Earnings Report /
Egypt

ADIB Egypt: 1Q20 – High OPEX overshadows strong operational quarter; lending expands

  • High OPEX overshadow strong operational quarter

  • We reiterate our equalweight recommendation on ADIB on FV of EGP12.75/share, pending the conclusion of the rights issue

  • Decline in profits was mainly mostly attributed to a spike in ‘other operating expenses’ coupled with a higher effective

Bottom line declines on surging OPEX despite strong financial indicators

ADIB 1Q20 consolidated net profit pre-minority interest and appropriations recorded EGP230 million (-12% q/q, -18% y/y), with an annualized ROAE of 18%. The decline in profits was mainly mostly attributed to a spike in ‘other operating expenses’ coupled with a higher effective tax rate, while operating income and balance sheet witnessed solid growth. 1Q2020 results key takeaways were:

  • NIM remained sequentially stable at 6.0% despite lower treasury exposure by 130 bps to stand at 32% of total assets as of March-end 2020. Net-interest income expanded by 8% q/q as interest income grew at 2% q/q while interest expense declined by 2% q/q.
  • Non-interest income also provided support to earnings by expanding 31% q/q, driven by fees and commissions which surged by 43% q/q. Non-interest income represented 19% of operating income in 1Q20, growing by 274 bps. 
  • OPEX surged sequentially by 44% mainly on higher ‘other provisions’, to completely wipe out operating income growth of 11% q/q resulting in a declining net operating income by 7% q/q. 
  • Cost to income ratio, rose 11pps to record 51%. 
  • The bank booked adequate provisions of EGP121 million (-19% q/q, 199% y/y), where cost of risk came in at 1.3% which is lower than the previous quarter of 1.8% but is equal to the average of the past four quarters, with an increase in coverage ratio by 7pps, recording 138%. Asset quality slightly improved with an NPL ratio of 2.9% (-24 bps q/q). 
  • Higher effective tax rate was recorded, increasing by 3pps to stand at 37% in 1Q20.
  • Lending witnessed robust growth of 9% over the first quarter of the year, while customer deposits grew by 1% q/q bringing Loan-to-Deposit ratio to record 77% (+5.6pps q/q) as of March 2020 ending balance.

ADIB trading attractive multiples, Maintain EW pending rights issue 

The stock is trading at an annualized P/E 2020 of 3.0x, and P/B 2020 of 0.5x, on ROAE of 18% and an EPS contraction of 18% y/y in 2020, if first-quarter profits were annualized. We are currently revising our valuation assumptions in light of the current challenges faced by the economy resulting from the virus outbreak

We reiterate our equalweight recommendation on ADIB on FV of EGP12.75/share, pending the conclusion of the rights issue. Management intends to increase capital by EGP3.0 bn while maintaining the same ownership structure (49% for ADIB UAE) without diluting the ownership of minority shareholders. ADIB UAE will use EGP1.5 bn of the total EGP1.8 billion already injected under capital increase to subscribe to the capital increase and redeem back the excess that is almost EGP300 mn. The remaining shareholders will subscribe to the remaining EGP1.5 bn. In case there aren’t enough subscriptions, ADIB UAE related parties will step in to cover for the balance. At current prices, we recommend trading the stock cautiously on a ST basis only, until the rights issue concludes in 2H2020 since we expect that it will have a negative impact on the price of the stock. Post the right issue conclusion, the stock will offer an unmatched investment opportunity, given the low multiples, high growth and relatively higher ADVT within the banking sector.