Earnings Report /

Egyptian Gulf Bank: 3Q21 earnings decline on higher provisions; lending stabilises

  • Quarterly earnings eaten up by provisions

  • Annual earnings supported by higher net-interest income along with lower provisions and opex

  • Performance is stabilising; Fair Value under review

Bassma Bakry
Al Ahly Pharos Securities Brokerage
10 November 2021

Quarterly earnings eaten up by provisions; annual earnings supported by higher net-interest income along with lower provisions and opex

EGBE 3Q21 standalone net profit pre-minority interest and appropriations came in at EGP173 million (-1% q/q, +16% y/y), bringing 9M21 net income to EGP507 million (+9% y/y). The sequential minimal decline in the bottomline came in despite the topline growth of 9%, the non-interest income growth of 28% and the 0.4% limited growth in OPEX. It is mainly attributable to the booked provisions of EGP57 million, which is 148% higher than 2Q21. Quarterly earnings were further supported by a 19% expansion in the net operating income.

Alternatively, the annual improvement was supported by: 1) 16% increase in net interest income, 2) 32% increase in net fees and commissions, 3) increased efficiency supported by a 3% decline in OPEX, and 4) lower booked provisions (-59% y/y). 9M21 bottom line grew by 9% on an annual basis, recording EGP507 million. This was supported by other operating income amounting to EGP151 million compared to EGP22 million in 2020 (+587% y/y), controlled OPEX which declined by 11% y/y and lower provisioning (-22% y/y). However, the annual growth was highly constrained by a significant increase in the effective tax rate which jumped from 38% in 9M20 to 55% in 9M21 (+17 pps y/y).

The balance sheet implied that the lending growth slowed down sequentially, but started to pick up on an annual basis, and funding increased sequentially and annually on the back of increased deposits.

3Q21 Key takeaways:

  • NIM expanded by 26 bps and stood at 4.1% in 3Q21, on the back of increased treasury exposure over 3Q21 standing at 55%, up from 51% in 2Q21. This can be attributed to the slowed lending momentum as the loan to deposits ratio stabilized at 36%, implying a 0.2 pps decline q/q.

  • Non-interest income increased sequentially, but plummeted annually (+28% q/q, -15% y/y). Sequential improvement came on the back of the higher net fees and commissions income which grew by 42% q/q, in addition to EGP8 million booked in other operating income. The annual decline took place despite the 32% y/y increase in the net fees and commissions, mainly as a result of the lower net trading income realized bringing the investment income to EGP15 million (-71% y/y). Therefore, non-interest income represented 10% of operating income compared to 9% in21Q21 (-1.3 ppts q/q).

  • Efficiency improved over 3Q21 since the cost to income ratio decreased and stood at 41% in 3Q21 despite increased operating income on a quarter and annual basis (+10% q/q, +12% y/y), mainly as a result of stable OPEX sequentially and lower OPEX annually.

  • Booked provisions recorded EGP57 million in 3Q21, compared to EGP23million in 2Q21 and EGP139 million in 3Q20 (+148% q/q, -59% y/y). Therefore, cost of risk stood at 0.9% (+0.6 pps q/q), while provisions coverage fell to 130% (-2pps q/q), due to 0.2 pps increase in the NPL ratio which recorded 5.6%, compared to 5.4% in 2Q21. The NPL ratio has been following an uptrend over the past 4 quarters as it increased from 3.8% in 1Q20 to 5.6% in 2Q21, which is in the green since it can be supported by the high provisions coverage.

  • EBT witnessed a growth of 11% sequentially and 73% annually. Sequential growth was mainly supported by the top-line growth, non-interest income and controlled OPEX. Alternatively, the annual growth can be attributed to the increased top-line, lower OPEX and lower provisioning. However, this high growth was wiped out by the high income taxes paid, as the effective tax rate stood at 59% in 3Q21, up from 39% last year, which is directly related to the bank’s relatively high treasury allocation.

  • Lending growth slowed down sequentially as it dropped by 1%, and grew by 4% y/y bringing the YTD growth to 2%. Customer deposits also dropped by 15% q/q and 4% y/y, bringing the YTD growth to -3%. Accordingly, LDR stabilized at 36% (-0.2 pps q/q).

  • Treasury exposure increased by 3.2pps q/q to stand at 55% of the total assets as of September-end 2021. This is expected to have a negative effect on the future effective tax rates if this high trend persists.

9M21 key takeaways :

  • 9M21 bottom line recorded EGP507 million, which is 9% higher than 9M20. This improvement came in as a result of the one-off gains (other operating income), controlled OPEX along with lower provisions.

  • Non-interest income increased by 17% on the back of other operating income realized in 9M21 amounting to EGP151 million, compared to EGP22 million in 9M20. This was the main driver of the bottom-line growth, however, it translated to a limited growth rate due to the surge in effective tax rate as it jumped from 115% in 9M20 to 164% in 9M21.

Performance is stabilising; Fair Value under review

Estimates for EGBE will need a revision in light of 9M21 results, since the bank’s performance in 3Q21 and 9M21 was positive as interest income witnessed a fair growth of 9% q/q and 1% y/y, in addition to the controlled OPEX (+0.4% q/q, -3% y/y). However, the bottom-line implied a negative growth sequentially due to the increased provisioning compared to 2Q21. Additionally, the lending momentum of the bank has slowed down, along with increased treasury allocation which costs the bank a lot in taxes under the new tax law. However, the bank has been successful in managing OPEX, reflected in the cost-to income ratio.

EGBE is currently trading at annualised P/E21 of 4.78x and annualized P/B21 of 0.49