Annual growth witnessed in most business lines despite higher OPEX and taxes; Sequential decline driven by lower IB operating revenue and higher taxes coupled with a surge in NBFI OPEX
1Q22 group attributable net profit recorded a healthy EGP345 million (-14% q/q, +18% y/y, and +7% higher than our estimates of EGP322 million). IB represented 51% of attributable bottom line, NBFI represented 28% and aiBank represented 21% (as both IB and NBFI platform profits declined).
Annual increase in profits was capped by a surge in taxes on the IB platform side, despite improved performance across all business lines expect PE, treasury operations, and leasing.
Sequential decline was softened by the group’s share in aiBank profits (c.EGP72 million, which represents 21% of 1Q22 group net attributable profit). IB and NBFI platforms failed to provide support. IB profits sequentially declined on lower operating revenue and higher taxes, despite a plunge in OPEX, while NBFIs profits sequentially declined on a surge in OPEX and taxes, despite improved operating revenue.
Group financial results in 1Q22 included the consolidation of aiBank’s first full quarter of results, post EFG Hermes’ acquisition of a majority stake (51%) during 4Q21
Business lines in focus
IB, Capital Markets and Treasury Operations' (46% of 1Q22 Group operating revenue) quarterly revenues contracted on a sequential basis mainly driven by lower AM (which included FIM’s incentive fees booked at year-end in the comparable quarter) and IB business followed by PE. On an annual basis, revenues grew mainly driven by the brokerage business followed by IB and AM which combined overshadowed the decline in PE and treasury operations.
NBFI (31% of 1Q22 Group operating revenue) revenues strengthened annually and sequentially mainly driven by ValU and Tanmeyah while leasing waned and factoring only showed annual expansion.
Tanmeyah (20% of 1Q22 Group operating revenue) represented 66% of the NBFI revenue in 1Q22 (-4pps q/q). Total outstanding portfolio expanded to EGP3.9 billion as of Mar-end 2022 (+6% q/q, +22% y/y). Tanmeyah did not book any additional provisions in 1Q22, maintaining a balance of EGP283 million. However, coverage remains well above the PAR 30+ and 90+ indicators. By the end of 1Q22, operational branches increased by 4, reaching 304, during the quarter.
ValU (7% of 1Q22 Group operating revenue) represented 24% of NBFI’s revenue in 1Q22 (+8 pps q/q), where growth came in strong annually and sequentially (+70% q/q, +157% y/y) with an outstanding portfolio of EGP2.9 million (+47% q/q, +196% y/y) (including securitized portfolio of EGP 179 billion). ValU ended 1Q22 with provisions of EGP76 million, increasing from EGP69 million. However, the coverage ratio decreased from 4.4% to 3.1% as the portfolio showed robust growth.
Leasing (2% of 1Q22 Group operating revenue) represented 7% of NBFI’s revenue in 1Q22 (-5 pps q/q), where revenues weakened annually and sequentially. New bookings in 1Q22 recorded a strong EGP2,062 million (+60% q/q, +141% y/y), taking the total outstanding portfolio to EGP7.4 billion (+28% q/q, +36% y/y) excluding securitized portfolio of EGP704 million. No provisions were booked during 1Q22, mainly on the back of a stability in accounts and by the end of 1Q22 Leasing total provisions stood at EGP64 million.
Factoring (1% of 1Q22 Group operating revenue) represented 3% of NBFI’s revenue in 1Q22 (-2% q/q). Revenues more than doubled annually but declined sequentially. Outstanding portfolio expanded to stand at EGP2,048 million (+8% q/q, +151% y/y). No provisions were booked during 1Q22, mainly on the back of a stability in accounts and by the end of 1Q22 Leasing total provisions stood at EGP64 million.
aiBank (23% of 1Q22 Group operating revenue) first quarter revenues were consolidated on HRHO’s books recording EGP 441 million which filtered into net attributable profit of EGP72 million.
Group OPEX contracted sequentially on lower employee expenses but expanded annually, to reflect the consolidation of EGP203 million of aiBank’s operating expenses, ValU’s higher marketing and third-party expenses as business multiplied in size y/y, that is in addition to the y/y increase in the Group salaries reflecting inflationary pressures. The employee expenses to revenues contracted reaching 41% up from 47% in 4Q21.
Maintain Overweight at an upated FV of EGP 19.50/share based on latest company developments
Lending businesses (NBFIs) which management sees at 50% of bottom line in 2 years (up from c.24% in FY21) should improve group margins with improved economic conditions and lower booked provisions. Microfinance and consumer finance services compromise 36% of FV, while leasing and factoring are 7% of FV.
AIB (12% of FV) is expected, within two years, to improve group profitability, and RoE by complimenting other lending businesses and creating new cross selling opportunities across the group. On the long term, commercial banking activities are expected to yield high RoEs, around the mid-teens ("AIB” 51% share valued at EGP2.6 bn).
The investment banking arm (20% of FV) is expected to be a key beneficiary of the revival in trading volumes in 2022 and healthy pipeline of IPOs, through its solid brokerage market share (north of 20%) and its strong IB/advisory business.
New Ventures: Factoring, Online Payment Platform “PayTabs”, Insurance, and Mortgage Finance, altogether will not have a meaningful contribution in FY22 but should have positive contribution on the longer-term.
HRHO is highly rich in cash with excess cash valued at EGP5.85/share (which is almost 39% of market price and 25% of FV), post the bank acquisition.
The company is currently trading at P/E22 9.1x and P/B22 0.9x.