The CFA Institute Research Challenge is a global competition that tests the equity research and valuation, investment report writing, and presentation skills of university students. The following report was prepared in compliance with the Official Rules of the CFA Institute Research Chal- lenge, is submitted by a team of university students as part of this annual educational initiative and should not be considered a professional report.

Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not consti- tute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Bangladesh, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge

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Date: November 18, 2018 Recommendation: BUY Sector: Bank

Current Price: BDT 69.50 (USD 0.83) Target Price: BDT 105.3 (USD 1.26) DSE: BRACBANK

Exchange Rate: 83.87 (as of November 16, 2018) Capital Gain: 51.5% Bloomberg: BRAC BD

Table1: Company Snapshot SME credit system is often considered as an economic movement. The two most attractive features of this movement are robust ROE potential from investors’ perspective and oppor- Paid up Capital(BDT Milion) 10,725 tunity to do something inclusive and sustainable by onboarding the underserved segment Total Number of Shares of the community from broad perspective. BRAC Bank Limited (BBL), being the pioneer of 1072.5 Outstanding (Million) the SME sector in the country, has been showcasing excellent performance since its in- Free Float Shares % 55.7% ception and already become a role model for the other players to follow. As a result, BBL kept outperforming the industry even when the banking industry is inundated with every Market Cap (BDT Mn) 74,431.5 possible and impossible negative events like stock market crash, surge in non-performing 3– Months Average Daily loans, tension in the political arena, slow credit growth environment, money heists from 48 Turnover ((Mn) central bank, directors’ loan etc. We believe, BBL will keep this strong hold on their upward trend in coming years as well. 52 Weeks Price Range BDT 63.00-114.00 Summary Forward P/E 14.66 We are issuing a BUY recommendation on BRAC Bank (plus bKash) with a 1-year target price of Financial Year End December BDT 105.3, implying 52.9% upside potential on the closing price of BDT 69.5 on November 15, Table 2: Price Performance 2018. Our target price is calculated by taking 50% weight from 3-stage DDM model and 50% weight Price Performance (%) 3M 6M 12M for Justified P/B value based model. Our recommendation is driven by : Highlights BRAC Bank -38.2 +36.1 +67.4 Booming Bangladesh opens door for BRAC Bank: Bangladesh is currently growing with a GDP growth rate of more than 7% and is anticipated to sustain its growth in the upcoming years as Source: Team Analysis, DSE well. The expected economic growth of Bangladesh coupled with its vast population not being into Table 3: Valuation Summary proper banking system creates massive opportunity for BRAC Bank to grow exponentially. With the agent banking is being established by BRAC Bank, the growth potential will get solidified. Valuation Date November 15 2018 Clean balance sheet makes BRAC Bank stand out: Strict credit policy and proper monitoring Methodology Weight Price system of BRAC Bank is driving its NPL down. Lower NPL is enhancing its asset quality and lowering Multi Stage DDM 50% 36.5 its credit risk. Along with the asset quality its quality disclosure makes it distinctive in nature. These Justified P/B 50% 40.0 positive characteristics of BRAC Bank will help in continuing its growth. One Year Target Price (31 Dec’19) ; 105.3 bKash; the revolutionary player in the financial sector of Bangladesh: bKash was started with Including bKash a view to bringing people who use cash for any kind of monetary transactions, except the 1% who use Current Market Price (16 Nov’18) 69.5 banking cards, under the mobile payment system. It has been quite successful as it already reached Expected Capital Gain 51.5% to 30% of the people attaining 71% of the market share. With the strategic partnership with tech giant like Alipay, potential opportunity to get into e-commerce business and spending highly on capital and Holding Period Return 51.5% operations, it has huge growth potential with capturing new segments of people.

Know the Risks 6,000,000 100 90 Major risk to our analysis includes 1. Increased 5,000,000 competition as another four new banks getting 80 70 approval, 2. Interest rate risk as Bangladesh Bank 4,000,000 decided to introduce single digit interest rate, 3. 60 Rising Competition in SME Loan Segment, 4. 3,000,000 50 Available Alternate investment as National 40 2,000,000 Savings Certificate (NSC) offer very high interest 30 20 rate compared to banks, 5. Uncertain regulatory 1,000,000 risk, other than that there is specific risk towards 10 bKash, 6. Excessive Competition and Regulatory 0 0 1/1/2018 3/1/2018 5/1/2018 7/1/2018 9/1/2018 11/1/2018 Risk. Volume Closing Price Table 4: Key Financials Year Deposit Deposit Loan Loan- Operating Operating NPAT NPAT NIM EPS ROA ROE BDT (mn) Growth BDT (mn) Growth Income Income Growth % BDT (YoY) (YoY) BDT (mn) Growth (YoY) (YoY) 2015 143,321 -3.5% 147,434 20.9% 7,799 15.1% 2.436 16.5% 5.4% 3.19 1.1% 13.3% 2016 168,860 17.8% 173,612 17.8% 8,013 2.7% 4,460 83.1% 6.0% 4.55 1.9% 22.2% 2017 196,224 16.2% 202,559 16.7% 9,050 12.9% 5,250 17.7% 6.2% 6.07 2.0% 22.1% 2018E 225,658 15% 232,943 15% 9,957 10% 5,329 1.5% 6.06% 4.97 1.7% 18.2% 2019E 264,020 17% 272,544 17% 11,209 12.6% 6,004 12.7% 6.06% 5.60 1.8% 17.1% 2020E 308,903 17% 318,876 17% 13,484 20.3% 7,154 19.2% 6.1% 6.67 1.9% 17.7%

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Recent News

Bangladesh Bank has recently proposed to bring down the CRR and ADR for banks for the betterment of asset-liability management. The regulator asked the banks to maintain CRR of 5.5% and ADR of 83.5% bringing down by 1% and 1.5%, respectively. A meeting of the Board of Directors will be held on October 30, 2018 disclosed the un-audited financial statements of BRAC Bank for the Third Quarter (Q3) period ended on September 30, 2018. Business Description Table 5: Quick Facts About BRAC Bank Established 2001 BRAC Bank Limited (DSE: BRACBANK) is a full-fledged SME Bank with its main Listing Year 2007 sponsor as BRAC the NGO. The Bank started its operation in 2001. It is considered as Number of Clients (Mn) 1.2 the 3rd generation Bank of the country. Agenda behind starting this Bank was to serve Number of Employees 9,500 the un-catered people who did not have any access to commercial banks. Hence, Number of Branches 186 SME Units 457 BRAC Bank is one of the pioneers in SME Banking, especially in the small segment. ATMs 447 Their portfolio is dominating in small segment with 45% investment of their total portfolio CDMs 90 in SME (Fig.1). According to Mr. Selim R. F. Hussain, the current Managing Director Deposit Market Share 2.19% Loan Market Share 2.04% & CEO, the bank has planned to increase the SME loans to 50% of their loan book Source: Annual Report & Team Analysis portfolio within 2020. Despite being heavily focused in SME, as BRAC Bank is a commercial bank, they also offer a wide range of corporate and retail banking products such as accepting deposits, disbursing loans, personal banking, lease financing, project Figure 1: Portfolio Distribution (Old Classi- financing, trade financing etc. BRAC Bank has around 2%-3% share of total loans in the fication) domestic market. The bank had an off shore banking unit since 2010.

BRAC Bank is one of the best run banks in the country and it’s clearly evident through Corporate its return profile with ROE of 22.14% (Fig.2) and NPL Ratio of 3.7%, whereas other banks have high NPL. Despite BRAC Bank being an SME bank, the low NPL indicates that they have better Asset Quality (Appendix 4). Retail BRAC Bank has created a strong presence with 186 branches, 457 SME unit offices, 447 ATMs and, 90 CDMs all around the country. In continuation to the first mover advantage achieved in their SME business, the division has spread its wings and explored newer horizons of opportunities in the untapped semi-urban and rural SME markets . And now they are exploring Agent Banking which has already been launched in October 2018 with 10 agents. They have a proposition to recruit 50 Agents within the next three months and 5,000 in the next 5 years. BRAC Bank is also strengthening its Source: LIVE Video of Q3 Disclosure capabilities in Digital Banking, thereby focusing on progressing towards a branchless banking. BRAC Bank achieved Ba3 credit rating from MOODY’S and B+ from S&P Figure 2: ROE Comparison Global ratings. Currently the company owns 4 subsidiaries- bKash Limited, BRAC EPL Investment Limited, BRAC EPL Stock Brokerage Limited and BRAC Saajan Exchange Limited (Appendix 12 A&B).

Investment Summary

Booming Bangladesh Opens Doors for BRAC Bank

Bangladesh has been growing on an average rate above 6.5% for the past five years annually. Bangladesh’s GDP growth rate reached 7.9% in 2018 and its’ expected to grow by 7.5% in 2019, according to ADB. Inflation on the other hand is expected to hover around 6.3% (Fig.9). Per Capita Income has also risen to USD 1,751. Bangladesh for its’ stable economic outlook has achieved 'Ba3' and 'BB-' rating from Moody's and Standard & Poor's respectively. World Bank has recently announced Booming Source: Annual Reports Bangladesh is set to graduate from least developed country to Lower middle income country by 2024. Though Bangladesh is populated with more than 170 million people, only 50% of the population are under proper Banking and Mobile Banking system. Figure 3: W. Avg Spread Tremendous economic growth, favorable demographic situation and low inflation have created opportunities for BRAC Bank.

BRAC Bank has grown exponentially over the years, which is indicated by the 17% increase in Balance Sheet size on average and 20% CAGR of NPAT in last 10 years. Due to having competitive advantage is SME, they earn the highest spread in the fragmented market (Fig.3). Moreover, BRAC Bank has widened banking services to unbanked population through Agent Banking. BRAC Bank can be a dominant player in the market due to its wide range of exposure through 457 SME units. BRAC Bank can have competitive edge in Agent banking by acquiring and monitoring Agents through SME units. Bangladesh Bank has provided a guideline stating the range of products & services that can be offered and transaction limits per account (Appendix 2). As of Source: Bangladesh Bank September 2018, only 2 million accounts were registered through Agent banking. 03

Figure 4: Agent Banking Potentials Though the coverage seems small, Banks providing Agent banking services successfully collected BDT 139 billion deposits, disbursed BDT 10 billion credits and facilitated BDT 198 inward remittance in 2017. We expect that Agent Banking window of BRAC Bank can be a great medium of collecting deposits and providing loans with lower transaction costs. It will allow BRAC Bank to increase their CASA account and as a result, will provide them with more room to give out loans. Additionally, their cost of funding will decline as well. Thus, their target of increasing SME loans & Advances exposure to more than 50% by 2020 can be fulfilled by Agent Banking.

Clean balance sheet makes BRAC Bank stand out

BRAC Bank, with their strict credit policy and monitoring system has been very successful in terms of Asset quality and NPL management. Balance between the Risk management capacity and Risk-taking appetites is the main reason behind the successful reduction in NPL. At present, BRAC Bank is serving 1.2 million customers Source: Bangadesh Bank of which, 76.5% are Retail, 23% are SME and 0.5% are corporate clients. Their combined NPL stood at 3.7% by September 2018. On the contrary, Industry NPL was 10.41% by June 2018 according to Bangladesh Bank’s stability report. Retail segment Figure 5: Historic NPL Coverage has the lowest NPL rate of 2.7%. The significant reduction in NPL was due to their ‘Cross Selling’ initiative in 2017. Cross selling initiative was introduced to build strong relationship with corporate clients and to sell retail products to their staffs and SME products to their vendors. This value chain has broadened their business horizon and reduced the probability of defaulters.

Another bold step of reducing 170,000 value destroying customers in Q1 of 2018 will contribute to lower the NPL in future. Customers who had misused bank’s distribution network and had inadequate KYC or documentation are termed as value destroying customers. BRAC Bank is focusing on bringing trustworthy and honest customers. Their newly recruited chief risk officer and separate underwriting units under the credit risk management division has given strong control over the asset portfolio. Moreover, Source: Annual Report historical NPL coverage of more than 90% indicates that BRAC Bank has always been precautious about future uncertainties (Fig.5). BRAC Bank has good quality of disclosure as well. We feel that their book is clean and contains accurate Figure 6: Number of customers (bKash) representation with nothing beneath the carpet. In our opinion, with current NPL coverage of 111%, well established coordination among portfolio management, collection & fast recovery and, legal functions, BRAC Bank can maintain healthy portfolio in upcoming years.

bKash; The revolutionary player in the financial sector of Bangladesh

bKash has turned out to be a revolutionary investment for BRAC Bank, bringing unbanked people under the hood of banking & payment services. BRAC Bank Limited formed bKash, the pioneer in the Mobile Financial Service (MFS) industry, in March 2010. In Bangladesh, we have 170 million population. So far Only 30% of them were brought under formal banking system, whereas more than 70% of them have mobile penetration, which is 130 million people (Fig.6). Hence, bKash has the potential to bank this 130 million unbanked people. Another opportunity is the payment system. Source: Annual Report Roughly 1% people use credit card in Bangladesh. The rest of the 99% people use cash for all kind of transactions. bKash can bring those 99% people under their payment system. They incurred substantial OPEX in last 9 months to strategically Table 6 partner with retailers, super chain shops, clothing shops, restaurants, ride sharing Equity Value (bKash) companies and hotels to develop the payment market. Apart from that bKash can also WACC 15% enter into ecommerce market, like Paytm India. The e-commerce market size in our PV of FCFF 48039.6 country is roughly BDT 25 billion. As Ali pay is the common strategic partner between Paytm and bKash, it will help them to get a competitive edge in e-commerce sector. + Cash & equivalents 24694.111 bKash has recently launched online bill payment system which has tremendous growth - Interest bearing debt 24.521926 potential for bKash. Although there are regulatory barriers, bKash has also the Equity value (BDT mn) 72709.15981 potentials to provide loans by collaborating with other banks similarly as mPesa Kenya. Exchane rate $ per BDT 83.87 Additionally, Nano-lending model introduced by Tigo, a Tanzania based MFS service Equity value ($ mn) $866.93 can be a great potential opportunity for bKash as well.

