• Strong 1Q16 revenue drives Y-o-Y earnings growth HDB reported 1Q16 consolidated net income of EGP182mn, up 17% Y-o-Y and 34% Q-o-Q, which was broadly in line with our forecast of EGP186mn. Y-o-Y earnings growth was driven by solid revenue growth of 22% Y-o-Y. Both net interest income and fee income were strong, up 48% and 14%, respectively, driven by i) spreads widening; ii) volume growth; and iii) free funds that HDB collects on behalf of state-owned New Urban Communities Authority (NUCA) from individuals willing to take part in land auctions.
• Valuation multiples remain very low despite decent fundamentals Despite strong reported numbers HDB’s share price has fallen 31% YTD versus a 22% YTD decline for an equal-weight index of the five Egypt small cap banks under our coverage (HDB, EGBE, Faisal, Al Baraka, ADIB Egypt). HDB trades at a 2016e P/E of just 3.3x, and at a 40% discount to book value. This is despite a ROE of 19.7% in 2016e, and dividend yield of 9.8%, well supported by strong capital ratios (CAR of 17.2%). Fundamentally, we remain buyers of HDB in light of such multiples, but continued poor market liquidity might not drive a quick re-rating of the stock in the short term.
• Strong loan growth momentum driven by EGP loans Loan growth was strong at 9% Q-o-Q (23% Y-o-Y) driven solely by EGP loans as the bank’s loan book is almost 100% EGP-denominated. Deposit growth was also strong at 10% Q-o-Q. The net interest spread expanded 32bps Y-o-Y fuelled by higher asset yields. The cost of risk fell 33bps Y-o-Y to 125bps in 1Q16 as loan loss provisions fell 6% Y-o-Y, and credit quality was broadly stable Q-o-Q at 7% (NPL coverage is high at 119%). However, HDB booked an additional EGP38mn provision related to previous years’ taxes, following an inspection from the Tax Authority, but we consider this provisioning charge a one-off.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel