Earnings Report /
Egypt

Faisal Islamic Bank of Egypt: A positive quarter sequentially and annually; Lending activity grows

  • Higher net-funded income coupled with lower provisions and taxes support sequential bottom-line growth

  • LDR slightly improves

  • Upgrade to Overweight; Performance is stabilizing

Bassma Bakry
Al Ahly Pharos Securities Brokerage
29 November 2021

Higher net-funded income coupled with lower provisions and taxes support sequential bottom-line growth; LDR slightly improves

FAIT 3Q21 consolidated net profit pre-minority interest and appropriations recorded EGP687 million (+26% q/q, +10% y/y), bringing 9M21 bottom line to EGP1.84 billion (+24% y/y).

3Q21 bottom line strong sequential growth came despite a 34% decline in non-funded income, mainly on the back of 1) 14% growth in net funded income, 2) well-maintained efficiency reflected in a 0% growth in OPEX, 3) lower booked impairments, and 4) lower effective tax rate. Alternatively, the annual growth in the bottom line is supported by a 24% growth in net funded income, along with

lower operating expenses. The annual growth came despite higher booked impairments in 3Q21 expanding by 78% y/y, and a higher effective tax rate (40% compared to 38% in 3Q20).

Gross financing facilities grew by 2% on a sequential basis, and by 13% on an annual basis, while deposits expanded by, 3% q/q, 13% y/y.

3Q21 results key takeaways:

• NFM expanded to settle at 5.2% (+20 bps q/q) supported by higher treasury exposure which recorded 62% to total assets (+1 pps q/q) along with higher net funded income expanding by 14% q/q.

• Non-funded income declined by 34% q/q, despite higher net fees and commissions income (+36% q/q), mainly attributed to lower booked other operating income (-29% q/q). Therefore, the contribution of the non-funded income to operating income decreased by 4.7 pps q/q to settle at 7.2% in 3Q21.

• Efficiency improved on a sequential basis, as operating income expanded by 9% q/q coupled with an increase in OPEX of 0.4% q/q only. Accordingly, cost to income ratio decreased by 2 pps and settled at 24% in 3Q21

• Effective tax rate declined to 40% (-4 pps q/q) which also supported the sequential bottom-line growth.

• Lending expanded by only 2% q/q bringing the YTD growth to 14%, driven by the retail segment. On the funding side, deposits grew by only 3% q/q, bringing the YTD growth to 13%. Therefore, the loan to deposit ratio stabilized at 12% as of September 2021.

9M21 results key takeaways:

• 9M21 bottom-line witnessed a 24% y/y growth that came despite a 135% increase in booked impairments and a 9% decline in non-funded income. Accordingly, it was mainly supported by the strong top-line growth of 30%, along with limited OPEX growth of 3%.

• Top-line growth was supported by a stronger increase in income from financing facilities compared to the growth in the cost of deposits. NFM expanded by 49 bps y/y on a 9M basis, supported by increased treasury exposure settling at 62% as of 9M21 compared to 60% as of 9M20 (+2 pps y/y).

• OPEX grew by 3% y/y despite a 23% annual growth in admin expenses. This is supported by booking no other operating expenses as of 9M21, compared to EGP164 million booked in 9M20.

Upgrade to Overweight; Performance is stabilizing

We upgrade our recommendation on FAIT to Overweight, on FV of EGP16.00/share after incorporating the actual performance of the bank in 9M21 and accordingly, adjusting the forecast over 2022-2026. It is important to highlight that the bank’s positive performance was supported by strong growth in the top-line, coupled with increased efficiency over the years. Additionally, the bank’s lending momentum started to pick up in 2021 as it grew by 14% YTD. Therefore, we believe that 2021f net income would stand at EGP2,342 million resembling a 1% y/y decline, mainly on the back of lower net-funded income due to booking lower investments income along with higher booked impairments. Additionally, we believe that the bottom-line will start witnessing stronger growth post-2022 supported by a stronger pick up in lending and a slightly lower treasury exposure that would control the high effective tax rate levels.

The stock is currently trading at P/B22 of 0.3x and P/E22 of 3.0x, with ROAE of 12.0%.