BRAC Bank's stake 42.40% The company started as a joint venture between BRAC Bank Limited (Bangladesh) Value of BRAC Bank's stake (Mn) 30828.7 and Money in Motion (USA). Later in 2013, International Finance Corporation (IFC), a member of the World Bank Group, became an equity partner of bKash Limited. In BRAC Bank Number of Shares (Mn) 1072.5 Per value share for Brac Bank BDT 28.74 2014, Bill & Melinda Gates Foundation became an investor of the company. Ant Financial Group, a concern of China’s e-commerce and tech giant Alibaba and the 04

parent company of Ant Financial, decided to buy 20% of bKash on a diluted basis in Figure 7: Transactions in bKash 2018. From regulatory standing, BRAC Bank currently has 51% ownership of bKash, while the remaining 49% is held by Money in Motion LLC, IFC and, the Bill and Melinda Gates Foundation. However, from the economic standing BRAC Bank owns 42.4% ownership at this moment. The major revenue sources of the company are service fees on cash out, money transfer, remittance services, mobile recharge and merchant payment.

We have done a separate valuation of bKash Limited (Appendix 5). Our valuation estimates bKash has a per share value of BDT 28.74 for BRAC Bank (Table 6). BRAC Bank’s per share is currently traded as BDT 69.50 in the market. Which means, for the core Bank, the market is pricing it at BDT 47.81. Moreover, the current P/B is 1.57x. But according to our Justified P/B value-based model, per share of BRAC Bank can be traded at 1.85x. Hence, we can say that the share of BRAC Bank is significantly underpriced as the market has not yet fully understood the potential of bKash. Source: Annual Report Industry Overview and Competitive Positioning

Macro economy Figure 8: Debt to GDP Ratio in 2017 If we look at global economic scenario, we can see an urge for ensuring more inclusive growth. In 2018, the global growth has been 3.9% and is expected to be the same in 2019 as well. But this growth is uneven across countries, and also more fragile and inequality is high too. US growth is 2.9% but it’s due to temporary fiscal stimulus and expected to slowdown in 2019. Growth is already slowing down in Canada, Europe, Japan and UK. The balance of risk is turning negative with rising oil prices, trade tensions and currency fluctuations. The time is now for countries to undertake reforms and prepare for the ‘rainy days’ while protecting the most vulnerable. Free and open global trade would help to create jobs and opportunities for all.

Now if we look at Bangladesh, it’s currently a USD 257 billion economy and is likely to become 26th largest economy in the world by 2030. Bangladesh is praised for its

Source: World Bank sustained economic growth and increasing foreign exchange reserves. It has a fiscal deficit below the 5 percent of GDP and a manageable Debt to GDP ratio of 32%, which is much lower than South Asian countries(Fig.8). Though the current account deficit Figure 9: GDP, Inflation & Per capita income has widened, BoP deficit has remained very low. The central bank has adopted cautionary monetary policy to maintain the macro-monetary balance. Broad money as % of GDP around 66% is adequate to accommodate the government's 8% GDP growth target. Banking sector made substantial contribution to economic sector. Notably, Private commercial banks contributed 22 per cent of our GDP in 2017. The detailed discussion on Macro environment is given below:

Current account deficit emerged as an issue

Bangladesh is an import depended country. While our Fiscal deficit is around 5% of GDP which is quite manageable, our Current Account deficit soared to 3.6% negatively affecting the Balance of Payment (Figure: 5). Import and Export grew at a rate of 25% and 6% respectively (Appendix 6). Import growth surged due to high import order of Source: Data Library, Asian Development Bank. materials for Rooppur Nuclear Power Plant and other mega projects of Government. Another reason of higher growth is importing 0.5 million tonnes of rice due to heavy flood in July. Moreover, increasing oil price in international market will widen the Figure 10: Current Account Deficit (%) Current Account Deficit further. However, Stable balance of payment & exchange rate might emancipate the concerns. Balance of Payment deficit were stable in last 2 quarter (Appendix 7). BOP accounts for 0.3% of GDP, which is quite low. The reasons of experiencing stable BOP was due to 17.09% increase in remittance inflows and 66% in foreign aid inflow. As BDT has depreciated against US Dollar, Bangladesh Bank injected $2.31 billion into the Banking system to lessen the FX volatility. Moreover, with FX reserve of $31.95 bn, Bangladesh is capable of making import payments worth of 7 months. Nevertheless, our currency might depreciate further against USD if BOP pressure remains the same.

Liquidity crisis to be blamed for banking sector instability

Banking sector of Bangladesh has gone through an ephemeral vulnerability due to political unrest, aggressive lending and policy confusion (Appendix 8). Deposit and Lending gap further stimulated the ADR ratio to 89% (Fig.11). While Banks were Source: Data Library, Asian Development Bank. offering 4%-5% return on deposits, 11.28% interest rate giving NSC became more

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Figure 11: Sectoral Deposit and Loan attractive to depositors (Appendix 10C). A sudden announcement from Bangladesh Bank to slash ADR ratio to 83.5% from 85% and CRR ratio to 5.5% from 6.5% pushed Banks to search for new deposits. Banks, unable to attract new deposits due to high rates of NSC had to raise the deposit rates as high as 9% High deposit rates, US Dollar injection by Bangladesh Bank, negative effect of Current Account Deficits and, Exchange rate volatility have caused Credit Crunch in the Banking System in the first half of FY18.

Moving forward beyond 2018

The first half of the year for Banking Sector was challenging. Credit Crunch and Liquidity pressure are considered to be the main culprit for the sluggish growth. The second half of the year might become a turning point for Banks. Net Debt to GDP ratio for Bangladesh is around 27%, which is quite low compared to other countries. Public and Private Investment crossed 31 percent of GDP. Idle money in the Banking Sector Source: Monthly Economic Trend 2018, Bangladesh Bank. has shrunk more than 3.5 times. Bank deposit growth rate will continue to sluggish as indicated by NSC sales increased by 18.79% whereas banks deposit rose only by 11.29%. We are expecting that in the post-election period, bank deposit rates will be Figure 12: Number of Scheduled Banks higher to attract new deposits. On the contrary, slow private sector credit growth is giving opportunity for Banks to readjust their ADR now. After the election business activity will increase, leading to increase in lending growth as well. Though the high NSC rate and Election in December this year will remain a concern, we expect that year beyond 2018, with a GDP growth around 7%, low inflation, increasing investments and positive reforms will revive the Banking sector.

Industry Fragmented banking industry The banking industry is quite fragmented with 58 scheduled banks, fully operated and supervised by Bangladesh Bank (Fig.12). Only 30 banks are listed on the capital Source: Bangladesh Bank. market. However, our Finance Minister has already indicated that in the long term we can expect merger or acquisition among Banks, primarily due to poor Asset Quality, high Non-performing loans and, generating low ROA & ROE. Figure 13: Asset Structure of the Banking Industry Asset structure of banking sector

Banking Sector balance sheet size rose by 10.3% to BDT 14,401.9 billion, till March FY18. The rate is significantly lower than FY17, because of sluggish growth rate in deposits and private sector credits. PCBs hold majority assets of the banking industry. According to the Financial Stability Report, loans and advances at end-March, as a percentage of total assets declined to 63% from 65% last year. The decline is justifiable by the instability in the first half of the year. No major change took place in the asset structure from last year.

Non-performing loan

For a country like Bangladesh BDT 1.31 trillion default loan until June 2018 is a vital concern. Though private commercial banks are taking protective measures, State- Source: Financial Stability Report, Bangladesh Bank owned Banks are lagging behind in managing the NPLs properly (Fig.14). On the other hand, stressed advances ratio was stated as high as 17.2% in Financial Stability Report. BRAC Bank’s NPL ratio is significantly lower than the industry average. Figure 14: Percentage of NPLs to total L&A Profitability of banks

Banking Sector profitability was hit by high growth in default loans, liquidity crisis and macroeconomic uncertainty. During that unstable period where other banks had to struggle, BRAC Bank managed to generate more than 22% ROE in both FY16 & FY17. Additionally, BRAC Bank generated a decent ROA compared to other banks during the same period. PCBs generated much higher ROE and ROA in each of the periods.

Competitive positioning

In-terms of market capitalization, BRAC Bank has the highest portion of the pie with 13% market share. While the second highest is taken by Islamic Bank ltd with 7% market share, other banks have less than 5%. BRAC Bank has the first movers’ advantage in SME sector. Let alone, their subsidiary bKash has first movers’ Source: Annual Reports & Bangladesh Bank Quarterly advantage in Mobile Financing service. They currently operate through 186 branches,

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Figure 15: Porter’s Five Forces 447 ATMs and 457 SME units, whereas bKash has more than 180,000 agents grabbing more than 80% market share of MFS. According to the company management, BRAC will leverage its SME units to operate Agent Banking services hiring 5000 agents in next 5 years. BRAC Banks has attracted 9,500 talented employees, who are generating BDT 1.32 million operating profit per employee. In upcoming years, their technology-based service system will allow them to start branchless banking and reduce NPL to a greater extent. We are of opinion that, despite having high CIR (around 52%), BRAC Bank will continue to generate high ROE & ROA primarily due to its vast network of SME, competitive advantage in Agent Banking, focusing more on trade financing and customer-centric approach in retail segment, paving the way forward with a vision to remain the best bank. We have done comprehensive industry analysis and peer analysis which evidently shows that BRAC Figure 16: Loan Growth Bank is actually one of the best run bank in the country. (Appendix 10, 11 & 14). Financial Analysis

Loan Growth

The 9 months growth already has been 18%. Since this is the election quarter, it is expected that loans will not increase much for the next 3 months, rather, the rate is likely to decrease slightly. Thus we are assuming the rate to be 15% in 2018. Next year is post-election year, economy is likely to give a rally, and increase at a rate of 13 -14% (7% real GDP and 6% inflation). Bangladesh Bank forecasted that credit growth will be 16% and being an SME focused business, BRAC bank is likely to have a bit higher growth than overall economy. Thus we consider the growth as 17% for the next few years. However, in 2023, we assumed a growth rate of 15% as a representation of a normalized scenario. Figure 17: Deposit Growth Deposit Growth

We kept the 2018 rate consistent with the 9 month number. From 2019, the rate we assumed is consistent with LDR ratio of last three years. Moreover, in the last quarter of 2018, because of the election quarter, people are expected to keep money in bank rather than keeping money in the capital market. Already we can see a downward trend in the daily turnover of DSE. So it is rational to expect that people will be withdrawing money from the capital market, and keeping in secured financial institutions like Brac Bank. Moreover, from 2019 onwards, the deposit of the bank is expected to grow at a higher rate as the economy is expected to reach a more stable position where the interest rate on deposits will experience a slight rise and interest rates on NSC is expected to fall in the later part of 2019 along with the major breakthrough of agent banking.

Figure 18: Spread Interest rate on deposit According to annual report, the overall interest rate for deposit or the interest expense for BRAC Bank is 4.2%. In the upcoming years, the deposit rate has to be increased if the NSC rate does not go down, or else people will be unwilling to keep money in the bank. Rather they will invest in NSC or any other high rate giving securities. Thus we, in the valuation have increased the interest expense over the years, but not significantly. Even though the deposit rate has to be increased, but overall cost of fund is also likely to go down because of the agent banking. We can expect that by 2020 the agent banking is going to be fully operational. If such happens, the CASA will increase, and cost of fund will be decreased. Even though the interest expense is likely to be increased for BRAC Bank as they will have to increase the deposit rate, but for CASA it will increase at a stable rate in the future. Figure 19: NPL Ratio Loan Yield

We expect that loan yield will decline in the future. Mainly because of two reasons- Competitions and Government regulation. The main reason behind of BRAC Bank’s higher spread. As more than 45% of their portfolio is exposed to SME, where they can charge higher interest rates due to risky nature of SME and giving loan without collateral. Some of BRAC Bank’s competitors like The City Bank Limited, Bank Asia Limited, IDLC, Eastern Bank are also trying to capture this market, which is going to enhance competition for BRAC BANK. So, BRAC Bank in the near future might lower the interest rate for SME loans. Moreover, because of Government regulation, BRAC

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Figure 20: NPL Coverage Bank might need to keep a spread of 4% in the future, which also will create a pressure on BBL to lower the interest rate in providing loans.

Spread

Due to the above mentioned reason, BRAC Bank is more likely to have lower spread in the future and we expect that it will be ~6.0% in the upcoming years.

NPL Ratio

Non-performing Loans has been declining for BRAC Bank in last few years with its exceptional capability of maintaining its asset quality and from now on it is expected to be stable at the current level. Their recent upgrade to Finacle 10 and continuous investment into high-end technology will allow them to monitor their creditors properly. Figure 21: Capital Adequacy Ratio Moreover, their innovative initiative likes cross selling are likely to lower their NPL in future.

