Credit Agricole Egypt: 1Q – Non-interest income provides support amid weak margins and high provisions

  • Non-interest income drives sequential growth in profits while provisions cause the annual decline
  • Loans remained stable against a 6% increase in deposits pushing LDR down to 62% as of Mar-2021 from 66%.
  • The stock is currently trading at 5.3x P/E21 (where EPS expands by 15% y/y in 2021) and 0.9x P/B21 with ROAE of 18%.

CIEB 1Q21 consolidated net profit pre-minority and appropriations recorded EGP379 million (+13% q/q, -14% y/y). The sequential increase was mainly driven by 1) non-interest income (which included one-off items related to the sale of land, and tax differences released deducted from tax liability previously formed), and 2) controlled OPEX, despite lower margins.  

The annual decline in profits was mainly attributed to higher booked provisions (EGP126 million versus only EGP30 million last year, which wiped out the positive impact of non-interest income (+55% y/y). Loans remained stable against a 6% increase in deposits pushing LDR down to 62% as of Mar-2021 from 66%.  

1Q21 results key takeaways were:  

  • Margins declined to record 6.2% (-34 bps q/q) as significant rate cuts become apparent coupled with a decline of treasury investments to total assets to stand at 18% (-130 bps q/q) as of March-end 2021.

  • Non-interest income provided support as it increased by 37% q/q and 55% y/y, supported by fees and commissions, investment income, and one-off income. Thus, non-interest income to total operating income recorded 31%, up from 24% in 4Q20.

  • Efficiency improved by 2.3 p​ps q/q where the cost to income ratio recorded 34%, triggered by an increase in operating income by 7% q/q against stable OPEX.

  • Booked provisions came in at EGP126 million implying a cost of risk of 1.9% vs an average of 1.4% over the past 4 quarters. Asset quality deteriorated where NPL ratio recorded 3.5% (-40 bps q/q). Provisions coverage declined to 155% as of March end 2021 down from 164% as of end of December 2020.

  • The effective tax rate rose by 1.1 pps q/q to record 31% as more treasuries get taxed under the new law.

  • The loan portfolio remained stable over 1Q21, mostly driven by the corporate segment. Customer deposits expanded by 6% q/q, bringing down LDR to 62% (-3.7 pps q/q) as of March-end 2020.

CIEB faced significant headwinds in 2020; Expect relative recovery in 2021

CIEB profits in 2020 were hit significantly by rate cuts since the bank doesn’t invest heavily in treasuries to support margins, cancellation of transaction fees and commissions, excess provisioning due to asset quality deterioration, and a higher effective tax rate. 

In 2021, we expect the broad recovery in all accounts from the slump witnessed in 2020. We project the bottom line to expand by 15% on higher interest and non-interest income, especially with better balance sheet growth, and controlled OPEX, despite sustained high CoR compared to historical averages. CoR should record 1.0% versus 0.5% historically but lower than 2020 of 1.4%.

Over the forecast horizon (2020-2025), we project lending growth at a 5-year CAGR of 13%, deposits at 10%, and treasury investments at 9% so that the LDR ratio reaches 79% in 2025 from 66% as of Dec-20. We estimate margins to continue falling, from 6.6% in 2020e to 5.4% in 2025, but would remain healthy supported by the growth of the high-margin retail lending and cheap funding base. Non-interest income is expected to grow at a CAGR of 10%, with lending growth revival, to reach 24% of operating income up from a current 21% in 2020e. Risk-weighted Assets (RWA) would grow at a CAGR of 11% with Capital Adequacy Ratio (CAR) getting slightly pressured on the back of lending revival but staying comfortably above the minimum required by the CBE at an average of 18% over 2020-2025. 

However, over the next period the bank should increase capital financed from equity reserves to reach the minimum required paid in capital of EGP 5 billion.

The stock is currently trading at 5.3x P/E21 (where EPS expands by 15% y/y in 2021) and 0.9x P/B21 with ROAE of 18%.

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