A surge in opex wipes out sequential growth and drags down annual profits along with lower holding and treasury revenues
HRHO 2Q22 net profit after tax and minority interest came in at EGP 344 million (0% q/q, -15% y/y, and 11% lower than our estimates of EGP 386 million) so that 1H22 reaches EGP689 million (-1% y/y).
Sequential growth of revenues (+16% q/q) mainly from aibank (+28% q/q) and IB platform (+10% q/q), driven by revenues from IB activity (+25% q/q). Such growth however was completely wiped out by:
1. A decline in NBFIs revenues (-16% q/q) driven by ValU and Tanmeyah.
2. Faster growth of opex (+16% q/q) than operating revenues (+6% q/q), driven by other operating expenses which included EGP166 million of provisions, 71% of which is related to aibank (EGP 118 million). As a result, net operating profit declined by 10% q/q.
However, lower sequential taxes limited bottom line decline to end stable at EGP 344 million (0% q/q), as the Investment Bank stronger revenues were generated from operations outside Egypt.
Annual decline in profits was caused by:
1. A decline IB revenues driven by lower revenues coming from holding and treasury that trickled down to the bottom line, despite growth in all business lines of the IB platform.
2. Slow growth of NBFIs platform revenues mainly on lower revenues from Tanmeyah.
3. A surge in other opex, across all three platforms, to end with a declining or flat net operating profit for each, driven by high booked provisions by aibank which recorded EGP118 million (71% of group total provisions in 2Q22), higher inflation and weaker EGP.
However, the bottom line declined despite the support coming from aibank of EGP 76 million.
Business lines in focus
IB, Capital Markets, and Treasury Operations' (47% of 1H22 Group operating revenue) quarterly revenues expanded on a sequential basis mainly driven by exceptional IB business activities which compensated for the decline caused by the holding and treasury operations. On an annual basis, revenues contracted by 11% mainly due to a plunge in holding and treasury operations which overshadowed the healthy growth of all business lines.
NBFI (28% of 1H22 Group operating revenue) revenues declined sequentially mainly driven by ValU and Tanmeyah while leasing came as a bright spot. Annual growth was limited by Tanmeyah while other business lines showed little or stable revenue growth.
Tanmeyah (19% of 1H22 Group operating revenue) represented 71% of the NBFI revenue in 2Q22 (+5 pps q/q) despite revenues decreasing annually and sequentially. Total outstanding portfolio expanded to EGP4.0 billion as of Jun-end 2022 (+4% q/q, +21% y/y). Tanmeyah did not book any additional provisions in 2Q22, maintaining a balance of EGP283 million. However, coverage remains well above the PAR 30+ and 90+ indicators.
ValU (5% of 1H22 Group operating revenue) represented 14% of NBFI’s revenue in 2Q22 (-10 pps q/q), as it plunged sequentially by 50%, but growth came in healthy annually at 9% with an outstanding portfolio of EGP3.6 million (+24% q/q, +227% y/y). ValU ended 2Q22 with provisions of EGP82 million, increasing from EGP76 million.
Leasing (3% of 1H22 Group operating revenue) represented 12% of NBFI’s revenue in 2Q22 (+4 pps q/q), where revenues strengthened annually and sequentially despite lower new bookings of EGP678 million (-67% q/q, -15% y/y), which represent only 40% of approved bookings in 2Q22, thus strong bookings are in the pipeline for 3Q22, taking the total outstanding portfolio to EGP7.8 billion (+5% q/q, +38% y/y) as of Jun-22. Provisions of EGP 7 million were booked during 2Q22 to reach a provisions balance of EGP 71 million, mainly on the back of updating the ECL model accounting for weaker macro-economic indicators.
Factoring (1% of 1H22 Group operating revenue) represented 3% of NBFI’s revenue in 2Q22 (0% q/q). Revenue growth slowed down annually tp record 17% y/y but declined sequentially by 22%. Outstanding portfolio recorded EGP2,048 million (-14% q/q, +59% y/y).an additional EGP11.2 million of provisions were booked during 2Q22 to reach a provisions balance of EGP37 million as of Jun-22.
aiBank (25% of 1H22 Group operating revenue) second quarter revenues were consolidated on HRHO’s books recording EGP 564 million which filtered into a net attributable profit of EGP76 million (+6% q/q). The bank's NPL ratio decreased along with higher provision coverage and a higher Loan- to-Deposit ratio.
Group OPEX expanded sequentially and annually driven by other OPEX despite controlled employee expenses, due to aiBank’s consolidated expenses which included a surge in provisions in 2Q22 of EGP 118 million out of EGP166 million for the whole group, coupled with higher inflation and weaker EGP for the rest of the group. The employee expenses to revenues contracted to reach 40% down from 41% in 1Q22 and 45% a year ago.
Maintain Overweight on a FV of EGP 19.50/share
Lending businesses (NBFIs) which management sees at 50% of the bottom line in 2 years (up from c.23% in 1H22) 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. In 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 a 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 as of Mar-22 (which is almost 39% of market price), post the bank acquisition.
The company is currently trading at P/E22 7.8x and P/B22 0.7x.