NPL Coverage

BRAC Bank has been keeping a large sum in its loan loss provision to safeguard itself from the Non-performing Loans and have been quite successful with this approach. Though it is expected that the NPL coverage will be lower because of the extraordinary performance of BRAC Bank to manage its NPL ratio consistently.

Capital Adequacy Ratio

Previously, BRAC Bank had faced issues with maintaining the statutory requirement and issued subordinated bond to raise its capital base under the Tier-II capital segment. But after the redemption of the subordinated bond, it has successfully Figure 22: NII as % of Average Assets brought up its capital adequacy ratio over the minimum requirement of 12.5% set by the Bangladesh Bank.

Du Pont Analysis

If we look at the main components of ROE, like profitability, asset utilization and leverage, and analyze for BRAC Bank, we will see at this moment the main earnings are coming from net interest income and also from non-interest income. These two items are driving the ROAA for BRAC Bank significantly and is higher than the close competitors of BBL; The City Bank Limited and Eastern Bank Limited. Moreover, another component leverage of BRAC Bank is lower compared to the close competitors. The profitability of BRAC Bank is expected to continue to grow as they Cost of Equity are going to increase exposure to SME in their loan portfolio, thus in case of no political uncertainty, their ROE is expected to increase in the near future, but in case of Real Risk-Free Rate 4.00% political uncertainty, it might affect ROE as SME business are very much sensitive to political uncertainty. Expected Inflation 5.50% Valuation Beta 1.00 We issue a BUY recommendation on BRAC Bank with our calculated fair value of BDT Equity Risk Premium 5.0% 105.3 at the end of December 2019. With the current market price of BDT 69.5, our fair value implies 52.9% upside potential.

Cost of Equity 14.5% Cost of Equity

The Cost of Equity (CoE) for our valuation is 14.5%. Each of the components of CoE was calculated to arrive at the specified rate. Growth Rates Firstly, we have assumed the risk-free rate to be 9.5% which we found by calculating Growth Stage (Stage 2) 12.0% the 10 years average rate of ‘10-year (BD) Govt. Treasury Bond’. Afterwards, we have Maturity Stage (Stage 3) 8.0% determined the point to point inflation rate for the same time period and calculated the average inflation rate. In the long-time horizon, Bangladesh will become a developing country and hence our estimation is that, inflation rate should be 5.5%. By adjusting Value per Share our calculated risk-free rate with expected inflation, we got a real risk-free rate of 4%.

PV of Dividends 33,678 Secondly, we have calculated Beta by running a regression between the last 3 year’s (2016–2018) stock adjusted price return of BRAC Bank and return of daily DSE X Terminal Value 28,822 Index. Though our calculated Beta is 1.03 we have assumed it to be 1. The main rationale of choosing 1 is, Beta is considered as mean reverting. In the long-run, Beta Value per Share 73.1 will revert to its mean, which is 1.

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Justified P/B value Finally, Equity risk premium is determined by deducting our calculated average ROE 20.0% inflation rate from the long-run return of DSE X Index. With the Equity risk premium of CoE 14.5% 5%, we have arrived at a CoE of 14.5%. Growth 8% P/B justified 1.85x Valuation method To determine the target price for BRAC Bank, we have utilized 3-stage DDM model Valuation Dec'2019 Weight w. (Stand val- and Justified P/B multiple valuation model. We have provided 50% weight to the 3- Alone) ue stage DDM value and 50% weight to the Justified P/B based value. Based on our Multi stage DDM 73.08 50% 36.5 estimates, the target price at the end of December for the BRAC BANK is BDT 76.5 per share. The detailed discussion on each of the model is followed. P/Tangible BV 80.01 50% 40.0 Multiple Dividend discount model

Weighted Valua- 76.5 We have used 3-stage DDM model to calculate fair value of BRAC Bank. For the 1st tion (intrinsic value) stage (2018-2023), we have forecasted BRAC Bank’s solo financial statements for 5 years. The average ROE for forecasted period is 17.8%. The shareholders’ equity Current Price 69.5 (Nov 15' 2018) during the same period increased on average by 15.5%. Price Return 10.1% For the 2nd stage (2024-2033), we have assumed that shareholder’s Equity to grow at Dividend Yield 1.4% a constant rate of 12%. We expect our country to grow at a nominal rate of 12%-13%. Due to high economic growth, banking activity is expected to grow as well. From our Total Return 11.6% conservative perception, we have assumed that shareholder’s equity will grow at 12%. (Stand Alone) In the same period, our ROE has fallen from 17.9% to 16.5% in 2033. The low ROE is very much justifiable considering a competitive market in future. Valuation Dec'2019 (Consolidated) For the 3rd stage (2034-2038), we have assumed shareholder’s Equity will grow at a Weighted Valuation (intrinsic value) 76.5 constant rate of 8%. The 3rd stage is considered as maturity stage. Hence, we have Target price for bKash 28.74 assumed there will be a low scope for high growth and ROE generation. Other Banks Target Price 105.3 will also start focusing more on SME, which will lead to a more competitive market for Current Price 69.5 BRAC Bank. For which, we have assumed the growth rate to be 8%. ROE is expected (Nov 15' 2018) Price Return 51.5% to decline from 16.5% to 15.5% in 2038. Based on our above-mentioned assumptions, Dividend Yield 1.4% we have arrived at a target price of BDT 73.08 per share for BRAC Bank using DDM model. Total Return 52.9% (Consolidated) Justified P/B

Figure 23: % of contribution in Consolidated Balance To calculate Justified P/B based value for BRAC Bank, we have taken average ROE of next 5 years, which is 20%. The CoE used for this model is 14.5%, as described earlier. The long-term growth is assumed to be 8%. Using the aforementioned assumptions, we found justified P/B multiple of 1.85x for BRAC Bank. Afterwards, by multiplying the Justified P/B multiple with Per share value (Tangible) we arrived at a value of BDT 80.01 per share.

Finally, we got a target price of BDT 105.3 by adding the BRAC Bank’s stand alone target price of BDT 76.5 and bKash’s target price of BDT 28.74, implying 52.9% capital gain.

Except for bKash, we did not conduct valuation for other subsidiaries. Because, the contribution of other subsidiaries in Consolidated Balance is very insignificant (Fig.23).

Investment risks Source: Annaul Report & Team Analysis. BRAC Bank has tremendous growth opportunities due to favorable demographic and Figure 24: Risk Matrix economic condition of Bangladesh. Positive Macro environment, rising GDP growth rate and low inflation have reduced many risks for Banking industry. Looking forward, the following risks might become potential threat for BRAC Bank.

MR1: Increasing competition- 4 new banks to get approval (IMPACT: MEDIUM\ PROBABILITY: MEDIUM):

Four new banks recently applied for the licensing approval from Bangladesh Bank. Bangladesh Bank already approved the license of ‘Community Bank by Bangladesh Police’. The market will become more competitive if 3 other banks get approval. It might create an excessive pressure on the liquidity and spreads of BRAC Bank.

MR2: Interest rate risk- lower spread (IMPACT: HIGH\ PROBABILITY: HIGH)

The Association of Banks (BAB) suggested to bring down the interest rate on lending 09

Recent Regulatory Changes to 9% and that on deposits to 6% from the existing levels. Currently, private banks are ADR declined to 83.5% to 85% lending at between 14%-15%, while the average interest rate for deposits is between 9%-10%. The decision to cut down interest rates will likely discourage clients from CRR reduced to 5.50% from 6.50%. depositing money in the banks and intensify the liquidity crisis.

Repo reduced to 6.0% from 6.75%. MR3: Rising Competition in SME Loans Segment (IMPACT: MEDIUM\ PROBABILITY: LOW) Govt deposits with PCBs limit increased from 25% to 50%. As new banks are coming into the industry and low growth of corporate loans

encourage banks to increase their operation in the SME segments. Rapid growth & Corporate Tax reduction from 40% to 37.5%. popularity of Agent Banking and technologies created new channels and medium to reach customers. At present, 20 percent of all bank loans are supposed to go to Figure 25: BASEL 3 compliance SMEs, and Bangladesh Bank determined to raise it to 25 percent by 2025. However, due to having competitive edge in SME it is expected that they will be able to maintain a substantial growth in this segment.

MR4: Available alternative investments (IMPACT: HIGH\ PROBABILITY: HIGH)

Net sales of savings certificates increased as an alternate investment over bank deposits. Banks are offering hardly 7 percent interest rate on fixed deposits nowadays whereas the rates offered by the national savings certificates are between 11.04 percent and 11.76 percent. Net sales of savings tools in fiscal 2016-17 hit an all-time high of BDT 52,327 crore- more than 2.5 times higher than the government's target. The trend would continue this year and years to come if the government does not Source: Annaul Report & Team Analysis. slash the rates on savings certificates. Hence, BRAC Bank has potential risk of losing Figure 26: Total Capital depositors. Regulatory Risk

RR1: Uncertain regulatory environment (IMPACT: MEDIUM\ PROBABILITY: MEDIUM)

BRAC Bank is well known for complying with regulations, as indicated by the ADR ratio of below 83% historically. They have maintained prescribed CRR of 5.5% and SLR of 13% in the past. Their NPL coverage was more than 90% and provisions as % of gross loans were higher than 1.5% on average. To comply with BASEL 3, BRAC Bank maintained more than 12.5% CAR. Out of which Tier 1 capital accounts for 12% and Tier 2 capital 0.5% on average (Fig.25). BRAC Bank has always taken higher position than the requirements. Hence, sudden changes might not have negative impact for BRAC Bank.

Source: Annaul Report & Team Analysis. bKash on the other hand operates under the strict regulations of Bangladesh Bank. They comply with every regulation as well. We are on opinion that government in the Figure 26: Monte Carlo future will create more friendly regulations for bKash.

Risk Related to bKash

bR1: Competition & Regulation (IMPACT: MEDIUM\ PROBABILITY: HIGH)

Till date bKash and Rocket Altogether comprises 99% of the total market share where bKash almost monopolies the market with a staggering 80% market share in terms of account opening and more than 90% in terms of transaction. But Bangladesh Post Office is going to introduce another Mobile Financial service named ‘NAGAD’ on a test basis to reach out to the unbanked population of the country. But the new service has raised concerns among relevant parties and industry insiders with its increased transactions limit which may create uneven competition in the market while Figure 27: Blue Sky & Grey sky Analysis increasing the scope for money laundering and terrorist financing. In our opinion, bKash will continue to have comparative advantage in future due to their well- established infrastructure and high-end technologies. Moreover, shareholders like Ant Financial, Bill & Melinda Gates Foundation and IFC will help them strategically to continue their exponential growth in future.

Risk to our valuation

We employed a Monte Carlo simulation to model possible movements of BBL stock prices. By analyzing historical price data, we determined the volatility, standard deviation, variance, and average price movement for BBL. Finally we generated 1000 simulated stock prices out of which 65.2% of prices were above our target price of

10

Figure 28: Football field Analysis 105.3 BDT. Bule sky & Grey Sky Analysis is a sensitivity analysis on the primary variables of the model like gross loan growth, total deposit growth, interest income and advances and interest expenses on deposits. If there’s a major economic downturn, all these growth drivers will go down and expense drivers will go up which is represented by the grey sky value. On the other hand an extreme economic boom will allow the stock prices go beyond the normalized scenario and is represented by blue sky value. Our Football Field Analysis also matched fair price (Fig 26,27&28)

Corporate Governance

Board of directors and executive committee of BRAC Bank

Source: Team Analysis BRAC Bank has 9 board of director, of which 8 members are non-Executive directors and the Managing director & CEO is the only Executive director. 5 members are nominated directors and 3 members are independent directors from the non-Executive Figure 29: Shareholding Composition directors. BRAC Bank has one of the smallest boards of director representation (Fig.24 & 25).

Selim R. F. Hussain was appointed as the MD & CEO of BRAC Bank on October, 2015. He has more than 30 years of working experience in Banking and Non-Banking financial institutions. Under his leadership, 1 Deputy Managing Director & CRO and 11 Head of different departments are working towards the vision of becoming the best bank of Bangladesh. The CRO has 24 years of banking experience. Almost all of the Head of the departments have worked as a core banker prior to joining BRAC Bank. Their performance is reflated by 16% increase in Total assets, 17% increase in Total loans and advances, 18% increase in Net profit after tax and, 17% increase in EPS from 2016 to 2017. They have generated 1.95% and 22.14% ROA & ROE respectively in 2017.

Sir Fazle Hasan Abed, KCMG is the founder and the current chairman of BRAC Bank,

Source: Annaul Report appointed on March 2013. Before joining BRAC Bank, he acted as the Chairperson of BRAC (one of the largest NGOs in the world). He won many national and international awards for his achievements as a visionary leader. Nihad Kabir, the nominated director Figure 30: Shareholding Composition has 25 years of experience as a lawyer. All of the directors are highly educated and have diverse experience of working in Bank, Pharmaceuticals, Agriculture, ICT, Development and, public sector. 4 out of 5 nominated directors own accumulated 0.02% shares of BRAC Bank. Independent directors do not own any share of the Bank. There are 2 female members on BRAC Bank’s board, one member being a nominated direction and the other member being an independent director. Success of the BRAC Bank is driven by the complete separation of BOD and Executives. BOD members set strategic decisions and monitor performance. Executives are responsible for implementing the strategies. Meeting between BOD and Executives are held every month to compare the results and to set future targets. To eradicate the conflict of interest, BOD members have set competitive salaries and benefits for the Executives.

