Healthy topline growth overshadowed by a surge in other OPEX while provisions reversal saves the scene; LDR ratio wanes
ADIB 2Q21 consolidated net profit pre-minority interest and appropriations recorded EGP349 million (+5% q/q, +16% y/y), with annualized ROAE of 24%. 2Q21 bottom line growth was mainly caused by provisions reversals of EGP15 million in 2Q21 coupled with lower effective tax rate and healthy growth of topline that was wiped out by a decline in non-interest income and a surge in other expenses. Profits grew annually on similar trends of provisions reversals and healthy topline despite higher opex and effective tax rate. Lending activity slowed down in 2Q21, contracting by 1% after witnessing adequate growth In the previous quarter bringing YTD growth to 3%.Deposits expanded by a healthy 2% q/q in 2Q21, bringing YTD growth to 4% and LDR down to 73% (-2 pps q/q).
2Q21 results key takeaways:
NIM inched up by 8 bps to stand almost unchanged at 4.9% on higher treasury exposure (+147 bps q/q) of 32% to total assets as of June-end 2021.
Non-interest income declined sequentially and annually, as the previous quarter included gain from the sale of financial investments and last year included high net trading income. Non-interest income represented 16% of operating income in 2Q21, contracting by 5.5 pps q/q.
OPEX expanded sequentially by 28%, to continue wiping out topline growth, bringing net operating income decline to -20% q/q.
Cost to income ratio surged in 2Q21 to record 49% (+11.5 pps q/q).
The bank reversed provisions in 2Q21 amounting of EGP15 million, where cost of risk came in at -0.1% which is lower than the average of the past four quarters of 1.1%. Coverage ratio declined by 11 pps q/q, recording 140%, due to higher NPLs where NPL ratio rose by 17 bps q/q to stand at 2.6%.
Effective tax rate declined by 2 pps, recording 34%, but remains higher than the average of the past four quarters of 32%.
Lending activity slowed down after recovering in the previous quarter, to slightly contract by 1% q/q bringing YTD growth to 3%. Deposits grew by 2% q/q, bringing YTD growth to 4% and LDR ratio down to 73% (-2 pps q/q).
ADIB trading attractive multiples; EW on recent share price rally and pending rights issue
We reiterate our Equalweight recommendation on ADIB on FV of EGP20.00/share, especially after the recent share price rally, and 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 2021of 3.1x and P/B 2021of 0.5x, on ROAE of 18%and an EPS growth of 22% y/y in 2021.