Earnings Report /

Al Baraka Bank Egypt: Q4 19 – Weak growth in annual profit despite healthy balance sheet growth

    Al Ahly Pharos Securities Brokerage
    24 February 2020

    Non-interest income and controlled opex soften sequential decline of earnings; healthy balance sheet growth

    SAUD’s bottom line in 4Q19 came in at EGP190mn (-42% q/q, and -49% y/y) – the weak sequential results came on the back of declining margins and a spike in income taxes, while higher non-interest income and controlled operating expenses softened the decline. FY19 bottom line was EGP1,054mn versus EGP1,004mn in FY18 (5% y/y, +2% higher than Pharos estimates) with ROAE of 28%. 

    Q4 19 key takeaways: 

    • NIM failed to drive earnings as it dipped by 54bps q/q to record 2.6% in 4Q19. Despite increased treasury exposure which rose 2.2ppts to stand at 29% to total assets as of December-end 2019, net-interest income fell sequentially by 14% as interest income declined by2 % q/q against interest expense expansion of 1% q/q.
    • Non-interest income expanded by 29% q/q mainly on higher fees and commissions, and other income, limiting the decline of operating income to only 7% q/q, reaching a contribution of 22% of operating income versus 16% a quarter ago.
    • Although OPEX declined sequentially by 3% in 4Q19, cost to income ratio rose by 110 bps due to a faster decline in base, standing at 29% in 4Q19.
    • Non-performing loans ratio (NPL) ratio remained stable at 7.3%, with higher Cost of Risk (COR) of 1.6% post provisions reversal in 3Q19, to result in a stable provisions coverage ratio of 104%.
    • Effective tax rate, surged by 14 pps recording 37% in 4Q19, up from 23% in 3Q19 and inching up to 30% for the year versus 29% in 2018.
    • Balance sheet witnessed healthy sequential growth with gross loans growing by 3% q/q, bringing loan growth to 7% in FY19. Customer deposits grew by 2% q/q, bringing FY19 deposit growth to 18%. Loan-to-Deposit ratio remained at 30% .

    SAUD is trading at attractive multiples; maintain Overweight

    We reiterate our Overweight recommendation on SAUD on FV of EGP14.00/share. The stock is trading at P/E20 of 2.5x, and P/B20 of 0.5x, on ROAE of 20%. These multiples are considerably below Egypt’s sector average of P/E20 of 4.2x, and P/B20 of 0.8x. BoD proposed distributing cash dividends of EGP0.70/share (broadly in line with our estimates) implying dividend yield of 6.8% , and 1:5 bonus share financed from 2019 net profit.