In our opinion, BRAC Bank Limited will achieve more success and grow even bigger in the next 5-10 years. One of the main reasons is that it is clearly different from the other Source: Annual Report. listed banks in terms of above stated corporate governance and strong management team. Such small board of directors having so much experience in different sectors of Top Investors this bank with no family impact makes it undoubtedly the best board among all the Investor Name % Out- Posi- Filing listed banks. The board of BRAC Bank was always very lucrative, especially after two standing tion (M) Date of the most successful CEOs in the banking industry of Bangladesh joined the board in RBC Global 3.82 40.92 30-Sep-18 2015- Kazi Mahmood Sattar as an independent director and Selim R.F.Hussain as the Asset Manage- ment (UK) Lim- CEO and Managing Director. Kazi Mahmood Sattar previously led Eastern Bank ited Limited and The City Bank Limited and has brought the best possible success for the Norges Bank 3.69 39.57 31-Dec-17 Investment banks. After leading few years to Eastern Bank, he joined The City Bank Limited in Management (NBIM) 2009 as the CEO and MD, he has positioned the bank from a traditional first- Matthews Inter- 3.45 36.99 30-Jun-18 generation bank to second-generation bank. Moreover, during his period in The City national Capital Management, Bank Limited, he did a reasonable job with 22.6% CAGR loan-book expansion and L.L.C. 15.0% average ROE. Moreover, the current CEO Selim R.F. Hossain has led IDLC for Templeton 1.85 19.84 30-Sep-18 six years and is told to be the architect of IDLC Finance’s meteoric rise over the past Asset Manage- ment Ltd. six years. Current Chairman, highly diversified BODs and present CEO have made the Russell Invest- 1.22 13.13 30-Sep-18 board or BRAC Bank, the best and the most lucrative board. ments Limited

Source: Thomson Reuters Eikon 11

Appendix 1

Index

BB- BANGLADESH BANK ADR- ADVANCE-DEPOSIT RATIO

ADB- ASIAN DEVELOPMENT BANK BOP- BALANCE OF PAYMENT

NPAT- NET PROFIT AFTER TAX NSC- NATIONAL SAVINGS CERTIFIACTES

NPL- NON-PERFORMING LOANS SANCHAYAPATRA- NATIONAL SAVING SCHEME OFFERED BY THE GOVERNMENT OF BANGLADESH. FX- FOREIGN EXCHANGE CIR- COST TO INCOME RATIO FY- FISCAL YEAR CAR- CAPITAL ADEQUECY RATIO

Appendix 2

Daily Number of Transactions and Amount Limit though Agent Banking.

Cash Deposit Cash Withdrawal Transfer/BEFTN/ Inter-bank/Intra-bank No. of transac- Total Vol- Total Vol- Nature of Accounts tions ume No. of transactions ume No. of transactions Total Volume

Current Account 4 600,000 2 500,000 4 1,500,000

Savings Account 2 400,000 2 300,000 2 500,000

Source: Bangladesh Bank Special Notice Deposit (SND) 2 600,000 2 300,000 4 1,000,000

Appendix 3 ANSOFF MATRIX For AGENT BANKING

BRAC Bank wants to reach unbanked population living in remote areas. They can offer basic services like Current Account, Savings Account, remittance, Small loan disbursements and, money transfers. BRAC Bank have to offer existing products in the new market.

Agents will work as a bridge between the new customers and BRAC Bank. In Ansoff Matrix model, we can put BRAC Bank’s Agent banking service in Market development grid. This indicates that BRAC Bank has the opportunity to grab the untapped market with their existing service offerings.

Source: Team Analysis

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Appendix 4: Non-Performing Loan By Division and Comparison

Non-Performing Loan By Division Non-Performing Loan By Comparison

Source: BRAC Bank Q3 disclosure live video Source: Annual Report

Appendix 5: Valuation of bKash

Appendix 5A: Income Statement

Amount in (BDT mn) 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E

Cash Out Fees 376 3,064 5,373 7,860 11,158 13,082 17006.43 20407.72 24489.26 29387.11 33795.18

p2p fees 5 96 270 413 508 636 841.22 925.342 1017.876 1119.664 1231.63

Airtime Purchase 8 75 286 357 432 496.282 570.7243 656.3329 721.9662 794.1629

Others 0 4 14 27 65 109 130.6451 156.8194 188.2422 225.9673 271.2603

Revenue 382 3,172 5,732 8,587 12,088 14,258 18,475 22,061 26,352 31,455 36,092

Cost of Services 348 2,819 4,773 7,011 9,766 11,299 13558.98 16270.77 18711.39 21518.1 23669.9

Gross Profit/Loss 33 353 958 1,576 2,322 2,959 4,916 5,790 7,640 9,937 12,422

Other Income 44 341 663 897 1,124 1,391 1558.206 1636.117 1717.923 1803.819 1894.01

Donor Grants 292 132 - 119 55 51 53.09107 55.74562 58.5329 61.45955 64.53253

Operating & Admin Expenses 194 507 783 1,220 1,957 2,462 1558.006 1713.807 1815.371 1923.6 2038.987

Marketing & Promotional Expenses - 476 496 852 876 1,041 1717.954 2576.931 3607.704 3968.474 4365.321

Utilization of grant funds 292 132 - 119 55 51 53.09107 55.74562 58.5329 61.45955 64.53253

Profit Before Contributing to WPPF (116) (290) 342 401 612 847 3,198 3,135 3,935 5,848 7,912

Contribution to WPPF - - 16 19 43 56 45.46987 52.29035 57.51938 63.27132 69.59845

Profit Before Tax (116) (290) 326 382 570 791 3,152 3,083 3,878 5,785 7,842

Current Income Tax Expenses 4 18 19 43 267 266 0 0 0 0 0

Deferred Income Tax Expenses/(Income) (36) (103) 118 99 (33) 37 0 0 0 0 0

Total Tax (32) (85) 137 142 235 303

Profit After Tax (84) (205) 189 239 335 488 3,152 3,083 3,878 5,785 7,842

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Appendix 5B: Balance Sheet

Amount in (BDT mn) 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E

Net PPE 86.1 155.9 202.6 405.0 708.3 767.6 844.3 928.8 1,021.6 1,123.8 1,236.2

Net Intangible Assets 40.8 37.1 147.6 334.9 269.5 463.6 334.9 334.9 334.9 334.9 334.9

Deferred Tax Assets 55.1 158.2 40.0 1.3 -

Non-current Assets 182.0 351.2 390.2 739.9 979.1 1,231.2 1,179.2 1,263.7 1,356.5 1,458.7 1,571.1

Advances, Deposits & Prepmts 50.4 130.8 166.0 430.9 585.2 770.2 847.2 931.9 1,025.1 1,127.6 1,240.4

Trade & Other Receivables 8.3 63.0 96.7 158.1 220.0 427.0 512.3 614.8 737.8 811.6 892.7

Restricted Cash & Equivalents - 4,274.3 7,222.9 11,171.6 17,506.6 21,986.3 26,383.5 31,660.2 37,992.3 41,791.5 45,970.7

Cash & Equivalents 1,270.6 1,159.4 1,502.9 306.4 299.6 186.2 223.5 268.2 321.8 370.1 425.6

Airtime Balance 9.7 19.2 45.3 156.3 70.5 1,163.1 1,744.7 2,617.1 3,925.6 4,710.7 5,181.8

Fixed Deposits - - - 1,470.0 1,620.0 2,121.8 2,355.2 2,614.3 2,901.8 3,221.0 3,575.4

Current Assets 1,339.0 5,646.7 9,033.9 13,693.4 20,301.8 26,654.6 32,066.5 38,706.5 46,904.4 52,032.5 57,286.5

TOTAL ASSETS 1,520.9 5,998.0 9,424.1 14,433.3 21,281.0 27,885.8 33,245.7 39,970.1 48,261.0 53,491.2 58,857.6

Share Capital 28.5 38.2 38.2 38.2 38.2 38.2 38.2 38.2 38.2 38.2 38.2

Share Premium 366.8 1,286.2 1,286.2 1,286.2 1,286.2 1,286.2 1,286.0 1,286.0 1,286.0 1,286.0 1,286.0

Share Money Deposit 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Retained Earnings (140.1) (345.7) (157.2) 80.4 415.5 903.4 993.7 1,093.1 1,202.4 1,322.6 1,454.9

TOTAL EQUITY 255.6 979.2 2,019.2 2,256.8 2,592.0 3,079.8 3,255.1 3,448.1 3,660.4 3,894.0 4,150.9

Convertible Preference Shares at face value - - 4.1 4.1 4.1 4.1 - - - - -

Convertible Preference Share Premium - - 847.4 847.4 847.4 847.4 - - - - -

QUASI EQUITY - - 851.5 851.5 851.5 851.5 936.7 1,030.3 1,133.4 1,246.7 1,371.4

Non-current Liabs 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1

Deferred Tax Liabs 59.2 36.0

Employee Benefits 44.5

Customer Deposits 375.4 2,376.5 4,547.3 7,346.8 11,487.7 14,885.9 17,118.8 19,686.7 22,639.7 24,903.6 27,394.0

Other Deposits 598.6 1,623.1 2,275.3 3,614.6 5,800.9 6,778.0 8,811.4 11,454.8 12,600.3 13,860.3 15,246.4

Finance Lease Liabilities - - - - 6.2 17.4 20.9 25.0 30.0 36.0 43.2

Accrued Expenses 42.6 242.7 222.7 497.6 903.0 1,312.2 1,509.0 1,735.4 1,995.7 2,295.1 2,639.3

Trade & Other Payables 77.6 185.7 305.3 606.3 673.0 1,023.2 1,125.5 1,238.0 1,361.8 1,498.0 1,647.8

Grant Funds 152.0 21.6 125.9 27.2 49.5 43.5 45.7 48.0 50.4 52.9 55.6

Provision for Income Tax 3.6 21.8 41.0 84.2 351.7 617.3 740.8 814.9 896.4 986.0 1,084.6

Total Current Liabilities 1,249.8 4,471.3 7,517.6 12,176.6 19,271.9 24,722.1 29,372.1 35,002.8 39,574.3 43,632.0 48,110.9

TOTAL LIABILITIES 1,257.0 4,478.5 7,524.7 12,243.0 19,279.1 24,765.2 29,379.3 35,010.0 39,581.5 43,639.2 48,118.1

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Appendix 5C: Cash Flow Statement

Amount in (BDT mn) 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E

Net Income (84) (205) 189 239 335 488 3,152 3,083 3,878 5,785 7,842

+ Depreciation & amortization 25 37 80 85 213 136 206 235 270 310 357

- Net working capital investments (892) (2,989) (2,848) (4,002) (6,264) (3,285) (3,580) (4,264) (2,698) (2,699) (3,361)

+ Other Non-cash expenses (32) (85) 137 142 235 303 - - - - -

Cash flow from operations 801 2,736 3,254 4,469 7,046 4,213 6,939 7,583 6,845 8,794 11,561

Capital expenditure 52 103 262 352 186 340 507 566 633 710 797

Change in Restricted Cash Balance & Fixed Deposits

Cash flow from investments (52) (103) (262) (352) (186) (340) (507) (566) (633) (710) (797)

Increase in equity capital 270 929 - - - - (0) - - - -

Grant received 119 (130) 104 (99) 22 (6) 2 2 2 3 3

Cash flow from financing 389 799 104 (99) 22 (6) 2 2 2 3 3

Total Cash Flows 1,138 3,432 3,096 4,018 6,882 3,867 6,434 7,019 6,214 8,086 10,766

+ Beginning Cash & Equivalent balance 82 1,271 1,159 1,503 306 300 186 223 268 322 370

Ending Cash & Equivalent balance 4,255 5,521 7,189 4,166 1,219 1,219 1,219 1,219 1,219 - -

Appendix 5D: DCF valuation

2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E

EBIT*(1-TAX) -116.3 -290.1 326.1 381.7 569.7 791.0 3152.4 3082.9 3877.7 5785.1 7842.4

Depreciation 24.9 36.6 80.0 85.4 212.6 136.1 206.3 235.4 269.5 309.7 357.1

(less) CAPEX 41.4 95.3 105.8 120.0 186.1 340.0 450.6 495.6 545.2 599.7 659.7 (less) Investment in Working Capital -892.2 -2989.1 -2847.6 -4002.4 -6263.7 -3285.5 -3580.1 -4264.2 -2697.6 -2698.8 -3361.2

Free cash flows -671.9 -1441.5 904.4 2796.3 4178.7

Terminal value 64471.6

Total cash flows -671.9 -1441.5 904.4 2796.3 68650.3

Time Line 0 1 2 3

PV of cash flows -671.9 -1441.5 786.4 2114.4 45138.7

15

Appendix 6: Import and Export Growth

Source: Monthly Economic Trend 2018, Bangladesh Bank

Appendix 7: Balance of Payment

Source: Data Library, Asian Development Bank.

