Earnings Report /
Egypt

QNB Alahli: 3Q22 – Strong annual growth; sequentially stable due to provisioning spike

  • Annual growth was supported by robust margins that trickled down to the bottom line

  • Sequential limited growth was caused by: lower investment income, higher OPEX, provisions and effective tax rate

  • Gross loans expanded by 4% q/q, bringing YTD growth to 17%, while deposits grew by 11% q/q, bringing YTD growth to 27%

Al Ahly Pharos Securities Brokerage
11 October 2022

Robust margins fail to boost earnings as OPEX, provisions, and effective tax rate surge sequentially; Lending grows

QNBA 3Q22 bottom line came in at EGP2,577 million (+1% q/q, +35% y/y), bringing 9M22 bottom line to EGP 7,332 million (+22% y/y).

Annual growth was supported by robust margins that trickled down to the bottom line supported by non-interest income and lower OPEX despite a surge in provisions and effective tax rate.

Sequential limited growth was caused by: 1) lower investment income due to high comparable base, which limited the positive impact of strong margins, coupled with 2) higher OPEX, 3) higher provisions and 4) higher effective tax rate.

9M22 net income reached EGP7,332 million (+22% y/y) on annual basis, where strong bottom line came on the back of: 1) strong margins, 2) higher non-interest income on both fronts, fees, and commissions, and investment income, despite, higher OPEX (+10 y/y), provisions (+93% y/y), and effective tax rate.

The balance sheet showed healthy growth where gross loans expanded by 4% q/q, bringing YTD growth to 17%, while deposits grew by 11% q/q, bringing YTD growth to 27%. Accordingly, LDR ratio recorded 57% (-4.3 pps q/q) as of Sep22.

3Q22 key takeaways were:

  • NIM expanded to record 5.5% (+27 bps q/q), despite lower treasury exposure of 33% to total assets (-3.7 pps q/q).

  • Non-interest income contracted on lower investment income, despite higher fees and commissions, to stand at 13% to operating income (-2.5 pps q/q).

  • The bank booked sequentially higher provisions during 3Q22 where the cost of risk (CoR) recorded 1.7% vs 1.3% in the previous quarter. Asset quality slightly deteriorated as non-performing loans recorded 4.2% (+10 bps q/q), with higher provisions coverage of 138% (+2.3 pps q/q).

  • Efficiency improved, where the cost-to-income ratio declined to stand at 20% from 21% in the previous quarter and versus an average of 24% over the previous four quarters.

  • Effective tax rate recorded 34% in 3Q22 versus an average of 32% over the past four quarters.

  • Loans grew in 3Q22 by 4% q/q, bringing YTD growth to 17%, while deposits grew by 11% q/q, bringing YTD growth to 27%. Accordingly, LDR ratio recorded 57% (-4.3 pps q/q) as of Sep22.

Maintain Overweight; stock liquidity is a major drag

We reiterate our Overweight recommendation on QNBA on FV of EGP25.00/share. The stock is currently trading at 2022 multiples of P/B of 0.7x and P/E of 4.1x. While the bank has already taken the step to raise the free float to 5%, we believe that further regulatory adjustments to raise the free float to 10% would unlock some of the high upside potential for the stock. However, we realize that this may not happen anytime soon.