Robust earnings and lower OPEX compensate for higher booked provisions; Strong balance sheet growth
QNBA 1Q22 net profit pre-minority interest and appropriations recorded EGP2,208 billion (+28% q/q, +12% y/y), which is 3% lower than our estimates of EGP2,267 billion.
1Q22 bottom line strong growth came on the back of 1) a jump in 'other income' which is driven by translation gains of financials assets held in foreign currency, 2) healthy growth in net interest income and fees and commissions, 3) lower OPEX, and 4) lower effective tax rate. Despite higher booked provisions, lending expanded in 1Q22 by 8% while deposits expanding by 9% q/q, with ROAE (pre-minority and appropriations) of 19%.
1Q22 results key takeaways were:
NIM declined by 18 bps q/q to record 5.1% on slower increase in net interest income (+4% q/q) against a faster base growth of interest earning assets of 8% q/q mainly driven by interbank deposits and net loans.
Non-interest income expanded by 62% q/q, mainly boosted by other income and investment income coupled with higher net fees and commissions. Non-interest income contribution to operating income increased by 6.5 pps q/q to 21% in 1Q22.
Efficiency improved boosted by an expansion in operating income by 12% q/q which was met by a decline in OPEX by -6% q/q, where cost to income ratio recorded 21% in 1Q22 (-4.0% q/q).
Non-Performing Loans ratio remained mostly stable (+9 bps q/q) to record 3.9% with stable provisions coverage of 142% and Cost of Risk of 2.1%.
Effective tax rate declined by 3 pps to stand at 32% which is slightly higher than the average of the past four quarters of 31%.
Lending expanded by 8% q/q driven by corporate sector. On the funding side, deposits grew by 9% q/q, bringing down loan to deposit ratio to 61% (-0.7 pps q/q).
Maintain Overweight; Stock liquidity is a major drag
We reiterate our Overweight recommendation on QNBA on FV of EGP25.00/share. The stock is currently trading at 2022 multiples of P/B of 0.7x and P/E of 4.3x. 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.