Appendix 8: BEGINNING OF CATACLYSM IN BANKING SECTOR

Liquidity crisis can be traced back to the political turmoil of FY13 & FY15. Businesses were unwilling to take credits due to heavy losses. NPL rose to 12.79% while excess liquidity in Banks piled up to Tk 102,223 crore. Banks went on aggressive lending in FY16 to reduce the excess liquidity, on the other hand they started to reduce deposit rates. Total loan outstanding rose by 30% during that period. Aggressive lending continued till FY17 but rate of deposit growth hovered around 10.30%. Private sector credit growth hovered over 18%, which was far above the target rate. One of the main reasons of sluggish deposit growth was attractive rate of return offered by NSC or Sanchayapatra. From FY15 & onwards, NSC offers 11.28% rate while Banks offers less than 5% deposit rates. Low deposits and aggressive lending pushed the ADR to 89%, which was higher than the prescribed rate of 85% by BB. Source: Team Analysis

Source: Team Analysis 16

Appendix 9: Peer Company Analysis The City Bank: City Bank is one of the oldest private commercial banks in Bangladesh. They provide wide range of services in corporate, retail and, SME segment. Due to their partnership with AMEX, their credit cards are very popular among gen- eral people. They have 14 BOD members in their board. Though they have wide network of ATMs and branches, they have only 11 SME centers across the country.

Eastern Bank Limited: EBL was established in 1992 as a commercial bank in Bangladesh. They became listed in 1993. They had been heavily focused on corporate banking. However, their 16.5% of the total portfolio goes to the SME segment. They had very low NPL of 2.5% along with low ROE of 11.41% in 2017.

Standard Chartered Bank Bangladesh: SCB Bangladesh is the subsidiary of British multinational bank Standard Chartered. They started their operation in 1948. They are very popular for Premium retail, SME and, corporate services. Their credit card service is very popular as well. They offer 5 different product categories for SME.

Appendix 10

Appendix 10A: Peer Comparison

Table: Market Cap (Thomson Reuters Eikon-Nov’18) Table: Asset Size (Annual Report 2017) Market Cap Asset Name (BDT mn) Name (BDT mn) Brac Bank Ltd 74,394 Islami Bank Bangladesh Ltd 899,599 Islami Bank Bangladesh Ltd 39,970 Brac Bank Ltd 289,501 City Bank Ltd 30,329 City Bank Ltd 275,531 Eastern Bank Ltd 25,450 Eastern Bank Ltd 253,365

Table: Loan & Advances (Annual Report 2017) Table: Deposit (Annual Report 2017) L&A Deposit Name (BDT mn) Name (BDT mn) Brac Bank Ltd 203,431 Brac Bank Ltd 216,929 City Bank Ltd 196,596 City Bank Ltd 183,493 Eastern Bank Ltd 184,027 Eastern Bank Ltd 166,959

Table: Earnings (Annual Report 2017) NPAT Name (BDT mn) Brac Bank Ltd 5,498 City Bank Ltd 3,628 Eastern Bank Ltd 2,428

Appendix 10B: Profitability Comparison

Table: Profitability Comparison (Annual Report 2017) Table: Profitability Comparison (Annual Report 2017) Name ROA Name ROE Brac Bank Ltd 1.77% Brac Bank Ltd 22.14% City Bank Ltd 1.40% City Bank Ltd 15.90% Eastern Bank Ltd 1.04% Eastern Bank Ltd 11.41%

Table: Valuation Comparison (Thomson Reuters Eikon-Nov’18) Name P/Book Brac Bank Ltd 2.80 City Bank Ltd 1.18 Eastern Bank Ltd 1.18 Sector average (Mean) 1.01

17

Appendix 10C : Peer Company Comparison in terms of Interest Rate

Scheduled Banks Weighted Average Interest Rate in %

Source: Bangladesh Bank

Interest Rates

INTEREST RATES OFFERED BY SANCHAYPATRA National Savings Certificates Interest Rates % Sanchaya Patra after 3-month interest 11.04 5-year Bangladesh Sanchayapatra 11.28 5-year Pensioner Sanchaya Patra after 3-month interest 11.76 5-year Paribar Sanchayapatra after monthly interest 11.52

INTEREST RATES OFFERED BY BANKS ON DEPOSITS

Private Banks BRAC EBL THE CITY BANK

Savings Deposits (Interest Rates %) 1.00-4.50 2.00-5.00 2.50-4.00

Fixed Deposits (Interest Rates %) 4.00-7.50 3.50-5.00 6.00-7.75 Source: Bangladesh Bank

18

Appendix 11 : Porter’s Five Forces

Competitive rivalry (IMPACT: Very High\ PROBABILITY: Very High)

BRAC Bank is ranked under one of the top 5 banks in the country. They enjoy the highest spread due to very high exposure in SME segment. Though BRAC Bank operates under the traditional banking model, other 57 scheduled banks have already started to adopt new technologies and improved business model. Notably, some of the high rate giving saving schemes like NSC is very attractive to depositors which have further intensified the competition. Hence, Competitive rivalry is very high for BRAC Bank.

Buyer power (IMPACT: High\ PROBABILITY: Moderate)

The bargaining power of clients, who take loans, is described as the ability of customers to put the bank under pressure which affects the interest rate of the banks. Clients possess a higher bargaining power because of low switching cost. SME and retail business have generally been less rate-sensitive; however, rising competition in this market segment have made it considerably more price sensitive as a number of banks are entering into the SME and retail sectors. Though for SME sector we are still considering the impact will be low, but the impact will be high for Retail and Corporate segments due to having easy access in other banks and NBFIs.

Supplier power (IMPACT: High\ PROBABILITY: Moderate)

For Banks the depositors are the main source or suppliers of funds. Previously the bargaining power was less for the banking industry as there are fewer banks but now due to huge numbers of banks many banks nowadays initiate an interest rate war in deposit rates which increase the supplier power. Other than that the resources are very unequally distributed in the coun- try. So, few depositors hold the lion’s share of deposits, resulting in giving them excess bargaining power.

Threat of new entrants (IMPACT: High\ PROBABILITY: Very High)

The industry is already very competitive with 58 scheduled banks. But still four new banks are coming to the industry. New entrants eventually impact the portfolio and profitability of the existing banks. However, Threat of new entrant will be lower for SME segment. To have rich distribution like BRAC Bank, other banks will need very high investment in infrastructure and human resources. There are many regulatory restrictions as well. Hence, the threat of new entrants is Low for SME but high for Corporate and Retail segment.

Threat of substitute products (IMPACT: Very High\ PROBABILITY: Moderate)

In general, differentiability in banking service is very low. Due to very similar characteristics, threat of substitute products is very high. Along with rival banks, non-banking financial institutions and Fintech companies are entering into the competitor zone. They have begun to offer specialized financial services that were traditionally only available from banks. Along with 33 NBFIs, Mobile financial services like- BKash, Rocket, Ipay, Upay, Naagad going to make the competition more in- tense and unpredictable.

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Appendix 12A: Subsidiary of BRAC Bank

Subsidiary and Associ- PAT in June ates 2018 Shareholding, as of June 2018 Bill & Melinda BRAC Bank MIM IFC Gates Alipay Others bKash Limited 316,062,015 42.4% 25.4% 8.7% 7.5% 16.0% 0.0% BRAC EPL Stock Broker- age Limited 56,467,530 90.0% 0% 0% 0% 0% 10.0% BRAC EPL Investment Limited -134,886,000 99.8% 0% 0% 0% 0% 0.2% BRAC Saajan Exchange Limited 224,236 75.0% 0% 0% 0% 0% 25.0%

Appendix 12B: Brief description about subsidiaries

bKash Limited

BRAC Bank Limited formed bkash, the pioneer in the Mobile Financial Service (MFS) industry in Bangladesh, in March 2010. The company started as a joint venture between BRAC Bank Limited (Bangladesh) and Money in Motion (USA). Later in 2013, International Finance Corporation (IFC), a member of the World Bank Group, became an equity partner of bKash Lim- ited. In 2014, Bill & Melinda Gates Foundation became an investor of the company. Later, in 2018 Ant Financial Group, a concern of China’s e-commerce and tech giant Alibaba and the parent company of Ant Financial, decided to buy 20% of bKash on a diluted basis. Alipay is expected to provide the best payment technologies and strategic guideline to bKash ac- cording to the deal. BRAC Bank Limited still holds 51% stakes in bKash, while the remaining 49% is held by Money in Motion LLC, a US-based company, the International Finance Corporation and the Bill and Melinda Gates Foundation. The major revenue sources of the company are service fees on cash out, money transfer, mobile recharge and merchant payment.

BRAC EPL Stock Brokerage Limited BRAC EPL Stock Brokerage was acquired by BRAC Bank in 2009. It was originally known as EPL and changed its name after BRAC BANK acquired 51% shares. Through a strategic decision, Bank acquired another 39% share increasing their controlling shares to 90%. The Brokerage is now the 3rd largest in the country, obtaining 3% market share (December 2017). BRAC EPL is pioneer in investment research. They are currently serving 28,000 national and foreign clients through 8 branches around the country. Their world class research and expertise in corporate advisory have attracted 60 foreign insti- tutional clients.

BRAC SAAJAN Exchange Limited BRAC SAAJAN Exchange Limited incorporated in in England and Wales operating with more than 200 agents is the largest remittance service provider. It holds 30% market share of remittances sent from outside Bangladesh, mostly from UK. Money can be sent from Europe to Bangladesh within just 10 minutes. Apart from remittance service, they have introduced many products to fulfil the investment needs of the NRBs. BRAC SAAJAN has branches in ltaly, Portugal and Spain to serve Bang- ladeshi community. Bangladesh Bank has recently approved to open new branches in Bradford and Luton.

BRAC EPL Investments Limited BRAC EPL Investments is a full-fledged investment banking service provider and portfolio manager. Currently they are serv- ing around 4600 clients from 6 branches all around Bangladesh. They provide services like Initial Public Offering, Underwrit- ing, Debt arrangement, Private Equity. They also facilitate M&A transactions, wealth management and, corporate advisory services.

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Appendix 13: Key Matrices of BRAC Bank

Division-wise Loan & Advance Investment Mix (2017)

Deposit Mix (2017) Source of Funds (2017)

Utilization of Funds (2017) Operating Cost and Profit employee

21

Appendix 14: SWOT Analysis

STRENGTHS OPPORTUNITIES

 Strong brand value backed by innovative  Reach the unbanked through Agent products and services, high productivity, banking and technological innovation. sustainable financial performance and  BKash and other subsidiaries have the good corporate governance. potential to grow further.  Affiliation with BRAC, the largest NGO in  Introducing convenient Internet Banking the world. facilities, leading towards branchless  Strong distribution and channel network. banking.  Winning Culture prioritizing Shareholders  Focusing more on Green financing. Wealth Maximization.  Block chain Technology in the future will  Strong capital base. increase trade services Efficiency.  Diversified product portfolio.  Steady ROA & ROE Growth.  Uninterrupted service delivery.  Competent and empowered human resources.  Technological Advancement: o Finacle 7 to Finacle 10 o Credit card upgrade – roll out THREATS . Call center upgrade – roll out  Highly experienced and professional Board  High rate offering alternative Investments of Directors. like NSC.  Margin and Interest rate pressure.

 Fluctuation in exchange rates.  Regulatory uncertainties.  Technological Disruption might affect the WEAKNESS business model.  Intense competition in the Corporate and Retail Segment.  30.5% of Total loans given to 24 Large Corporate.  Lack of technological advances in internet banking.

22

Appendix 15: Valuation for BRAC Bank—Standalone

Appendix 15A: Balance Sheet Key -- Actual Input; Calculation; Driver, %Change, Breakdown Amount in Million (BDT) 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Total assets Cash and balances with Central Bank % of Deposits 13.7% 11.5% 11.3% 9.4% 9.3% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% % Chg 26.2% -0.3% -5.2% -2.4% 15.6% -16.0% 17.0% 17.0% 16.0% 16.0% 15.0%

Interbank

% Chg 3.4% 55.2% -9.2% -31.1% 26.2% 6.5% 8.0% 10.0% 10.0% 12.0% 12.0%

Balance with other banks and FI 15,839 24,579 22,319 15,367 19,396 20,020 23,019 25,321 27,853 31,195 34,939 % of interbank 100% 100% 100% 100% 100% 97% 97% 97% 97% 97% 97% Money at call ------% of interbank 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Total Securities

% Chg -16.1% 12.2% -17.2% 13.7% 11.0% 8.5% 10.3% 10.3% 9.6% 9.7% 9.7% % Chg -51.3% -2.4% -3.6% 45.9% 119.7% 2.0% 12.0% 12.0% 8.0% 8.0% 8.0% Liquidity ratio 43.5% 44.2% 40.7% 31.8% 31.9% 28.0% 26.6% 25.4% 24.4% 23.6% 23.0%

Gross loans % Chg -0.9% 18.7% 20.9% 17.8% 16.7% 15.0% 17.0% 17.0% 16.0% 16.0% 15.0%

Provisions (Balance sheet)

% of Gross Loans 6.8% 5.9% 5.7% 4.6% 3.9% 3.5% 3.2% 2.7% 2.4% 2.0% 1.8% % Chg 7.4% 2.8% 17.2% -4.7% -0.3% 3.4% 3.9% 0.7% 0.7% 0.7% 0.5%

Net Customer Loans

% Chg -1.4% 19.9% 21.1% 19.1% 17.5% 15.5% 17.5% 17.5% 16.4% 16.4% 15.3% Loans/Deposits (LDR) 76.7% 77.3% 97.0% 98.1% 99.2% 99.6% 100.0% 100.4% 100.8% 101.1% 101.4%

Total interest earning assets

% of total 74.9% 76.5% 79.1% 79.2% 80.2% 80.6% 81.5% 82.4% 83.2% 83.9% 84.5% % Chg 2.1% 21.5% 13.5% 10.8% 18.0% 12.3% 16.7% 16.9% 16.0% 16.1% 15.1%

Other Assets

% Chg -1.8% 10.9% 12.0% 8.0% 10.1% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Total assets

