ADIB Egypt: 1Q21| Profits decline sequentially despite strong top-line

  • Topline sequential improvement wiped out by higher OPEX, provisions and effective tax rate
  • Annual growth driven by lower OPEX
  • Lending activity resumed in 1Q21 after pausing in the previous quarter, growing by 5%.

Topline sequential improvement wiped out by higher OPEX, provisions and effective tax rate; LDR ratio improves  

ADIB 1Q21 consolidated net profit pre-minority interest and appropriations recorded EGP332 million (-6% q/q, +44% y/y), with annualized ROAE of 22%. 1Q21 bottom line declined sequentially on higher OPEX, booked provisions on rising NPLs, and higher effective tax rate. Profits grew annually despite stable top line, mainly on lower OPEX which recorded an exceptionally high figure in 1Q20. Lending activity resumed in 1Q21 after pausing in the previous quarter, growing by 5%. Deposits expanded by a healthy 2% q/q in 1Q21, bringing LDR up to 69%.  

1Q21 results key takeaways:

  • NIM inched down by 4 bps to stand almost unchanged at 4.8% despite higher treasury exposure (+174 bps q/q) of 31% to total assets as of March-end 2021.

  • Non-interest income expanded sequentially, supported by both fees and commissions income (+26% q/q) and investment income (+52% q/q). Non-interest income represented 21% of operating income in 1Q21, growing by 415 bps.

  • OPEX expanded sequentially by 18% to contribute in wiping out the growth witnessed in operating revenues (+10% q/q), capping net operating income growth to 6% q/q. 

  • Cost to income ratio increased in 1Q21 to record 37% (+257 bps q/q).

  • The bank booked high provisions of EGP117 million (+40% q/q, -4% y/y), where cost of risk came in at 1.1% which is almost in line with the average of the past four quarters of 1.2%. Coverage ratio declined by 18.5 pps, recording 150% in tandem with NPL rise by 0.31 bps q/q to stand at 2.6%.

  • Effective tax rate increased by 3 pps, recording 36%, which is higher than the average of the past four quarters of 32%.

  • Lending activity resumed after pausing in 4Q20, to grow at 5% q/q in 1Q21, supported by both retail and corporate segments. Deposits grew by 2% q/q, bringing LDR ratio to 69% (+225 bps q/q).

ADIB trading attractive multiples; Maintain EW on pending rights issue  

We reiterate our Equalweight recommendation on ADIB on FV of EGP20.00/share, pending the conclusion of the rights issue. Management intends to increase capital by EGP3.0 billion while maintaining the same ownership structure (49% for ADIB UAE) without diluting the ownership of minority shareholders. ADIB UAE will use EGP1.5 billion 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 million. The remaining shareholders will subscribe to the remaining EGP1.5 billion. In case there is not 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, given the low multiples, high growth, and relatively higher ADVT within the banking sector, until the rights issue concludes. After the conclusion, we see a huge potential in the bank, with an adequate upside and would recommend buying the stock after any potential pressure created by the announcement.

The stock is trading at P/E 2021 of 1.9x and P/B 2021 of 0.4x, on ROAE of 18% and an EPS growth of 2% y/y in 2021. 

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