Earnings Report /
Egypt

Egyptian Gulf Bank: 2Q22 – Annually strong quarter but sequentially weak

  • Net profit rose cautiously despite no growth in topline and higher OPEX, mainly on lower booked provisions and tax rate

  • Lending growth shrank by 4% q/q bringing YTD growth down to 7%. Deposits slightly expanded by 1% q/q and 10% YTD

  • EGBE is currently trading at P/E22 of 4.6x and P/B22 of 0.5x

Al Ahly Pharos Securities Brokerage
21 August 2022

Lower effective tax rate boosts earnings annually and sequentially; LDR declines

EGBE 2Q22 standalone net profit pre-appropriations recorded EGP212 million (+7% y/y, +22% q/q), which is 5% higher than our bottom-line estimate of EGP202 million.

2Q22 net profit rose cautiously despite no growth in topline and higher OPEX, mainly supported by 1) lower booked provisions, and 2) a 5 pps q/q decline in the effective tax rate.

The annual growth is mainly supported by 1) healthy topline growth, supported by interest and non-interest income growth, 2) a 10 pps y/y decline in effective tax rate, despite higher OPEX and provisions.

Lending growth shrank by 4% q/q bringing YTD growth down to 7%. On the funding side, deposits slightly expanded by 1% to bring YTD growth to 10%. As a result, LDR went down to 37.5% as of Jun-22 (-2 pps q/q).

2Q22 Key takeaways:

  • NIM rose slightly by 6 bps and stood at 3.9% in 2Q22, despite lower treasury exposure standing at 39% (-2.2 pps q/q, -13 pps y/y).

  • Non-interest income declined sequentially but expanded annually (-4% q/q, +57% y/y). Sequential decline was driven by lower fees and commissions and investment income. Accordingly, non-interest income represented 12.5% of the total operating income compared to 13.1% in 1Q22 (-0.56 pps q/q).

  • Efficiency deteriorated as a result of faster growth of OPEX than operating income, where cost to income ratio stood at 48% in 2Q22 (+2.8 pps q/q, +3.5 pps y/y).

  • Provisions amounted to EGP25 million, compared to provisions of EGP38 million in 1Q22 and EGP23 million in 2Q21. Therefore, cost of risk stood at 0.4%, (-0.2 pps q/q). Accordingly, provisions coverage stood at 132% (+9.3 pps y/y, +0.06 pps q/q) as a result of the higher provisions and lower NPLs.

  • Lending shrank by 4% q/q where YTD growth reached 7% mainly due to a contraction in corporate segment activity. Customer deposits grew by 1%q/q. Accordingly, LDR declined by 2 pps q/q as it recorded 37.5% as of Jun-2022.

Positive Outlook; Maintain Overweight

We reiterate our Overweight recommendation on EGBE on FV of USD0.55/share. EGBE started to shift its asset allocation away from treasury investments which reflected positively on the effective tax rate in 1Q22. Moreover, it maintained relatively higher levels of interbank deposits along with stronger lending momentum to minimize the negative effect on the margins. We believe that the bank will continue applying this asset allocation strategy over the next years as to avoid paying very high taxes. Additionally, the bank’s non-interest income will witness partial recovery over 2H22 as the CBE cancelled the exemption of fees and commissions initiative after June 2022, which will also minimize the effect of the limited growth in the top-line on the net profit. Lastly, we believe that asset quality will slowly improve over the next years, while efficiency will start improving in 2022 and going forward, given the improvement that already took place in 1Q22, which will all reflect positively on the bottom-line growth over the next years.

EGBE is currently trading at P/E22 of 4.6x and P/B22 of 0.5x.