        Positives: i) Spreads; ii) Costs; iii) Deposit growth; iv) NPLs
        Negatives: i) Provisioning costs; ii) Past due loans
 
Housing & Development Bank (HDB) released its detailed financials for FY17: earnings increased 67% Y-o-Y to EGP1,076mn, coming in 4% below our forecast of EGP1,118mn. There were two key positive surprises: i) net interest income (+51% Y-o-Y) and ii) fee income (+17% Y-o-Y). However, provisioning costs came in well above our estimate (they rose +49% Y-o-Y, cost-of-risk of 746 bps in FY17). 4Q17 earnings, of EGP187mn, doubled Y-o-Y because of very strong net interest income, but fell 35% Q-o-Q because of an increase in provisioning expenses, with 4Q17 earnings coming in 18% below our estimate of EGP230mn. It is worth noting the very strong increase in net interest income in 4Q17, up 130% Y-o-Y and 106% Q-o-Q. This is not coming from the core banking business. HDB sources a large share of interest income from zero cost funds from NUCA’s auctions. There was a large auction in August, and we believe interest income from this auction was partly reflected in 4Q17 (HDB invests these zero cost funds in short-term placements, including CDs at the Central Bank and T-Bills). However, this was also partly offset by the strong provisioning during 4Q17, up 133% Y-o-Y, and 10x 3Q17’s provisioning costs (cost of risk was 827 bps in 4Q17), which led to a 35% Q-o-Q drop in net income. Our initial reading into this is that management has been cautious in booking provisions, as NPLs did not increase during the last quarter of last year (they have been flat for most of 2017), although it is worth noting that 4Q17 saw a significant increase in past due loans.
 
Cash dividend of 2.5/share slightly below our estimate: The Board is recommending a cash dividend per share of EGP2.5, up from EGP2 in 2016 and slightly below our estimate of EGP2.8. The proposed dividend implies a payout of 29% (below 40% in 2016), and a dividend yield of 4.6%. 
 
Key highlights:
        Free funding from NUCA auctions drive strong net interest income growth. Net interest income in 4Q17 rose 130% Y-o-Y and 106% Q-o-Q: interest expenses were flat Q-o-Q, and interest income increased 43% Q-o-Q. As mentioned above, strong increase in interest income came mainly as a result of interest income earned by the bank in free funds linked to NUCA land auctions: down-payments from individuals that want to take part in these auctions (that actually work as a lottery) are investment by the bank in deposits with the CB and in T-Bills for a short-period of time. There was a large lottery in August last year, and this should have driven up NII in 4Q17.  For FY17, interest income from customers increased 37% Y-o-Y, and interest income from govt. securities increased 129% Y-o-Y. Interest income from customer represents just 31% of interest income 
 
        Solid loan growth at 23% Y-o-Y, but sluggish in 4Q17. Loan growth was slower this quarter, at 2% Q-o-Q (up 23% Y-o-Y), after average Q-o-Q growth of 7% in the past four quarters. On a Y-o-Y basis, retail loans increased 18% Y-o-Y and corporate loans increased 44% Y-o-Y
 
        NPLs flat Q-o-Q, but balance of past due loans up strongly. HDB’s NPL ratio improved in 4Q17, falling to 6.9%, from 7.4% last quarter (and 7.0% in 4Q16), driven by loan growth amid stable absolute NPLs Q-o-Q. NPL coverage rose to 212% in 4Q17. However, we believe the bank booked large provisions in 4Q17 (4Q17 cost of risk: 827 bps) as the balance of past due loans more than doubled Q-o-Q: as a % of gross loans, past due loans are up from 11.6% in 3Q17 to 20.5% in 4Q17

Housing & Dev. Bank: EGP54.66 as of 26 Feb. 2018, Rating: Neutral, TP: EGP53.60/share, MCap: USD392mn, HDBK EY/HDBK.CA