Highest single quarter provisions wipe out healthy operational performance; LDR declines
QNBA 4Q21 net profit pre-minority interest and appropriations recorded EGP1.62 billion (-15% q/q, -12% y/y), bringing FY21 bottom line to EGP7.63 billion (+1.8% y/y).
The 4Q21 bottom-line annual and sequential decline was driven by record provisions ( more than tripling q/q to bring 2021 total provisions balance 6% higher than 2020 levels) and high effective tax rate, despite 1) solid maintained NIMs of 5.3%, 2) healthy growth of non-interest income, and 3) controlled operating expenses only on a sequential basis. Lending grew at 2.7% in 4Q21, bringing YTD growth to 5.8%, while deposits expanded by 7.5% q/q, bringing YTD growth to 27%, which resulted in a lower LDR of 62% (-2.9 pps q/q).
4Q21 results key takeaways:
NIM stabilized at 5.3 bps q/q on higher treasury exposure which recorded 37% to total assets ( +25 bps q/q).
Non-interest income expanded by 12% q/q on improved fees and commissions income and investment income. Its contribution to operating income inched up by 53 bps q/q to 12.7% in 4Q21.
Efficiency improved as operating income expanded by 7% q/q against a decrease in opex of 5% q/q, where cost to income ratio recorded 25.6% in 4Q21(-3.1 pps q/q).
Provisions coverage jumped to 143% (+11 pps q/q) as a result of surging CoR at 2.1%, against a stable non-performing loans ratio of 3.8%.
Effective tax rate rose to 36% during the quarter (+4 pps q/q) which is higher than the average of the past four quarters of 30%.
Lending expanded by 2.7% q/q, reaching 5.8% YTD mostly driven by the corporate segment. On the funding side, deposits grew by 7.5% q/q, reaching 26.6% YTD, bringing down loan to deposit ratio to 62% (-2.9 pps q/q, -12.2 y/y).
Maintain Overweight; 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 4.7x. 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.
Management proposed cash dividends distribution of EGP1.3/share (DY 7.0%) , 50% above our estimates of 0.87/share.