Strong operations muted by high opex, provisions, and soaring effective tax rate, despite improving margins and non-interest income
ADIB 4Q21 consolidated net profit pre minority interest recorded EGP381 million (-2% q/q, +8% y/y). The effect of strong margins and non-interest income during the quarter was muted by high opex, booked provisions, and soaring effective tax rate, bringing the bottom line to a marginal decline of 2% q/q, while lower annual provisions coupled with strong top-line performance brought the bottom line to an increase of 8% y/y.
On a full-year basis, the bottom line came in line with our estimates, recording a strong EGP1,451 million (+21% y/y, and 1% higher than Pharos estimates of EGP 1,440 million), supported by: 1) strong margins, 2) high non-interest income growth, and 3) lower booked provisions, despite higher opex and effective tax rate.
NIM inched up by 60 bps to stand at 5.6% on higher treasury exposure (+19 bps q/q) of 33% to total assets as of Dec-end 2021.
Non-interest income expanded sequentially and annually. Non-interest income represented 16% of operating income in 4Q21 (-65 bps q/q).
OPEX surged annually and sequentially, eating up bottom-line growth, driven by other operating income.
Cost to income ratio deteriorated in 4Q21 to record 47% (+5.6 pps q/q).
The bank booked provisions in 4Q21 amounting to EGP58 million, where the cost of risk came in at 0.5% which is equal to the average of the past four quarters. Coverage ratio declined by 7.4 pps q/q, recording 120%, due to higher NPLs where NPL ratio rose by 17 bps q/q to stand at 3.1%.
The effective tax rate surged annually and sequentially to stand at 38%, versus an average of the past four quarters of 34%.
Lending activity continued growing in 4Q21 by 3% q/q bringing YTD growth to 13%. Deposits grew by 4% q/q, bringing YTD growth to 21% and LDR ratio down to 62% (-29 bps q/q).
ADIB trading attractive multiples; EW until capital increase concludes
We reiterate our Equalweight recommendation on ADIB on a FV of EGP29.29/share, until the conclusion of the rights issue. BoD agreed on increasing the bank’s paid-in capital by EGP2.0 billion, from a current of EGP2.0 billion, to reach EGP 4.0 billion, financed through a rights issue, still up to the GAM approval. Depending on the success of the first issue, the remaining EGP 1.0, to reach the min. required capital of EGP5.0 billion will be financed through either a second round of rights issue or distribution of bonus shares from the 2021 bottom line.
The same ownership structure will be maintained with ADIB UAE owning 49% of the bank, 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 potentially 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 1.9x and P/B 22 of 0.3x, on ROAE of 19%.