Earnings Report /
Egypt

QNB Alahli: 1Q20 – Surge in provisions eats up margin strength; lending grows steadily

  • Strong margins fail to filter through on high CoR; Lending grows steadily

  • 1Q2020 results key takeaways

  • Maintain Overweight; Higher free float should unlock upside potential

Al Ahly Pharos Securities Brokerage
13 April 2020

QNBA 1Q20 net profit pre-minority interest and appropriations came in at EGP1.87 billion (-9% q/q, -8% y/y). Annual and sequential decline were mainly caused by unusually high booked provisions in the first quarter of the year. We expect to see banks booking excess provisions in anticipation of lower asset quality as a result of the repercussions of the covid19 outbreak. ROAE (pre-minority and appropriations) recorded 22%. 1Q2020 results key takeaways were:

  • NIM strengthened to stand at 6.1% on higher interest income (+2% q/q) coming from treasury investments met by a decline of interest expense (-3% q/q) despite lower CASA deposits contribution to total assets. This in turn resulted in net interest income increase by 7% q/q. NIM was mainly supported by higher treasury allocation which recorded 34% of total assets as of Mar-20, (+170 bps q/q)
  • Non-interest income expanded by 3% q/q. Its contribution to operating income declined to 12% in 1Q20 from 13% in the previous quarter due to faster growth in base. 
  • Efficiency deteriorated mainly on sizable 'other impairments' related to leased assets, where cost to income ratio surged from 20% in 4Q19 to 27% in 1Q20.
  • Non-Performing Loans ratio stabilized at 2.7% with higher provisions coverage of 171% on a spike of Cost of Risk to 1.2%.
  • Effective tax rate increased on the back of higher treasury investments recording 31% in 1Q20 versus an average of 26% over the past four quarters.
  • Lending expanded by 2.4% q/q driven by the light weight retail lending. On the funding side, deposits also expanded by 3.7% q/q, bringing loan to deposit ratio to 76% from 77% in the previous quarter due to higher growth in funding than lending. The bank is one of few to exceed the 2019-year end CBE SME portfolio target of 20%, with its SME portfolio at 22.75% of total lending.
Maintain Overweight; Higher free float should unlock upside potential
We reiterate our Overweight recommendation on QNBA on FV of EGP60.00/share. The stock is currently trading at P/B20 and P/E20 of 0.9x, and 4.4x, respectively. Egypt banking sector (including COMI) is trading at an average of P/B20 and P/E20 of 0.7x and 3.4x, respectively. While the bank has already taken the step to raise the free float to 5%, we believe that further regulatory adjustments to raise the free float to 10% would unlock some of the high upside potential for the stock. However, we realize that this may not happen anytime soon.