Strong operating income trickles down to profits supported by controlled opex and lower provisions; LDR ratio declines
ADIB 3Q21 bottom line recorded EGP389 million (+12% q/q, +24% y/y) bringing 9M21 bottom line to EGP1,069 (+27% y/y). The annual and sequential improvement came on the back of strong interest and non-interest income growth. Controlled opex further supported sequential growth, while lower provisions supported annual growth despite a soaring effective tax rate of 34% in 3Q21 (+6 pps y/y). Gross loans expanded by 4% q/q bringing YTD growth to 9%, while customer deposits expanded by 12% bringing YTD growth to 16%.
9M21 bottom line reached EGP 1,069 million (+27% y/y) driven by: 1) healthy topline, 2) non-interest income expansion, 3) limited opex growth, and 4) a drop in booked provisions (-67% qy/y), despite higher effective tax rate recording 35% (+3.3 pps y/y).
3Q21 results key takeaways:
NIM inched up by 5 bps to stand almost unchanged at 5.0% on higher treasury exposure (+78 bps q/q) of 33% to total assets as of Sep-end 2021.
Non-interest income expanded sequentially and annually. Non-interest income represented 17% of operating income in 3Q21 (+96 bps q/q).
OPEX contracted sequentially by 9%, further supporting topline growth, bringing net operating income expansion to +22% q/q.
Cost to income ratio improved in 3Q21 to record 42% (-7.2 pps q/q).
The bank booked little provisions in 3Q21 amounting to EGP16 million, where cost of risk came in at 0.1% which is lower than the average of the past four quarters of 0.8%. Coverage ratio declined by 12 pps q/q, recording 127%, due to higher NPLs where NPL ratio rose by 12 bps q/q to stand at 2.9%.
The effective tax rate remained almost stable sequentially at 34%, but this is still higher than the average of the past four quarters of 33%.
Lending activity picked up after shrinking in the previous quarter, to grow by 4% q/q bringing YTD growth to 9%. Deposits grew by 12% q/q, bringing YTD growth to 16% and LDR ratio down to 62% (-4.6 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 are not enough subscriptions, ADIB UAE-related parties will step in to cover 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 22 of 2.1x and P/B 22 of 0.4x, on ROAE of 17%.