Egyptian Gulf Bank: Bottom line growth hinges on one-off gains; provisions and taxes wipe out growth

  • 1Q21 bottom line is neutral sequentially on booked provisions and high income taxes
  • Lending inches up
  • Maintain Equalweight; Growth prospects in question

1Q21 bottom line is neutral sequentially on booked provisions and high income taxes; Lending inches up

EGBE 1Q21 standalone net profit pre-minority interest and appropriations came in at EGP160 million (+0.3% q/q, +2% y/y), which is 14% higher than our estimates for 1Q21.

1Q21 bottom line witnessed neutral sequential growth despite the high growth of other operating income, the lower OPEX, since it was all wiped out by booked provisions compared to provisions reversals in 4Q20, and high income taxes. 

Similarly, the bottom line barely grew on an annual basis despite positive growth in other operating income, lower OPEX and healthy topline growth, because it was constrained by high income taxes and provisions.

The balance sheet implied that the lending growth started to pick up, and funding witnessed healthy growth sequentially and annually on the back of increased customer deposits.

Key takeaways:

  1. NIM only grew by 2 bps and stood at 4.1% in 1Q21 which is almost similar to 4Q20. This is attributed to the limited shrinkage in treasury investments, and the limited lending growth as the loan to deposits ratio stood at 38% (-3 pps q/q).

  2. Non-interest income surged sequentially and annually (+194% q/q, +62% y/y) despite the decline in the investment income, mainly on the back of other operating income recording EGP143 million related to the reversals of other provisions. Therefore, non-interest income represented 27% of operating income compared to 12% in 4Q20 (+16 ppts q/q) and it supported the operating income, especially in light of the limited growth in the net-interest income.

  3. Cost to income ratio plummeted to record 36% in 1Q21, as OPEX  dropped by 30% q/q and 9%  y/y on the back of lower admin expenses and absence of other operating expenses. This was also associated with strong growth in the operating income (+25% q/q, +19% y/y), signaling the bank’s improved efficiency in 1Q21.

  4. Booked provisions recorded EGP260 million in 1Q21, compared to reversals of EGP13 million in 4Q20 and provisions of EGP154 million (+69% y/y). Therefore, the coverage ratio increased to 146% (+13ppts q/q), while the NPL ratio remained almost stable recording  4.72%, compared to 4.66% in 4Q20. The NPL ratio has been following an increasing trend over the past 4 quarters as it increased from 3.8% in 1Q20 to 4.7% in 1Q21, which can be supported by the high provisions coverage.

  5. EBT witnessed a growth of 18% sequentially and 29% annually, supported by the other operating income amounting to EGP143 million. 

  6. To remove the effect of this one-off gain on the earnings and the income taxes, we used the historical average effective tax rate over the last four quarters (39%), as to calculate an estimate of the income taxes excluding the one-off gain. Accordingly, the EBT recorded EGP182 million compared to EGP325 million (44% lower than 1Q21 actual EBT), and the bottom-line excluding the one-off gain is EGP 111 million, which is 31% lower than 1Q21 actual net profit (-30% q/q, -29% y/y). This highlights the bank’s negative performance in 1Q21 on the back of the limited topline growth and the relatively high booked provisions.

  7. Effective tax rate increased, in tandem with the bank’s relatively high treasury allocation and excess provisions which is taxable, to stand at 51% in 1Q21.

  8. Lending growth started to pick up, as gross loans grew by 4% q/q and 10% y/y, while customer deposits expanded by 11% q/q and 11% y/y, bringing down the loan-to-deposit ratio to 38% (-3 pps q/q).

  9. Treasury exposure declined by 3pps q/q to stand at 48% of the total assets as of March 2021. This is expected to have a positive effect on the future effective tax rates and a negative effect on the NIM over the next quarters, if the LDR  shrinkage trend continued. 

Maintain Equalweight; Growth prospects in question 

We reiterate our Equalweight recommendation on EGBE on FV of USD0.49/share, despite its higher than expected bottom-line. The bank’s performance in 1Q21 shows weak growth prospects, since the bottom line hinges on other operating income. Additionally, the lending momentum of the bank is not sufficient to compensate for the expected decline in margins and decreased treasury allocation. However, the bank’s efficiency has significantly improved this quarter compared to the previous 4 quarters, and its lending momentum is expected to pick up over the next couple of years, supporting the bottom line. The stock is currently trading at annualized P/B21 of 0.48x and annualized P/E21 of 4.27x on EPS expansion of 2%.

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