Profits sequentially decline on lower margins; despite lower booked provisions and OPEX control; Strong balance sheet growth
ADIB 4Q19 consolidated net profit pre-minority interest and appropriations came in line with our expectations at EGP261 million (-15% q/q, +20% y/y), bringing FY19 bottom line to EGP1,228 million (+44% q/q) which is very close to our estimates of EGP1.29 billion, with an ROAE of 33%.
4Q2019 results key takeaways were:
- NIM weakened sequentially by 80bps, to record 6.0%, despite strong lending and treasury investment growth. Treasury exposure to total assets rose sequentially by 550 bps, recording 34% in 4Q19. Net-interest income declined by 7% q/q as interest expense grew at 3% q/q while interest income declined by 2%.
- Non-interest income failed to provide support to earnings, since it declined by 14% q/q, with its contribution falling to 16% in 4Q19.
- Although OPEX declined sequentially by 6% in 4Q19, operating income witnessed a further decline of 8% q/q, resulting in a relatively higher cost to income ratio, rising by 120 bps, to stand at 39% in 4Q19.
- Booked provisions came in 18% sequentially lower, translating to cost of risk at 1.9% in 4Q19, up from 2.4% a quarter earlier, with an increase in coverage ratio by 11pps, recording 131%. Asset quality stabilized with an NPL ratio of 3.5%.
- Higher effective tax rate was recorded, increasing by 7pps to stand at 34% in 4Q19, up from 27% in 3Q19, as a result of higher treasury exposure.
- Balance sheet witnessed robust annual and sequential growth with gross loans expanding by 3% q/q, bringing YTD loan expansion to 28% versus 22 in 2018. Customer deposits grew by 7% q/q, bringing YTD deposit growth to 28%. Loan-to-deposit ratio fell by 220bps to record 63% as of December 2019 ending balance.
ADIB is trading at attractive multiples, Maintain Equalweight pending rights issue
We reiterate our Equalweight recommendation on ADIB on an unchanged FV of EGP12.75/share, pending the conclusion of the rights issue. Management intends to increase capital by EGP3.0 bn while maintaining the same ownership structure (49% for ADIB UAE) without diluting the ownership of minority shareholders. ADIB UAE will use EGP1.5 bn of the total EGP1.8 billion already injected under capital increase to subscribe to the capital increase and redeem back the excess that is almost EGP300 mn. The remaining shareholders will subscribe to the remaining EGP1.5 bn. In case there aren’t enough subscriptions, ADIB UAE related parties will step in to cover for the balance.
At current prices, we recommend trading the stock cautiously on a short-term basis only, until the rights issue concludes in 2H2020, as we expect that it will have a negative impact on the price of the stock.
Post the right issue conclusion, the stock will offer an unmatched investment opportunity, given the low multiples, high growth and relatively higher ADVT within the banking sector.
The stock is trading at P/E 2020 of 2.8x, and P/B 2020 of 0.6x, on ROAE of 26%. Egypt’s sector average P/E 2020 and P/B 2020 are 4.2x and 0.8x, respectively.