High booked provisions and effective tax rate wipe out noninterest income gains; LDR expands
CANA 1Q21 net profit pre-minority interest and appropriations recorded EGP116 million (-53% q/q, +1.2% y/y). The bottom line plummeted sequentially on the back of 1) weak net interest income (-3% q/q) , 2) booked provisions, compared to provisions reversals in 4Q20, in addition to, 3) higher effective tax rate. The limited annual growth came on the back of the large booked provisions, which surged by 205% y/y coupled with high Opex. On a positive note, lending activity expanded in 1Q21 by 8% q/q and 18% y/y. Deposits grew by 3% q/q and 4% y/y, which beefed up LDR.
1Q21 results key takeaways:
• NIM declined by 20 bps to stand at 3.1%; which came on the back of the bank’s lower treasury exposure, as it contributed 29% of total assets as of March 2021 (-3 pps q/q). Net interest income declined by 3% q/q, to stand at EGP374 million in 1Q21. Such performance is driven by the fact that the lending momentum is still insufficient to absorb the contraction in interest rates and NIM.
• Non-interest income surged sequentially and annually, recording an increase of 220% q/q and 64% y/y supported by investment income and other operating income. We assume that this is related to asset or investment liquidation. Therefore, non-interest income represented 42% of the total operating income in 1Q21, compared to 18% contribution in 4Q20 (+24 pps).
• OPEX expanded sequentially by 17% and annually by 9%, as a result of higher admin expenses. Since the growth in operating income was larger than the growth in OPEX supported by the non-interest income, efficiency improved and cost-to-income ratio contracted in 1Q21 and stood at 42% (-7 pps q/q).
• Booked provisions in 1Q21 amounted to EGP137 million, compared to provisions reversals of EGP68 million in 4Q20. Cost of Risk came in at 2% which is higher than the average of the past four quarters of 1.0%. This caused a surge in the coverage ratio by 7 pps, recording 104%. Coverage increased as a result of the higher booked provisions and improved asset quality, supported by the lower NPL ratio recorded in 1Q21 which decreased by 1 pps q/q to stand at 9.9%.
• Therefore, net operating profit witnessed a decline of 23% q/q, and a limited expansion of 2% y/y, mainly attributed to the booked provisions, as the growth in non-interest income and the topline were not sufficient to absorb the increased provisions.
• Effective tax rate surged by 31 pps q/q, recording 51%, which is higher than the average of the past four quarters of 43%.
• Lending witnessed a healthy q/q and y/y growth of 9% and 24%, respectively. Deposits grew by only 3% sequentially and 4% annually, bringing LDR ratio up to 48%.
• The bank’s paid in capital currently stands at EGP2.2 billion, which still falls short of the new banking sector requirement of EGP5 billion.
Neutral set of results; Maintain Equalweight
We reiterate our Equalweight recommendation on CANA on the back of its neutral performance, relative to listed peer group average. However, it is worth mentioning that CANA’s NPL ratio has been improving over the past years indicating better asset quality and a stronger position in the market. Additionally, the bank’s lending momentum has witnessed a significant improvement over the past 4 quarters, while treasury exposure has been decreasing over time, which mirrors the bank’s plans to change its investment strategy and minimize the treasury investments portfolio. The stock is currently trading at P/B21 of 0.52x and P/E of 4.8x.