Equity Coverage on BRAC Bank Limited
BRAC Bank Limited (BBL) is a scheduled commercial bank established in Bangladesh with the noble vision of providing formal banking solutions to the ‘unbanked’ small and medium enterprises (SME). BBL business can be broadly classified into three prominent wings- corporate, retail, and SME banking. Currently, BBL has a dynamic network of 187 branches (including SME), 460 ATMs, 461 SME unit offices, and 750+ agent banking outlets across Bangladesh, enabling BBL to seamlessly onboard customers cheaply.
In addition, BRAC Bank is leading the digital revolution in the banking sector with the card management system, mobile banking app ‘Astha,’ internet banking for corporate customers under COPTnet, agent banking mobile app, e-commerce, and & POS platform. Another leading app, ‘Obichol,’ speeds up retail loan processing and issuing credit cards. In addition, BBL recently launched the ‘Shubidha’ app, where particular customers can use retail loans digitally.
BRAC Bank holds the highest market capitalization in the banking sector (BDT 77 billion market cap) and is the largest foreign shareholding company in the domestic banking industry (Feb-FY23). BBL’s Economic value-added (EVA) spiked almost double in FY2021 compared to the previous fiscal, estimated to be BDT 6,026 million against BDT 3,965 million YoY.
BBL holds the second-highest CASA ratio with 63.9% among 34 listed banks, keeping a minimum cost of deposit of 1.9% in FY2021, the second lowest in the banking sector. ROE of BBL stood at 8.1% at the end of 2021 and reckoned on average 12.9% in the last five years, which is one of the highest among the listed banks. At the end of FY2021, the Advance-Deposit Ratio (ADR) came down to 88.4% against the regulatory limit of 87.0%. NPL of BBL stood at 3.9% at the end of FY2021 compared to a sector average of 7.6%. BBL kept its NPL at 4.0% in the last five years. BBL’s cost-to-income ratio was poor among the 34 listed banks.
The appropriate valuation methods are (Residual Income Approach and Relative Valuation) to determine the BRAC Bank’s intrinsic value. The assumed cost of equity and terminal growth rate is 12.1% and 3.0%, respectively. Under the residual income model, the company’s value is BDT 58.2 per share. Under the relative valuation, the Last Twelve Months (LTM) PE and PB multiples have been used to determine the relevance and merits of the valuation models. It has been given 70% weight in the Residual income model and 30% in relative valuation. Overall, the intrinsic value of the BBLs has been estimated at BDT 55.58 per share. Currently, BBL’s share is traded at BDT 38.50. So BBL’s return potential is 44.37%.