Robust margins boost earnings despite weak non-funded income, higher provisions and effective tax rate; LDR improves
SAUD 2Q22 net profit recorded EGP414 million (+12% y/y, +18% q/q), 9% higher than our estimates for 2Q22 of EGP 380 million, bringing 1H22 to EGP 783 million (+26% y/y).The sequential improvement is mainly attributed to 1) robust margins, and 2) controlled OPEX, despite lower non-funded income, higher provisions and higher effective tax rate. The annual increase came on the back of strong margins and lower provisions despite lower non-funded income, higher OPEX and higher effective tax rate.
On the balance sheet side, gross financing facilities expanded by 8% q/q reaching 19% YTD, driven by both retail and corporate segments. Customer deposits expanded by 1% q/q, after contracting on the previous quarter, bringing YTD growth to 1%. Accordingly LDR rose to 40% as of Jun-22 (+2.4 pps q/q, +6.7 pps y/y).
2Q22 results key takeaways:
NFM expanded and stood at 5.0% (+97 bps q/q, +79 bps y/y) as treasury exposure increased over 2Q22 to record 35% of the total assets (+0.34 pps q/q +8.6 pps y/y) further supporting the growth in NFM and top-line.
Non-funded income failed to support earnings as it declined annually and sequentially despite a 22% annual increase in net fees and commissions income. As a result, non-funded income recorded 9.6% of operating income in 2Q22 (-3.45 pps q/q, -6.0 pps y/y).
Efficiency has improved on a sequential basis due to faster growth of operating income than operating expenses. Therefore, cost to income ratio stood at 24% in 2Q22 (-3.7 pps q/q).
Impairments coverage has witnessed a significant improvement as it recorded 188% (+16 pps q/w, +107 pps y/y). Improvement is mainly supported by a 9% q/q an d19% decline in non-performing facilities. The CoR stood at 1.6% as of Jun22 (+0.54pps q/q, -1.3 pps y/y).
The effective tax rate surged to 30% (+4 pps q/q, +6 pps y/y) potentially driven by higher treasury exposure and excessive impairments.
Financing expanded by 8% q/q reaching 19% YTD, driven by both retail and corporate segments. While customer deposits expanded by 1% q/q, after contracting on the previous quarter, bringing YTD growth to 1%. Accordingly LDR rose to 40% as of Jun22 (+2.4 pps q/q, +6.7 pps y/y)signaling a healthy growth of the balance sheet and increased lending momentum.
Positive outlook given expected strong performance and improved asset quality; Maintain Overweight
We reiterate our overweight recommendation on SAUD on FV of EGP20.00/share. Our outlook for SAUD reflects a recovery in performance in 2022 and going forward supported by lower excess impairments as asset quality starts to improve slightly over the years, stronger efficiency, the expected recovery in net fees and commissions income over 2H22, along with top-line growth supported by the expected increase in rates and probable temporarily increase in treasury exposure over the next two years to maximize the benefit from rate hikes.
However, we believe that the bank is going to control its treasury exposure cautiously to avoid high effective tax rates wiping out bottom-line gains. It will slowly start to migrate from investing in treasuries to increased financing to avoid paying high taxes, supported by the increased financing momentum realized YTD.
Accordingly, we expect the top-line to fully recover in 2022 and going forward on the back of the bank’s controlled treasury exposure, strong top-line growth, expected improvement in efficiency in addition to lower excess impairments and higher non-funded income supported by the recovery in net fees and commissions over 2H22 and going forward.
The stock is one of the cheapest amongst listed banks. The stock is currently trading at P/B22 of 0.5x and P/E22 of 2.4x, with ROAE of 20%.