% Chg -1.0% 19.0% 9.7% 10.7% 16.5% 11.7% 15.4% 15.7% 14.9% 15.0% 14.2%

Average Total Assets (ATA)

Liabilities & shareholders' equity

Interbank

Net borrower in interbank % Chg 79.4% -5.8% 115.1% 12.8% 17.1% 29.7% 12.0% 12.0% 10.0% 10.0% 10.0%

Total deposits 124,746 148,464 143,321 168,860 196,224 225,658 264,020 308,903 358,328 415,660 478,009 % Chg -7.4% 19.0% -3.5% 17.8% 16.2% 15.0% 17.0% 17.0% 16.0% 16.0% 15.0%

Total Securities/ borrowings ------

% Chg 0.0% 0.0% 0.0% -1.6% -3.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Minorities - - - - - Total interest bearing liabilities

% Chg -3.3% 16.5% 4.7% 16.8% 16.0% 15.6% 16.2% 16.3% 15.1% 15.2% 14.4%

Other Liabilities

% Chg 7.7% 16.8% 46.2% -19.9% 15.7% -26.5% 6.8% 9.0% 10.7% 12.1% 11.0% 12.1% 11.9% 15.8% 11.4% 11.4% 7.5% 6.9% 6.5% 6.3% 6.1% 6.0%

Shareholders' funds

% Chg 14.1% 53.2% 6.0% 14.0% 21.2% 25.4% 15.3% 15.6% 15.4% 15.5% 15.3%

Average shareholders' funds

Average Adjusted shareholders' funds

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Appendix 15B: Income Statement

Income Statement 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E

Net interest income 6,669 7,602 8,674 10,807 12,148 14,928 17,123 20,117 23,424 27,217 31,275 % Chg 2.3% 14.0% 14.1% 24.6% 12.4% 22.9% 14.7% 17.5% 16.4% 16.2% 14.9%

Net fees and commissions 2,609 2,567 2,915 2,538 2,876 2,416 2,778 3,195 3,578 4,008 4,409 % Chg -12.9% 13.3% -16.0% 15.0% 15.0% 12.0% 12.0% 10.0%

Investment Income 2,672 2,501 2,454 2,497 3,581 3,533 3,741 3,853 4,056 4,142 4,453 Avreage Yield 11% 11% 11% 12% 15% 14% 13% 12% 12% 11% 11%

% Chg 74.5% -6.4% -1.9% 1.8% 43.4% -1.3% 5.9% 3.0% 5.3% 2.1% 7.5%

Interest from fixed income 2,217 2,435 3,038 2,188 1,997 1,931 2,124 2,207 2,427 2,513 2,764 Average Yield 11% 12% 15% 11% 10% 9% 9% 9% 9% 8% 8%

Other Income 455 66 (584) 309 1,584 1,603 1,617 1,647 1,629 1,629 1,689 Average Yield 20% 4% -41% 18% 48% 35% 33% 30% 27% 25% 24%

Other Income 510 738 1,042 123 105 76 87 98 109 120 132 % Chg 59.3% 44.7% 41.2% -88.2% -14.8% -27.7% 15.0% 12.0% 12.0% 10.0% 10.0%

Total income 12,461 13,408 15,085 15,965 18,710 20,954 23,730 27,263 31,168 35,487 40,269 % Chg 14.4% 7.6% 12.5% 5.8% 17.2% 12.0% 13.3% 14.9% 14.3% 13.9% 13.5%

Total operating costs (6,536) (6,635) (7,286) (7,952) (9,660) (10,997) (12,521) (13,780) (15,170) (16,704) (18,400)

Net operating income 5,925 6,774 7,799 8,013 9,050 9,957 11,209 13,484 15,998 18,783 21,869 % Chg 15.2% 14.3% 15.1% 2.7% 12.9% 10.0% 12.6% 20.3% 18.7% 17.4% 16.4%

Total loss provisions (2,900) (2,611) (3,177) (865) (1,152) (1,274) (1,438) (1,682) (2,320) (2,690) (3,092) % Chg -8.1% -10.0% 21.7% -72.8% 33.3% 10.5% 12.9% 16.9% 37.9% 16.0% 15.0%

Other non-operating income - - - - -

- - - - - 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Pretax profit 3,025 4,163 4,621 7,148 7,897 8,683 9,771 11,802 13,679 16,093 18,776 % Chg 52.2% 37.6% 11.0% 54.7% 10.5% 9.9% 12.5% 20.8% 15.9% 17.6% 16.7%

Tax (1,778) (2,072) (2,186) (2,688) (2,647) (3,354) (3,767) (4,648) (5,521) (6,627) (7,799) % tax rate 58.8% 49.8% 47.3% 37.6% 33.5% 37.5% 37.5% 37.5% 37.5% 37.5% 37.5%

Net profit 1,246 2,091 2,436 4,460 5,250 5,329 6,004 7,154 8,158 9,465 10,978 % Chg 130.6% 67.8% 16.5% 83.1% 17.7% 1.5% 12.7% 19.2% 14.0% 16.0% 16.0%

Preference Dividend - -

Minorities ------

Net profits attributable to shareholders' 1,246 2,091 2,436 4,460 5,250 5,329 6,004 7,154 8,158 9,465 10,978

Total dividends (paid on OS during the year) - 443 1,419 1,773 710 855 1,026 1,283 1,454 1,710 2,138

Appendix 15C: Analysis

2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Per share figures BVPS (per ordinary weighted adjusted share) 20.8 22.0 25.1 30.4 38.1 43.9 50.8 58.6 67.7 78.1 % Chg 53.2% 6.0% 14.0% 21.2% 25.4% 15.3% 15.6% 15.4% 15.5% 15.3% TBVPS 20.2 21.4 24.5 29.8 37.5 43.3 50.2 58.0 67.1 77.4 % Chg 48.8% 6.1% 14.3% 21.7% 26.0% 15.5% 15.8% 15.6% 15.6% 15.4% EPS (per ordinary weighted adjusted share) 2.4 2.8 5.2 6.1 6.2 7.0 8.4 9.5 11.1 12.8 % Chg 67.8% 16.5% 83.1% 17.7% 1.5% 12.7% 19.2% 14.0% 16.0% 16.0% DPS (per ordinary share) 2.0 2.5 1.0 - 1.0 1.2 1.5 1.7 2.0 2.5 Payout ratio (to OS of Earnings) 67.8% 72.8% 15.9% 0.0% 16.0% 17.1% 17.9% 17.8% 18.1% 19.5% No. of ordinary simple weighted adjusted shares YE (m) 855.2 855.2 855.2 855.2 855.2 855.2 855.2 855.2 855.2 855.2

Number of ordinary shares YE (m) 709.3 709.3 710.4 855.2 855.2 855.2 855.2 855.2 855.2 855.2

Number of diluted shares YE (m) 855.2 855.2 855.2 855.2 855.2 855.2 855.2 855.2 855.2 855.2

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2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Margin analysis

Interest income from banks 1,365 1,372 2,289 1,026 1,794 2,003 2,095 2,225 2,383 2,575 2,804 % margin 8.8% 6.8% 9.8% 5.4% 10.3% 10.0% 9.8% 9.5% 9.3% 9.0% 8.8% % Chg -11.4% 0.5% 66.9% -55.2% 74.8% 11.7% 4.6% 6.2% 7.1% 8.0% 8.9%

Interest income from loans and advances 17,351 15,883 15,411 17,284 19,941 23,517 27,802 33,120 38,916 44,743 50,739 % margin 16.8% 14.1% 11.4% 10.8% 10.6% 10.8% 11.00% 11.20% 11.30% 11.20% 11.00% % Chg 8.5% -8.5% -3.0% 12.2% 15.4% 17.9% 18.2% 19.1% 17.5% 15.0% 13.4%

Interest income 18,716 17,254 17,700 18,310 21,734 25,520 29,896 35,345 41,299 47,318 53,543 % gross asset margin 14.7% 12.1% 10.6% 9.8% 10.1% 10.4% 10.6% 10.7% 10.7% 10.6% 10.4% % Chg 6.8% -7.8% 2.6% 3.4% 18.7% 17.4% 17.1% 18.2% 16.8% 14.6% 13.2%

Interest expense to banks (723) (1,097) (1,183) (1,479) (1,562) (1,990) (2,490) (2,910) (3,363) (3,847) (4,394) % cost 7.9% 9.6% 6.8% 5.8% 5.3% 5.5% 5.8% 6.0% 6.3% 6.5% 6.8% % Chg 216.5% 51.8% 7.8% 25.0% 5.7% 27.4% 25.1% 16.9% 15.6% 14.4% 14.2%

Interest expense on securities & borrowed funds - - - - - (565) (478) (440) (377) (365) (164) % cost 18.8% 15.9% 14.7% 12.7% 12.6% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% % Chg 0.2% -15.3% -8.0% -14.2% -3.4% -55.1% -100.0% - - - -

Interest expense to customer deposits (9,755) (7,617) (7,077) (5,180) (6,424) (8,438) (10,283) (12,318) (14,512) (16,254) (17,873) % cost 7.5% 5.6% 4.9% 3.3% 3.5% 4.0% 4.20% 4.30% 4.35% 4.20% 4.00% % Chg 3.7% -21.9% -7.1% -26.8% 24.0% 31.4% 21.9% 19.8% 17.8% 12.0% 10.0%

Interest expense (11,043) (9,192) (8,699) (7,036) (8,351) (10,591) (12,773) (15,228) (17,875) (20,101) (22,268) % cost of funds 7.8% 6.1% 5.2% 3.8% 3.9% 4.3% 4.4% 4.5% 4.6% 4.5% 4.3% % Chg 8.3% -16.8% -5.4% -19.1% 18.7% 26.8% 20.6% 19.2% 17.4% 12.5% 10.8% Net interest income 7,673 8,062 9,001 11,275 13,384 14,928 17,123 20,117 23,424 27,217 31,275 % net margin (Need to adjust the total interst bearing aseet) 6.0% 5.7% 5.4% 6.0% 6.2% 6.06% 6.06% 6.10% 6.10% 6.11% 6.07% % spread 6.9% 6.0% 5.4% 6.0% 6.2% 6.09% 6.15% 6.16% 6.14% 6.11% 6.05% % Total assets 4.5% 3.9% 4.0% 4.5% 4.6% 4.62% 4.59% 4.66% 4.72% 4.77% 4.80% % Total income 61.6% 60.1% 59.7% 70.6% 71.5% 71.2% 72.2% 73.8% 75.2% 76.7% 77.7%

Profit analysis ROAA 0.7% 1.1% 1.1% 1.9% 2.0% 1.7% 1.8% 1.9% 1.9% 1.9% 1.9% ROAE 11.5% 14.3% 13.3% 22.2% 22.1% 18.2% 17.1% 17.7% 17.4% 17.5% 17.6% RoATE 11.5% 14.5% 13.7% 22.7% 22.6% 18.5% 17.4% 17.9% 17.6% 17.7% 17.8%

Staff costs per employee 0.423 0.424 0.385 0.521 0.636 0.687 0.742 0.801 0.865 0.934 1.009 24.3% 0.2% -9.3% 35.5% 22.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Cost/ income ratio 52.5% 49.5% 48.3% 49.8% 51.6% 52.5% 52.8% 50.5% 48.7% 47.1% 45.7% Asset quality

Total Provision 2,900 2,611 3,177 865 1,152 1,274 1,438 1,682 2,320 2,690 3,092 % of Gross Loans 2.8% 2.1% 2.2% 0.5% 0.6% 0.5% 0.5% 0.5% 0.6% 0.6% 0.6% % Chg -8.1% -10.0% 21.7% -72.8% 33.3% 10.5% 12.9% 16.9% 37.9% 16.0% 15.0%

NPLs (Closing Balance) 7,601 6,980 8,839 5,911 7,221 8,304 9,550 10,982 12,300 13,776 15,429 % Chg -37.7% -21.9% 104.1% -77.5% 180.0% 15.0% 15.0% 15.0% 12.0% 12.0% 12.0%

NPL Reserves B/S (Closing LLP) 6,988 7,182 8,417 8,025 7,999 8,267 8,591 9,183 10,227 11,807 13,827 % Chg 7.4% 2.8% 17.2% -4.7% -0.3% 3.4% 3.9% 6.9% 11.4% 15.5% 17.1%

Loan Write-offs/Gross Loans 2.3% 2.0% 1.2% 2.2% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.2% Addition NPL/Gross Loans 2.3% 1.5% 2.5% 0.5% 1.1% 0.9% 0.9% 0.8% 0.7% 0.6% 0.6% NPL Ratio 7.4% 5.7% 6.0% 3.4% 3.6% 3.6% 3.5% 3.4% 3.3% 3.2% 3.1% NPL Coverage 91.9% 102.9% 95.2% 135.8% 110.8% 99.6% 90.0% 83.6% 83.1% 85.7% 89.6% Provisioning Charge P&L 2.8% 2.1% 2.2% 0.5% 0.6% 0.5% 0.5% 0.5% 0.6% 0.6% 0.6% Equity-to-asset ratio 6.7% 8.7% 8.4% 8.6% 9.0% 10.1% 10.1% 10.1% 10.1% 10.2% 10.2%

Contingents 80,830 55,983 64,767 74,406 85,579 97,763 28,225 37,713 49,954 57,211 68,250 Contingents as % of Assets 16.4% 18.4% 22.3% 23.0% 23.6% 25% 15% 15% 15% 15% 15% % Chg 57.1% 12.3% 20.7% 3.4% 2.4% 6.0% -40.0% 0.0% 0.0% 0.0% 0.0%

