Weak bottom line growth due to high base effect in Q1 19; lending shrinks sequentially
SAUD’s consolidated bottom line in Q2 19 was EGP271mn (+2% qoq, and +27% yoy), which reflected a relatively weak operational performance mainly due to the following:
- Treasury exposure plunged by 8ppts in Q2 19 to stand at 25% of total assets. Accordingly, NIM declined by 20bps, standing at 3.4%. Net-interest income stabilised sequentially at EGP491mn.
- Non-interest income dropped by 44% qoq due to a high base one-off effect in Q1 19, leading operating income to drop by 11% q/q.
- Opex declined sequentially by 6% in Q2 19, on a slower pace than that of operating income which resulted in a higher cost/income ratio, increasing by 1.3ppts, standing at 23.5% in Q2 19.
- Lower asset quality, where NPL ratio increased by 27bps, recording 7.6% in Q2 19, up from 7.6% a quarter earlier, coupled with lower cost of risk (CoR), where booked provisions fell by 52% sequentially, resulting in a CoR of 1.3% in Q2 19, down from 2.7% in Q1 19, resulting in a decrease in coverage ratio by 6% at 96%.
- Lower effective tax rate, decreasing by 2% to stand at 30% in Q2 19, down from 32% in Q1 19.
- Balance sheet witnessed sequential weak growth with gross loans shrinking by 1% qoq, versus an average growth of of 3% over the past five quarters, and customer deposits grew by 5% qoq, versus an average of 5% over the last five quarters, bringing loans/deposit ratio to 31%.
SAUD is trading at attractive multiples compared to peers; maintain Equalweight on FV of EGP15.81
We reiterate our Equalweight recommendation on SAUD on FV of EGP15.81/share. The stock is trading at P/E19 of 3.4x, and P/B19 of 0.6x, on ROAE of 20%. These multiples are considerably below Egypt’s sector average of P/E19 of 3.9x, and P/B19 of 0.9x. Our Equalweight recommendation is underpinned by low focus on aggressive growth or market share gains, and a strategy that had focused on treasury investments, which is no longer going to pay off in light of the new tax treatment.