 76.94 BLUE SKY GREY SKY growing at a 1.5% rate per yearCASA Ratio consisting 55% of the portfolioSME Business growing at 7% per yearSalary Per Employee is 12.94%Cost of Equity growing at a 0.5% rate per yearCASA Ratio consisting 45% of the portfolioSME Business growing at 9% per yearSalary Per Employee is 14.94%Cost of Equity TARGET PRICE Source: Team Assessment
  34. 34. Major Risks For BRAC Bank PROBABILITY IMPACT Low Moderate High LowModerateHigh Losing Key Staffs Credit Risk: Regulatory Risk Exchange Rate Risk Liquidity Risk High NPL rate in SME Loan Increasing Competition In MFS Political Risk Failure to execute future growth plans Increase in Corporate Tax Regulatory Risk2 Increasing Competition In MFS 3 High NPL rate in SME Loan1 Source: Team Assessment
  35. 35. High NPL may affect Asset Size & Profitability RISK MITIGATION Rate of NPL in SME Loan For Commercial Banks40% up to For Specialized Banks35% up to 15 Years of Experience Strong Loan Disbursement & Recovery System High NPL in SME Loan Portfolio Source: Financial Express
  36. 36. Regulatory risk may affect the profitability RISK MITIGATION Pressure to cut down the SPREAD to Lack of enforceable Mechanism Post election, pressure on lending will decrease Regulatory Risk LESS THAN 5% Source: Daily Star
  37. 37. Increasing competition may hinder growth RISK MITIGATION 18 MFSs increase competition Strong Network Effect Technological superiority due to ALIPAY partnership Increasing Competition in MFS Growing Marketing Expenses
  38. 38. 35 50 65 80 95 BDT 69.40 Closing Price 18th November, 2018 BUY RECOMMENDATION 11.03% UPSIDE BDT 76.94 Target Price Outlier in The Industry Significant Balance Sheet Growth Strong Operating Performance Outstanding Growth Potential in bKash
  39. 39. DISCLAIMER This presentation is created solely for the purpose of participating in the CFA Institute Research Challenge 2018 Bangladesh Round. We analyzed the industry and company for that purpose only. We won’t be held liable for any investment decision made based on the recommendation in this presentation.
  40. 40. ` December 08, 2018 BUYRECOMMENDATION

×