Al Baraka Bank Egypt: Bottom-line surges on lower impairments, taxes, and operational efficiency

  • Strong quarterly earnings on lower impairments, OPEX, effective tax rate and robust growth in non-funded income
  • Balance Sheet growth is questionable
  • Maintain Equalweight; SAUD is trading at attractive multiples though

Strong quarterly earnings on lower impairments, opex, effective tax rate and robust growth in non-funded income; FDR came in neutral

SAUD 1Q21 standalone bottom line recorded EGP269 million (+109% q/q, and +3% y/y). The strong sequential improvement was mainly attributed to: 1)exceptionally low bottom-line recorded in 4Q20, 2) lower booked impairments in 1Q21 compared to 4Q20 (-18% q/q), 3) lower effective tax rate in 1Q21 standing at 36%, compared to 4Q20 effective tax rate of 60%, 4) operational efficiency supported by the lower OPEX, in addition to 5) an increase in the top line supported by a limited growth of 5% in net funded income and a growth of 33% in non-funded income. Alternatively, the limited annual growth came in on higher booked impairments in 1Q21, compared to 1Q20 (+71% y/y), despite the 14% y/y growth in net funded income and the limited growth in OPEX.

On another note, the bank’s financing momentum increased by only 2% sequentially and by 13% annually, while deposits expanded by only 1% q/q and 3% y/y bringing FDR to 35%.

1Q21 results takeaways

  • NFM slightly increased by 22 bps to 3.8%, on the back of the higher net-funded income, which expanded sequentially and annually by 5% and 14%, respectively.

  • Non-funded income expanded sequentially on an exceptional 88% growth in net fees and commissions supported by a 9% increase in fees income, coupled with a 75% decline in fees and commissions expense. This brings the contribution of non-funded income to total operating income to 11% in 1Q21 against 8.9% in 4Q20 implying a growth of 2 pps.

  • OPEX contracted sequentially by 11% on the back of lower admin expenses and other operating expenses. Moreover, it slightly increased by 5% on an annual basis, which all implies the banks’ improved efficiency in 1Q21.

  • Cost to income ratio decreased by 5.2 pps and stood at 26% in 1Q21, compared to 31% in 4Q20, which is mainly attributable to the operational efficiency realized amid increasing revenues.

  • Booked impairments amounted to EGP113 million in 1Q21 (-18% q/q, +71% y/y). The sequential decline partially supports the sequential surge recorded in the bottom-line. On the other hand, the annual surge wiped out the stronger top line recorded on an annual basis and explains the reason behind the limited growth of bottom line 3% y/y.

  • Non-performing asset ratio (NPA) slightly improved by 10 bps to record 5.8%, while the cost of risk (COR) decreased by 50 bps, on the back of increased gross financing, to stand at 2.0%, which is almost equals the historical average COR over the last four quarters of 1.8%.

  • Provisions coverage increased from 127% in 4Q20 to 130% in 1Q21, as a result of the higher booked impairments, compared to a smaller growth in NPAs.

  • Effective tax rate decreased by 24 pps on a sequential basis and stood at 36% in 1Q21, this could be attributed to the banks’ lower treasury exposure in 1Q21 as it fell down from 42% in 4Q20 to 33% in 1Q21 (-8.4 pps), as well as lower precautionary provisioning that are taxable.

  • Financing expanded by 2% q/q and 13% y/y, while, customer deposits increased by 1% q/q and 3% y/y.

Maintain Equalweight; SAUD is trading at attractive multiples though

We reiterate our Equalweight recommendation on SAUD on FV of EGP15.00/share, on the back of the bank’s positive but unsustainable performance. It is important to highlight that the bank’s exceptional positive performance is usually attributed to one-off gains or lower booked impairments, against a positive but limited growth in the net funded income. Moreover, the balance sheet figures implied lower treasury exposure signaling the bank’s direction towards increased financing and lower investments to avoid paying very high taxes. However, the weak financing momentum realized in 1Q21 reveals a lot of questions about whether SAUD’s future financing facilities would be sufficient to wipe out the effect of expected rate cuts or not. The stock is currently trading at P/B21 of 0.5x and P/E of 3.3x, with ROAE of 21% on EPS growth of 6% in 2021.

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