Loan loss provisions / Interest income 15.5% 15.1% 17.9% 4.7% 5.3% 5.0% 4.8% 4.8% 5.6% 5.7% 5.8% Interest expenses / Interest income 59% 53% 49% 38% 38% 42% 43% 43% 43% 42% 42%

CAR Tier I 9.4% 12.7% 10.9% 11.0% 12.2% 12.6% 12.6% 12.7% 12.8% 12.9% 13.0% Tier II 2.7% 2.0% 1.4% 1.2% 0.6% 1.3% 1.3% 1.3% 1.4% 1.3% 1.3% Total CAR 12.1% 14.7% 12.2% 12.3% 12.7% 13.9% 13.9% 14.0% 14.2% 14.2% 14.4%

Tier I capital 10,843 17,062 18,079 20,813 25,451 30,436 35,365 41,148 47,695 55,213 63,750 % Chg 13.0% 57.4% 6.0% 15.1% 22.3% 19.6% 16.2% 16.4% 15.9% 15.8% 15.5%

Tier II capital 3,121 2,655 2,297 2,282 1,185 3,161 3,584 4,273 5,029 5,760 6,580 % Chg -1.1% -14.9% -13.5% -0.6% -48.1% 166.6% 13.4% 19.2% 17.7% 14.5% 14.2%

Total Capital 13,964 19,718 20,375 23,095 26,636 33,596 38,949 45,421 52,724 60,973 70,330 % Chg 9.5% 41.2% 3.3% 13.3% 15.3% 26.1% 15.9% 16.6% 16.1% 15.6% 15.3%

RWAs 115,524 133,930 166,622 188,431 209,351 242,491 279,914 323,836 372,029 427,897 488,814

Total assets 171,902 204,592 224,493 248,605 289,501 323,322 373,218 431,782 496,039 570,529 651,752 - RWAs / TA 67.2% 65.5% 74.2% 75.8% 72.3% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% % Chg 3.6% 15.9% 24.4% 13.1% 11.1% 15.8% 15.4% 15.7% 14.9% 15.0% 14.2% % Chg -1.0% 19.0% 9.7% 10.7% 16.5% 11.7% 15.4% 15.7% 14.9% 15.0% 14.2% 25

Appendix 15D: 3-Stage DDM Model

BRAC Bank Valuation (BDT mn) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Historical Net Income 973 1,304 1,670 1,702 540 1,246 2,091 2,436 4,460 5,250 % cng - 33.9% 28.1% 1.9% -68.3% 130.6% 67.8% 16.5% 83.1% 17.7%

Dividends Paid - - - 268 - - 443 1,419 1,773 710 % cng - - - - -100.0% - - 220.0% 25.0% -59.9% % payout 16% 0% 0% 36% 68% 73% 16% 0%

Reinvested 973 1,304 1,670 1,435 540 1,246 1,648 1,017 2,687 4,540 - 33.9% 28.1% -14.1% -62.3% 130.6% 32.2% -38.3% 164.2% 68.9% Adjusted Equity 5,438 8,151 9,418 9,603 10,155 11,587 17,239 18,299 20,924 25,474 - 49.9% 15.5% 2.0% 5.7% 14.1% 48.8% 6.1% 14.3% 21.7% ROE (Adjusted) 19.0% 17.9% 5.5% 11.5% 14.5% 13.7% 22.7% 22.6%

BRAC Bank Valuation (BDT mn) 2018F 2019F 2020F 2021F 2022F 2023F Estimates Net Income 5,329 6,004 7,154 8,158 9,465 10,978 % cng 1.5% 12.7% 19.2% 14.0% 16.0% 16.0%

Dividends Paid - 855 1,026 1,283 1,454 1,710 % cng -100.0% - 20.0% 25.0% 13.3% 17.6% % payout 16% 17% 18% 18% 18% 40%

Reinvested 5,329 5,149 6,128 6,875 8,012 9,267 17.4% -3.4% 19.0% 12.2% 16.5% 15.7% Adjusted Equity 32,086 37,064 42,936 49,639 57,395 66,234 26.0% 15.5% 15.8% 15.6% 15.6% 15.4% ROE (Adjusted) 18.5% 17.4% 17.9% 17.6% 17.7% 17.8%

BRAC Bank Valuation (BDT mn) 2024F 2025F 2026F 2027F 2028F 2029F 2030F 2031F 2032F 2033F

Growth Stage Net Income 12,380 13,767 15,308 17,021 18,924 21,039 23,389 26,000 28,901 32,124 % cng 12.8% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2%

Dividends Paid 4,432 4,865 5,338 5,854 6,417 7,032 7,701 8,430 9,222 10,084 % cng 159.1% 9.8% 9.7% 9.7% 9.6% 9.6% % payout 39% 39% 38% 38% 37% 37% 36% 35% 35% 57%

Reinvested 7,948 8,902 9,970 11,167 12,507 14,007 15,688 17,571 19,679 22,041 -14.2% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Adjusted Equity 74,182 83,084 93,055 104,221 116,728 130,735 146,423 163,994 183,673 205,714 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% ROE (Adjusted) 17.6% 17.5% 17.4% 17.3% 17.1% 17.0% 16.9% 16.8% 16.6% 16.5%

BRAC Bank Valuation (BDT mn) 2034F 2035F 2036F 2037F 2038F Maturity Stage Net Income 34,873 37,200 39,677 42,312 45,115 % cng 8.6% 6.7% 6.7% 6.6% 6.6%

Dividends Paid 18,416 19,427 20,482 21,581 22,726 % cng 161.9% 5.5% 5.4% 5.4% 5.3% % payout 56% 55% 54% 54% 0%

Reinvested 16,457 17,774 19,196 20,731 22,390 -25.3% 8.0% 8.0% 8.0% 8.0% Adjusted Equity 222,171 239,945 259,140 279,871 302,261 8.0% 8.0% 8.0% 8.0% 8.0% ROE (Adjusted) 16.3% 16.1% 15.9% 15.7% 15.5%

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Appendix 16: Ratio Analysis for BRAC Bank-Standalone

Return Ratio: 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Net Interest Margin 6.02% 5.65% 5.39% 6.02% 6.24% 6.06% 6.06% 6.10% 6.10% 6.11% 6.07% ROAA 0.72% 1.11% 1.14% 1.89% 1.95% 1.74% 1.83% 1.91% 1.88% 1.90% 1.92% ROAE 11.46% 14.25% 13.32% 22.16% 22.14% 18.19% 17.11% 17.66% 17.43% 17.52% 17.61% RoATE 11.46% 14.51% 13.71% 22.74% 22.63% 18.52% 17.37% 17.89% 17.62% 17.69% 17.76% Staff costs per employee 42.30% 42.39% 38.46% 52.12% 63.59% 68.68% 74.17% 80.11% 86.52% 93.44% 100.91% Effective Tax Rate 58.80% 49.77% 47.30% 37.60% 33.52% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50%

Efficiency Ratios: 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Interest expenses / Interest income 59.00% 53.27% 49.15% 38.42% 38.42% 41.50% 42.72% 43.08% 43.28% 42.48% 41.59% Loan loss provisions / Interest income 15.50% 15.13% 17.95% 4.72% 5.30% 4.99% 4.81% 4.76% 5.62% 5.68% 5.78% Cost/ income ratio 52.45% 49.48% 48.30% 49.81% 51.63% 52.48% 52.76% 50.54% 48.67% 47.07% 45.69% Credits/Assets 59.76% 59.60% 65.67% 69.83% 69.97% 72.05% 73.03% 73.85% 74.57% 75.21% 75.71% Deposits/Asset 72.57% 72.57% 63.84% 67.92% 67.78% 69.79% 70.74% 71.54% 72.24% 72.86% 73.34%

Profitablity Ratio: 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E BVPS (per ordinary weighted adjusted 13.55 20.76 22.00 25.07 30.39 38.12 43.94 50.81 58.65 67.72 78.05 share) TBVPS 13.55 20.16 21.40 24.47 29.79 37.52 43.34 50.20 58.04 67.11 77.45 EPS (per ordinary weighted adjusted 1.46 2.44 2.85 5.22 6.14 6.23 7.02 8.37 9.54 11.07 12.84 share) DPS (per ordinary share) 1.00 2.00 2.50 1.00 0.00 1.00 1.20 1.50 1.70 2.00 2.50

Growth Ratio: 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Net profit 130.64% 67.76% 16.49% 83.14% 17.70% 1.50% 12.67% 19.16% 14.02% 16.03% 15.98% Pretax profit 52.16% 37.63% 11.01% 54.68% 10.48% 9.95% 12.53% 20.79% 15.90% 17.65% 16.68% Net operating income 15.15% 14.32% 15.13% 2.75% 12.94% 10.02% 12.58% 20.29% 18.65% 17.40% 16.43% Total income 14.37% 7.60% 12.50% 5.84% 17.19% 11.99% 13.25% 14.89% 14.32% 13.86% 13.48% Net interest income 2.31% 13.99% 14.10% 24.59% 12.41% 22.89% 14.70% 17.48% 16.44% 16.19% 14.91% Gross loans -0.86% 18.70% 20.91% 17.76% 16.67% 15.00% 17.00% 17.00% 16.00% 16.00% 15.00% Total deposits -7.35% 19.01% -3.46% 17.82% 16.21% 15.00% 17.00% 17.00% 16.00% 16.00% 15.00%

Asset Quality: 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E NPL Ratio 7.40% 5.72% 5.99% 3.40% 3.56% 3.56% 3.50% 3.44% 3.33% 3.21% 3.13% NPL Coverage 91.94% 102.88% 95.23% 135.77% 110.78% 99.56% 89.96% 83.61% 83.14% 85.71% 89.61% Provisioning Charge P&L 2.82% 2.14% 2.15% 0.50% 0.57% 0.55% 0.53% 0.53% 0.63% 0.63% 0.63% Equity-to-asset ratio 6.74% 8.68% 8.38% 8.62% 8.98% 10.08% 10.07% 10.06% 10.11% 10.15% 10.24% Capital Adequacy Ratio (CAR): Tier I 9.39% 12.74% 10.85% 11.05% 12.16% 12.55% 12.63% 12.71% 12.82% 12.90% 13.04% Tier II 2.70% 1.98% 1.38% 1.21% 0.57% 1.30% 1.28% 1.32% 1.35% 1.35% 1.35% Total CAR 12.09% 14.72% 12.23% 12.26% 12.72% 13.85% 13.91% 14.03% 14.17% 14.25% 14.39%

Branches 157 166 174 180 186 % Chg 44.83% 3.66% 3.58% 3.90% 3.09% YE Headcount 6624 6886 7700 6355 6835 % Chg -11.76% 3.80% 10.57% -21.16% 7.02% ATMs 333 374 457 469 447 % Chg 4.20% 10.96% 18.16% 2.56% -4.92% SME Unit Office 415 458 479 448 457 % Chg 1.45% 9.39% 4.38% -6.92% 1.97%

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Appendix 17: Corporate Governance

Table: Brief Profile of Board of Directors

Name Status Brief Profile Sir Fazle Hasan Abed, KCMG is a Bangladeshi social worker, the founder and chairman of BRAC, the world’s largest non-governmental organization. For his contributions to social im- provement, he has received the Ramon Magsaysay Award, the UNDP Mahbub Ul Haq Award, the inaugural Clinton Global Citizen Award and the inaugural WISE Prize for Education. In 2015, he received World Food Prize for his “unparalleled” work on reducing poverty in Bangla- desh and 10 other countries. He was appointed Knight Commander of the Order of St Michael Sir Fazle Hasan Abed KCMG Chairman and St George (KCMG) in the 2010 New Year Honours for services in tackling poverty and empowering the poor in Bangladesh and globally. In 2017, Abed was ranked 37 in the list of The World's 50 Greatest Leaders prepared by Fortune. Sir Fazle Hasan Abed founded the BRAC Bank in 2001 to develop inclusive banking services for the small and medium entrepre- neurs’ including those in rural Bangladesh. He was the Chairman of BRAC Bank from July 2001 to April 2008.

Mr. Shib Narayan Kairy currently serves as the Chief Financial Officer and a nominated Director of BRAC Bank Limited. He joined BRAC in 1982 and he progressed through the roles of chief accountant, finance manager, head of finance, director of finance and accounts, and was ap- pointed to his current position in May 2011. Kairy supervises the overall financial control and management over the sources and applications of funds for BRAC activities, both development Mr. Shib Narayan Kairy Nominated Director and commercial. His responsibilities include ensuring effective financial control, transparency and accuracy of financial data and reporting and he has altogether 32 years of working experi- ence. He is responsible for ensuring the effective procurement and asset management of BRAC. Shib Narayan Kairy was re-appointed as a Nominated Director of BRAC to the Board of Directors of BRAC Bank Limited in April 2014.

