Housing & Development Bank (HDB) released its detailed financials for 1Q18: earnings increased 75% Y-o-Y to EGP611mn, coming in 62% ahead of our forecast of EGP376mn. The main driver of the strong beat was a higher-than-expected net interest income, which rose 77% Y-o-Y and fell 14% Q-o-Q from a high base in 4Q17, which was a very strong quarter for income coming from NUCA’s down payments. While not as strong as that of 4Q17, net interest income in 1Q18 also included a large amount of income linked to NUCA’s down payments, while we had estimated normalised net interest income. Other drivers of the earnings beat were investment and trading and operating expenses, down 21% Q-o-Q (+11% Y-o-Y).
 
Positives: i) Net interest income; ii) costs; iii) loan growth; iv) credit quality
Negatives: i) Deposits; (ii) fee income
 
Key highlights:
      Pick-up in loan growth: Customer loans increased 5% Q-o-Q and 20% Y-o-Y. Loan growth rates on a Y-o-Y basis are higher for HDB than for the sector as HDB was not affected by repayments of USD loans last year; almost 100% of HDB’s loan book is in EGP. Credit growth was driven by both the retail segment (38% Y-o-Y and +4% Q-o-Q) and the corporate segment (+14% Y-o-Y and +7% Q-o-Q). Within the retail book, most growth came from mortgages under CBE’s initiative for the low- and middle-income segments. As of Mar 2018, 56% of HDB’s loan book was retail (share of retail loans to total loans was flat Q-o-Q).
 
      Q-o-Q fall in total deposits; Y-o-Y, deposits are up strongly because of NUCA’s down payments and very aggressive collection of corporate deposits: Total deposits, which in HDB’s new disclosure (since 4Q17) include NUCA’s down payments (before that, these down payments were included as part of other liabilities), which fell 10% Q-o-Q  and increased 92% Y-o-Y. “Other deposits”, which we estimate include the bulk of down payments, fell 37% Q-o-Q from a high base in 4Q17, but were strongly up Y-o-Y. Excluding down payments, customer deposits increased 3% Q-o-Q and a very strong 98% Y-o-Y, as HDB placed a strong focus on customer deposit collection in 2H17. New deposit inflows since 2H17 have been mainly coming from the corporate sector: the share of corporate deposits to total deposits has jumped to 49% in 1Q18 vs. 26% in 1Q17. These deposits have so far been sticky (corporate deposits are very short term in nature and are far more volatile than retail deposits), but have resulted in higher funding costs for HDB. As of March, down payments were 22% of total deposits vs. 32% in 1Q17 and 25% in 4Q17.
 
      Strong net interest income in 1Q18 because of a high level of NUCA down payments: Net interest in 1Q18 rose 77% Y-o-Y (-14% Q-o-Q). Around 85% of incremental net interest income on a Y-o-Y basis came from the investment book (gov’t paper and deposits at CBE) and only 15% from core lending. HDB’s net interest income is very volatile on a quarterly basis and jumps in quarters when NUCA conducts land auctions for the private sector. For individuals to take part in these auctions (where land is allocated through a sort of lottery), they need to make down payments only at HDB (which is c50% gov’t owned, of which one of the main shareholders is NUCA), and HDB can invest these down payments in short-term investments while these funds are with the bank. There is no cost for HDB on these down payments. In terms of funding costs, deposit costs have increased 100bps Y-o-Y because of HDB’s very aggressive corporate deposit collection. 
 
      Credit quality slightly improved in 1Q18: HDB’s NPL ratio improved in 1Q18, falling to 6.7%, from 6.9% last quarter (and 9.8% in 1Q17), driven by loan growth (absolute NPLs grew 2% Q-o-Q). NPL coverage rose to 225% in 1Q18. The bank booked lower provisions in 1Q18 on a Q-o-Q basis, but the cost of risk was still very high at 525 in 1Q18 vs. 2,102 in 4Q17. The balance of past due loans improved slightly Q-o-Q: as a % of gross loans, past due loans were down from 20.5% in 4Q17 to 16.9% in 1Q18.

Housing & Dev. Bank: EGP56.20 as of 16 May 2018, Rating: Neutral, TP: EGP53.60/share, MCap: USD396mn, HDBK EY/HDBK.CA