Weak margins and stable fees result in muted operating income growth; Provisions slightly lower
QNBA 1Q21 net profit pre-minority interest and appropriations recorded EGP1.97 billion (+6% q/q, +5% y/y), which is in line with our estimates of EGP1.99 billion (our estimates were 1% higher).
1Q21 bottom line growth came on the back of a jump in 'other income', and lower provisions while margins and net fees and commissions declined. Lending grew marginally in 1Q21 inching up by 0.8% while deposits expanding by 6% q/q, with ROAE (pre-minority and appropriations) of 20%.
1Q21 results key takeaways were:
NIM declined by 7 bps q/q to record 5.3% held by a marginal increase in net interest income (+1% q/q) against a faster base growth of interest earning assets of 5% q/q mainly driven by treasury investments, which recorded 31.8% of total assets (+0.42 bps q/q).
Non-interest income expanded by 3% q/q, boosted by other income and investment income compensating for the decline witnessed in net fees and commissions. NII contribution to operating income increased by 30 bps q/q to 15.3% in 1Q21.
Efficiency deteriorated slightly boosted by faster expansion of opex by 6% q/q than in operating income which was broadly stable (+1% q/q), where cost to income ratio recorded 22% in 1Q21 (+1.1% q/q).
Non-Performing Loans ratio grew by 31 bps q/q to record 3.3% with lower provisions coverage of 166%, as Cost of Risk declined by 41 bps q/q recording 1.1%.
Effective tax rate remained stable at 29% which is equal to the average of the past four quarters.
Lending expanded by 0.8% q/q driven by retail sector. On the funding side, deposits grew by 6% q/q, bringing down loan to deposit ratio to 70% (-3.8 pps q/q).
Maintain Overweight; Liquidity is a major drag
We reiterate our Overweight recommendation on QNBA on FV of EGP26.26/share. The stock is currently trading at 2021 P/B of 0.8x and P/E of 4.8x, 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.