Equity Analysis /

ADIB Egypt: Analyst day highlights

    Al Ahly Pharos Securities Brokerage
    25 February 2020

    ADIB analyst day 

    • ADIB targets 15%-20% growth in balance sheet in 2020, with higher growth in lending, pushing LDR from 63% currently to 70%, with a special focus on SME and Microfinance segments where the bank sees huge growth potential. ADIB will continue to park excess liquidity in treasury bills when lending growth subsides or deposit growth spikes. ADIB Management highlighted that the bank will not need to include any of its clients under the CBE's debt restructuring program for financially distressed companies. The bank has tight risk management and continues to be very well provisioned. Management expects margins to remain healthy this year, but to face some pressure with monetary easing. Fees and commissions growth will continue to be weak in 2020, on the back of waning trade activity. 
    • Pending rights issue is the last legacy issue that is yet to be resolved. Management stated that there has been no decisions taken yet regarding the matter and they're waiting for the perfect time to do it. However, it expects that retained earnings over the next three years will close the gap between the bank's capital and the EGP5 billion minimum capital required by the CBE. [Quick refresher from Pharos Research of the capital increase plans: management previously stated that it 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.]
    • Management's plan is to restructure then gradually divest all legacy subsidiary-companies that were historically on the books but are not related to its core role of being a financing intermediary, a total of 7 companies. Starting with the National Glass company that turned into profit in 2019 achieving EGP2.5 million in bottom line from a net loss of EGP70 million in 2017. Acquisition offers are currently on the table being studied, and is expected to have a positive gain on the bank's books but not yet quantified. Management sees growth potential in its two wholly owned subsidiaries ADIB Capital and ADIB Leasing, mainly driven by cross selling opportunities, cost synergies, and turnaround of management. The consolidated BV of subsidiaries represent EGP160 million generating a total consolidated net profit of EGP125 million.
    • ADIB received a subordinated loan of USD30 million in early 2019, from ADIB UAE, in order to support CAR that came under pressure (12.7% in Dec18 versus CBE minimum requirement of 12.5% for 2019), which provided support to the bank CAR which hit market levels of 14% as of December-end 2019.
    • The bank is expected to wipe out all retained losses on the bank's balance sheet in 1Q2020, amounting to almost EGP230 milllion. 
    • The bank's cost to income ratio, currently hovering at 39%, is not expected to come down over the short term since the bank is still highly investing in technology, information security and branch re-branding and restructuring, however expected to normalize at early 30s in 5-years' time.
    • The bank is impatiently waiting for the introduction of Sukuk (which is Sharia Compliant investment option) which management sees as a major driver for the bank's operations. Last week the law has been passed from the Finance Ministry to the Cabinet for approval then it shall go to the house of representatives. 

    ADIB is trading at attractive multiples, Maintain Equalweight pending rights issue 

    We reiterate our Equalweight recommendation on ADIB on FV of EGP12.75/share, pending the conclusion of the rights issue. At current prices, we recommend trading the stock cautiously on a ST basis only, until the rights issue concludes, since 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 2.7x, and P/B 2020 of 0.6x, on ROAE of 26%. Egypt’s sector average of P/E 2020 and P/B 2020 are 4.1x and 0.8x, respectively.