Higher net-funded income coupled with impairments reversals and lower taxes support sequential bottom-line growth; lending activity improves
FAIT 4Q21 consolidated net profit pre-minority interest and appropriations recorded EGP1,180 million (+72% q/q, +48% y/y), bringing 2021 bottom line to EGP3.0 billion (+31% y/y).
4Q21 bottom line strong sequential growth is mainly supported by 1) 7% growth in net funded income, 2) 344% growth in non-funded income, driven by net trading income and gains from financial investments, 3) impairments reversals of EGP25 million, compared to impairments of EGP40 million in 3Q21, and EGP119 million in 4Q20, and 4) lower effective tax rate recording 29% in 4Q21 (-11 pps q/q).
On an annual basis, the growth in the bottom line came in despite a slight decline in the net-funded income, mainly supported by 1) a 106% growth in non-funded income, driven by net trading income, 2) higher efficiency reflected in a 10% decline in OPEX, 3) impairments of EGP25 million compared to impairments of EGP119 million in 4Q20, and 4) lower effective tax rate recording 29% which is 5 pps lower on an annual basis.
Gross financing facilities grew by 4% on a sequential basis, and by 19% on an annual basis driven by both the retail and corporate segments, while deposits expanded by 3% q/q and 13% y/y.
3Q21 results key takeaways:
NFM expanded to settle at 5.5% (+35 bps q/q) despite the lower treasury exposure as of December 2021, which recorded 59% to total assets (-3 pps q/q). NFM expansion was supported by the growth in interest-earning assets including due from banks growing by 22% q/q, and net funding facilities growing by 7% q/q, along with the net funded income expanding by 7% q/q on the back of the stronger decline in costs of deposits (-51%), compared to the decline in the income from earning assets (-26%).
Non-funded income expanded sequentially by 344% q/q and 106% y/y, despite lower net fees and commissions income (19% q/q, -22% y/y). The growth was supported by the investment income, driven by dividend income (+22% ) and net trading income (+219%) on a quarterly basis, and driven by net trading income only on an annual basis. Therefore, the contribution of the non-funded income to operating income increased by 17 pps q/q, and 11 pps y/y, to settle at 25% in 4Q21.
Efficiency has improved sequentially and annually reflected in the lower cost to income ratio settling at 20% in 4Q21 (-4 pps q/q, -6 pps y/y) . On a sequential basis, OPEX slightly increased by 10%, driven by the increase in the Zakaa fund support, while operating income increased by 31%. Whereas, on an annual basis, OPEX declined by 10%, supported by lower admin expenses (-10%) despite the higher zakaa fund support (+61%).
Effective tax rate declined by 11 pps q/q and by 5 pps y/y, to record 29%, which supported the sequential and annual bottom-line growth. The decline could be attributable to the lower treasury exposure on an annual and sequential basis, where it stood at 59% as of December 2021 (-3 pps q/q, -0.9 pps y/y), in addition to the lower excess impairments as 4Q21 witnessed impairments reversals of EGP25 million, compared to impairments of EGP40 million in 3Q21, and EGP119 million in 4Q20.
Lending expanded by 4% q/q, and 19%, driven by both the retail and corporate segments. On the funding side, deposits grew by only 3% q/q, and 13% y/y. Therefore, the loan to deposit ratio slightly increased by 0.1 pps q/q and 0.6 pps y/y, recording 13% as of December 2021.
2021 bottom-line growth is driven by top-line growth and impairment reversals, along with controlled opex
2021 bottom-line witnessed a 31% y/y growth, supported by:
A 20% expansion in net-funded income, which came in despite the lower NFM recording 5.5% as of December 2021, compared to 5.7% as of December 2020. Therefore, the growth could be attributable to the stronger growth in income from financing facilities driven by a 15% growth in interest-earning assets, and a slower growth of only 11% in costs of deposits, driven by a 14% growth in interest-bearing liabilities.
A 42% growth in non-funded income, driven by higher investment income.
Lower impairments of EGP213 million (-3% y/y).
Slightly lower effective tax rate (-0.5 pps y/y).
Maintain Overweight on earnings and FV upgrade
We reiterate our recommendation on FAIT to Overweight, on FV of EGP16.00/share after incorporating the performance of the bank in 2021. FY21 bottom-line came in 27% higher than our estimates, mainly driven by the strong growth in the top-line and nonfunded income, impairments reversals, and increased efficiency. Additionally, the bank’s lending momentum started to pick up in 2021 as it grew by 19% YoY. Therefore, we believe that the net income would start to recover strongly over 2023 and 2024, mainly on the back of stabilized net-funded income supported by reviving lending momentum, slightly declining treasury exposure, and higher due from banks, along with a stronger going-forward recovery in the non-funded income driven by net fees and commissions income. Lastly, we believe that the effective tax rate will start to decline slowly over the years as the bank starts to slowly shift its assets away from treasuries, and books lower impairments over the years to avoid paying high taxes on excess impairments.
The stock is currently trading at P/B22 of 0.4x and P/E22 of 2.9x, with ROAE of 15.0%