Nihad Kabir is an advocate of the Supreme Court of Bangladesh and the Treasurer of Ain O Salish Kendra. She is the Legal Adviser of Centre for Policy Dialogue (CPD) and Committee Member of the Metropolitan Chamber of Commerce and Industry, as well as Chair to Its Com- mercial Legislation Sub-Committee. She is a member of the Asian Roundtable on Corporate Governance. She has been a member of the Company Law Reform Committee and the World Independent Trade Organization (WTO) working group on TRIPS and TBT, Government of Bangladesh. She Mrs. Nihad Kabir Director was the first legal counsel of the Securities and Exchange Commission. She worked as counsel at the Asian Development Bank and is currently a member of the National Education Policy Committee. She has more than 18 years of work experience as a lawyer. Nihad Kabir was elected as the Nominated Director of BRAC Bank Limited in 2015. She is the Senior Partner of Syed Ishtiaq Ahmad and Associates. She is also a Director of Kedarpur Tea Company Limited, Sathgao Tea Estate and Shaistaganj CNG Company Ltd. Ms. Fahima Chowdhury was appointed as an Independent Director to the Board of Directors of Independent BRAC Bank Limited in April 2018. She is also Managing Director of the country’s leading adver- Mrs. Fahima Choudhury Director tising company, Ogilvy & Mather Communications Pvt. Ltd.

Kazi Mahmood Sattar previously led Eastern Bank Limited and The City Bank Limited and has brought the best possible success for the banks. After leading few years to Eastern Bank, he joined The City Bank Limited in 2009 as the CEO and MD, he has positioned the bank from a Mr. Kazi Mahmood Sattar Independent Director traditional first-generation bank to second-generation bank. Moreover, during his period in The City Bank Limited, he did a reasonable job with 22.6% CAGR loan-book expansion and 15.0% average ROE.

Mr. Kaiser Kabir was appointed as a Nominated Director to the Board of BRAC Bank Limited in Mr. Kaiser Kabir Nominated Director June 2016. He is the CEO & Managing Director of Renata Limited.

Dr. Ahsan Mansur was appointed as an Independent Director of BRAC to the Board of Direc- tors of BRAC Bank Limited in April 2017. Dr Ahsan Mansur is the Executive Director of Policy Research Institute, and a former Division Chief of the IMF's Middle East and Central Asia De- Independent Dr. Ahsan H. Mansur partment. He also served as: the IMF Fiscal Advisor to the Minister of Finance and helped im- Director plement VAT in Bangladesh. He was a member of the team responsible for drafting of the Sixth Five Year Plan of the Govt of Bangladesh.

Mr. Asif Saleh was appointed as a Nominated Director of BRAC to the Board of BRAC Bank Limited in April 2017. Mr. Saleh is the senior director of strategy, communications and empow- erment for BRAC and BRAC International. He oversees advocacy, information and communica- Mr. Asif Saleh Nominated Director tions technology (ICT), communications and the social innovation lab. Prior to joining BRAC in 2011, Mr. Saleh was the executive director at Goldman Sachs and also worked at NorTel and IBM.

Mr. Selim R. F. Hussain joined BRAC Bank Limited as the Managing Director & CEO on No- vember 8, 2015. After joining BRAC Bank, in less than 3 years he has managed to guide BRAC Bank to the top and emerging as one of the largest bank of Bangladesh. Mr. Hussain is a ca- reer banker. He is the immediate past CEO & Managing Director of IDLC Finance Limited. He is Managing Director & widely recognized and highly acclaimed across the financial sector for being the architect of Mr. Selim R. F. Hussain CEO IDLC Finance’s remarkable rise over the past six years. He was also the Chairman of the Board of Directors from 2010 to 2012 of IDLC Finance’s two subsidiaries – IDLC Investments Limited and IDLC Securities Limited. Before moving to IDLC Group in 2010, he worked in various roles with the two largest multi-national banks in Bangladesh, ANZ Grindlays Bank and Standard Chartered Bank, for twenty four years.

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Table: Brief Profile of Top Management

Name Status Brief Profile

Chowdhury Akhtar Asif joined BRAC Bank Limited as Deputy Managing Director (DMD) and Chief Deputy Managing Direc- Risk Officer (CRO) on March 30, 2017. Prior to joining BRAC Bank, Mr. Chowdhury was working Chowdhury Akhtar Asif tor & CRO as Head of Credit Risk Management (CRM) in One Bank Limited. He has more than 24 years of experience in the banking sector.

Brigadier General Brigadier General Tushar Kanti Chakma (Retd.) joined BRAC Bank Limited on September 01, Head of General Ser- Tushar Kanti Chakma 2016 as Head of GSS & Procurement. Mr. Tushar brings 35 years' rich experience from the Bang- vices (Retd.) ladesh Army. He was also director of Trust Bank Limited. Mr. Rais Uddin Ahmad joined BRAC Bank Limited on March 2005 as Company Secretary and Company Secretary, Head of Risk Management. He has been working in the banking sector since 1994. He started his Rais Uddin Ahmad Head of Regulatory career with ANZ Grindlays Bank, Bangladesh. He also worded with Standard Chartered Bank from Affairs & CAMLCO 2002 to 2003 as Acting Head of Legal & Compliance. Concurrently he was the Integration Manager for SCB & ANZ Grindlays.

Sarwar joined BRAC Bank Limited on 1st January, 2002 as the Credit Manager- Retail. Sarwar Head of Internal Control M. Sarwar Ahmed started his career with Arab Bangladesh Bank Limited (ABBL) and later also worked for the Prem- and Compliance ier Bank Limited.

Mr. Tareq Refat Ullah Khan joined BRAC Bank Limited as the Head of Credit Risk Management on Head of Corporate March February 01, 2017. Mr. Tareq has around 20 years of professional exposure in banking Tareq Refat Ullah Khan Banking industry in various capacities. He has started his career in 1996 with IFIC Bank Ltd. He has also worked for AB Bank Ltd. and prior to Joining BRAC he was working for EBL. Syed Abdul Momen joined BRAC Bank in August 2005. He has 13 years of multifaceted experi- Syed Abdul Momen Head of SME Banking ence in the Banking Sector primarily concentrating in Technology, Operations and Business Func- tions. Mr. Nazmur Rahim joined BRAC Bank Limited on May 04, 2016. Mr. Nazmur has 19+ years of Nazmur Rahim Head of Retail Banking corporate experiences in different leading organizations. He has worked for ANZ Grindlays Bank Limited, Standard Chartered Bank and AB Bank Limited prior to joining BRAC Bank. Md. Shaheen Iqbal joined BRAC Bank Limited in March 2004. With more than 14 years of experi- Head of Treasury & Md. Shaheen Iqbal ence in various key positions in the banking industry ranging from arenas as diverse as the foreign Financial Institutions exchange market to branch banking. Mr. Md. Muniruzzaman Molla joined BRAC Bank Limited as the Head of Operations on 23 October Muniruzzaman Molla Head of Operations 2016. He started his career with ANZ Grindlays Bank. He has also worked for Citibank N.A. and Habib Bank Limited. Ms. Bilquis Jahan joined BRAC Bank Limited on May 2, 2016 as the Head of Human Resources Head of Human Re- Bilquis Jahan and a Member of the Management Committee. Bilquis brings 24+ years of corporate experience sources and a very fine academic record to BRAC Bank. She has worked for IDLC Group for a long time.

Mr. Shyamol B. Das joined BRAC Bank Limited on 1st December 2009. He is a technologist with 18 years of Experience in the field of Technology strategy and management and is an active practi- Shyamol B. Das Head of Technology tioner of Information Security framework. Shyamol is also the Acting CEO of BRAC IT Services Ltd. (biTS).

Ms. Zara Jabeen Mahbub joined BRAC Bank Limited (BBL) on March 23, 2009. She has 19 years Zara Jabeen Mahbub Head of Communication of multifaceted work experience in various industries in both Bangladesh and the US while working primarily in strategic marketing.

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Appendix 18: SME, A primary driver of the Economy

Small and medium enterprises (SMEs) are considered as the economic foundation of emerging countries. SMEs play vital role in fostering economic growth, creating employment and alleviating poverty. Lack of access to the credit for the ‘Missing Middle’ is a global phe- nomenon. SME sector has been one of the primary drivers for the economy of many coun- tries along with Bangladesh. In developed countries, 60%-80% of credits are in SMEs.

Sir Fazle Hasan Abed, KCMG identified the gap and founded BRAC Bank in 2001. SME unit of BRAC Bank is widely recognized as a pioneer in the industry. Their ability to custom- ize financial solutions to suit the customer’s business profile and cash flow cycle is very popular. Their vast network of 457 SME units all around the country, they had disbursed BDT 84,051 mn loans to 122,656 customers in 2017. One of the key reasons for their outra- geous success in SME sector is their payment system. At least 70-80% of the sales generated by the businesses they provide loan with goes to their linked account in BRAC Bank Ltd on a daily basis. It works as an indirect safety collateral for the bank against these unsecured loans. The definition of SME in our country is often debatable. We follow the definition of Reserve Bank of India which is a two-dimensional definition, one is the number of employees and the other is the fixed asset excluding land and building.

Table: Definition of SME

India Bangladesh

Enterprise Type Fixed Assets Fixed Assets Loan limit

Manufacturing Upto $62,500 above $11,000 & upto $89,000 $ 1.2 million

Micro Enterprises

Service upto $ 25,000 upto $ 11,000 $30,000

Cottage upto $ 11,000 $12,000

Manufacturing above $ 62,500 & upto $ 1.25 million above $ 89,000 & upto $17million $23 million

Small

Service above $ 25,000 & upto $ 0.5 million above $ 11,000 & upto $ 2 million $5 million

Manufacturing above $ 1.25 million & upto $ 2.5 million above $ 17 million & upto $ 59 million $90 million

Medium Service above $ 0.5 million & upto $ 1.5 million Above $ 2 million & upto $ 35 million $60 million

Due to the risky nature of SME, many bankers were unwilling to give loans to the SME sector. However, some positive reforms initiated by previous Bangladesh Bank Governor, Dr. Atiur Rahman has changed the mindset of the bankers to some extent. SME credit percent- age as a portion of the total private sector credit has grown to 25% from 15% in the past 5-7 years. The percentage is above standard compared to the other LDC status holding countries. Most of the credits go to Agro-Processing/Agri-business/Plantation, Light Engineer- ing and Metal working, Knitwear & Readymade Garments, Fashion Rich Effects, Wear & Consumers Goods, Leather Making & Leather Goods clusters, Handloom & Specialized Textiles clusters, Healthcare & Diagnostics clusters, Plastics & Other Synthetics, Electronics & Electrical, and Educational Services in Bangladesh. Being an over-populated nation, labor-intensive organizations like SMEs are needed in Bangladesh. Annual turnover in SME sector is about BDT 573,510 million per year. To sustain the growth, SMEs will need continuous flow of credits from Banks.

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Appendix 19: Reference

1. Bangladesh: Economy. (2018). Retrieved from https://www.adb.org/countries/bangladesh/economy#tabs-0-0 2. Financial System. (2018). Retrieved from https://www.bb.org.bd/fnansys/bankfi.php 3. 2017 Global Findex: Behind the Numbers on Bangladesh. (2018). Retrieved from http://www.cgap.org/blog/2017-global-findex-behind-numbers- bangladesh 4. BRAC Bank. (2018). EARNINGS DISCLOSURE Q3'18 [Video]. Retrieved from https://www.facebook.com/search/top/?q=brac%20bank%20q3% 20disclosure 5. Report, S. (2018). Bangladesh has stable economic outlook. Retrieved from https://www.thedailystar.net/business/bangladesh-has-stable- economic-outlook-1610527 6. Banerjee, P. (2018). Excess liquidity: challenge or opportunity?. Retrieved from https://www.thedailystar.net/excess-liquidity-challenge-or- opportunity-55593 7. B., & Report. (2018). Budget deficit for outgoing FY soared to 5% of GDP. Retrieved from https://www.thedailystar.net/bangladesh-national- budget-2018-19/budget-deficit-outgoing-fy-soared-5-gdp-1587826 8. Ahmed, J., & Ahmed, A. (2018). Agrani Doer Banking: Agent Banking Business in Bangladesh. Business Perspectives And Research, 6(2), 154- 164. doi: 10.1177/2278533718765532 9. Demirguc-Kunt, A., Klapper, L., Singer, D., Ansar, S., & Hess, J. (2018). The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. doi: 10.1596/978-1-4648-1259-0 10. Atandi, F. (2013). Challenges of agent banking experiences in Kenya. International Journal Of Academic Research In Business And Social Sci- ences, 3(8). doi: 10.6007/ijarbss/v3-i8/161 11. Ant Financial, operator of Alibaba-linked Alipay, will buy 20 percent of Bangladesh’s bKash. (2018). Retrieved from https://bdnews24.com/ business/2018/04/26/ant-financial-operator-of-alibaba-linked-alipay-will-buy-20-percent-of-bangladeshs-bkash 12. Investment hits record high. (2018). Retrieved from https://www.thedailystar.net/business/investment-crossed-gdp-of-bangladesh-1638673 13. FRILLS, N., & Hashim, S. (2018). A loan defaulting epidemic: Over two lakh privileged institutions!. Retrieved from https://www.thedailystar.net/ opinion/no-frills/news/over-two-lakh-privileged-institutions-1635121 14. Bangladesh Bank. (2018). Monetary Policy Statement. Bangladesh Bank. 15. Bangladesh Bank. (2018). Bangladesh Bank Quarterly. Dhaka: Bangladesh Bank. 16. Monetary Policy Department. (2018). Major Economic Indicators: Monthly Update. Dhaka: Bangladesh Bank. 17. Alter, A., Feng, A., & Valckx, N. (2018). Understanding the Macro-Financial Effects of Household Debt: A Global Perspective. IMF Wroking Pa- per, WP/18/76. 18. Alipay to purchase 20% shares of bKash. (2018). Retrieved from https://www.dhakatribune.com/business/stock/2018/04/26/alipay-purchase-20- shares-bkash/

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