Lower taxes and lower excess impairments along with improved efficiency support earnings; LDR improves
SAUD 1Q22 net profit recorded EGP369 million (+37% y/y, +3797% q/q), 26% higher than our estimates for 1Q22. The annual increase came in despite a 27% y/y increase in OPEX, mainly supported by 1) 13% y/y growth in net-funded income, 2) 38% y/y growth in non-funded income driven by net fees & commissions and investment income, 3) lower impairments declining by 39% y/y, and 4) lower effective tax rate standing at 30% (-6 pps y/y).
On the other hand, the significant sequential improvement could be attributable to 1) a 51% q/q decline in provisioning with only EGP69 million booked compared to EGP140 million in 4Q21, 2) lower OPEX declining by 30% q/q as a result of booking other OPEX of only EGP10 million, compared to EGP128 million in 4Q21, 3) lower effective tax rate recording 30% in 1Q22, compared to 96.2% in 4Q21 (-66 pps q/q), along with 4) a 17% and 3% growth in net-funded and non-funded income, respectively.
On the balance sheet side, gross financing facilities grew by 15% on an annual basis, and by 10% on a sequential basis, while customer deposits expanded by 6% y/y, but declined by 2% y/y. This implies healthy growth of the balance sheet and improvement in the lending momentum of the bank.
1Q22 results key takeaways:
NFM expanded and stood at 4.0% (+19 bps y/y, +51 bps q/q) as net funded income recorded EGP719 million (+13% y/y, +17% q/q) driven by the stronger growth in income from financing facilities (+4% y/y, +4% q/q), along with a decline in the costs of funds (-2% y/y, -3% q/q). Moreover, the bank’s treasury exposure has increased over 1Q22 as it stood at 34% of the total assets (+1.0 pps y/y, +10 pps q/q), further supporting the growth in NFM and top-line.
Non-funded income expanded by 38% annually and by 3% sequentially, where the annual improvement is mainly driven by a 26% growth in net fees and commissions income, along with a 74% growth in investment income driven by net trading income. On the other side, the limited sequential growth came in despite a 115% growth in investment income driven by a dividend income of EGP5 million (+423% q/q) and net trading income of EGP31 million (+142% q/q). This is due to a 17% decline in net fees and commissions income which partially wiped out the positive effect of the investment income growth on a quarterly basis.
Efficiency has slightly deteriorated on an annual basis as the cost-to-income ratio increased by 3 pps y/y as a result of the larger growth (27% y/y) in OPEX driven by admin expenses, compared to only a 16% growth in operating income.
On a sequential basis, efficiency improved over 1Q22, since operating income expanded by 15% q/q, coupled with a decrease in OPEX of 30% q/q, driven by lower other operating expenses (-93% q/q). Therefore, cost to income ratio stood at 28% in 1Q22 (-18 pps q/q). However, it is worth mentioning that the total OPEX in 4Q21 included one-off expenses (other expenses) of EGP128 million which is the highest recorded since 2019. Accordingly, to better assess the actual level of efficiency improvement, we excluded the one-off expenses in 4Q21, which brought the total OPEX to EGP206 million in 4Q21 rather than EGP386 million (13% lower than the total OPEX in 1Q22 of EGP233 million). This brings the cost-to-income in 4Q21 to 28.6% which is only 0.5 pps higher than the cost-to-income is 1Q22. Therefore, one-off expenses have affected the level of improvement that appears on the financials.
Impairments coverage has witnessed a significant improvement annually as it recorded 171% (+41 pps y/y). However, it slightly declined by 4 pps q/q. The annual improvement is mainly supported by a 16% y/y growth in accumulated impairments, coupled with a 12% y/y decline in non-performing financing facilities. Alternatively, the sequential decline in impairments coverage came on the back of faster growth in non-performing financing facilities (+9% q/q), compared to only a 6% growth in accumulated impairments balance. The CoR stood at 1.1% as of March 2022 (-0.9 pps y/y, -1.3 pps q/q).
The effective tax rate plummeted to 30% (-6 pps y/y, -66 pps q/q). The annual limited decline came on the back of the lower excessive booked impairments in 1Q22 compared to 1Q21 (-39% y/y). Moreover, the large quarterly decline came in despite a 10% increase in treasury exposure, also supported by the lower excessive impairments (-51% q/q).
Lending expanded by 15% y/y and 10% q/q, mainly driven by the growth in the corporate segment. On the funding side, deposits grew by 6% y/y, but declined by 2% y/y. This brought the loan to deposit ratio up to 38% (+3 pps y/y, -+4 pps q/q) signaling the healthy growth of the balance sheet and increased lending momentum.
Positive outlook given expected strong performance and improved asset quality; Maintain Overweight
We reiterate our overweight recommendation on SAUD on FV of EGP20.00/share. Our outlook for SAUD reflects a recovery in performance in 2022 and going forward supported by lower excess impairments as the asset quality starts to improve slightly over the years supported by the improvement that took place over the past years as the NPA ratio recorded 4.5% in 1Q22 (-1.4 pps y/y, -0.04 pps q/q), stronger efficiency, the expected recovery in net fees and commissions income over 2H22, along with top-line growth supported by the expected increase in rates and probable temporarily increase in treasury exposure over the next two years to maximize the benefit from rate hikes. However, we believe that the bank is going to control its treasury exposure cautiously to avoid high effective tax rates wiping out bottom-line gains. It will slowly start to migrate from investing in treasuries to increased financing to avoid paying high taxes, supported by the increased financing momentum realized in 1Q22.
Accordingly, we expect the top-line to fully recover in 2022 and going forward on the back of the bank’s controlled treasury exposure, strong top-line growth, expected improvement in efficiency in addition to lower excess impairments and higher non-funded income supported by the recovery in net fees and commissions over 2H22 and going forward. The stock is one of the cheapest amongst listed banks.
The stock is currently trading at P/B22 of 0.6x and P/E22 of 3.0x, with ROAE of 20%.