CAL’s Q2 PAT rose 12% yoy, in line with our expectations. Bottom-line performance was driven by higher net interest income (up 29% yoy) and non-interest income (up 35% yoy), which outweighed a 20% yoy increase in operating expenses and a 3x yoy spike in the net impairment charge. Notably, the yoy increase in net interest income was most likely the result of double-digit loan book growth and the sharp decline in cost of funds. Relative to Q1 19, PAT was up 12% yoy, driven by stronger margins.
Our Buy rating (TP unchanged at GHS1.30, ETR at 35%) is supported by: 1) the digital agency banking roll-out, which has helped deposit-gathering and the cost of funds (down 250bps yoy to 7.2%); and 2) CAL’s strong medium-term loan growth prospects, particularly after a 0.7ppts qoq rise in the CAR and a 22ppts decline in net loans/deposits. CAL trades at 0.7x 2019f PB – a 26% discount to frontier peers.
Cost/income fell 0.3ppts yoy to 42%, despite the 20% rise in operating expense (on strong increases in key revenue lines). The cost pressure can be attributed to investment in technology and agency banking, which should fall in the medium term and drive revenue growth and efficiency gains. We forecast a moderation in the cost/income ratio to 39% by 2023f.
Strong balance sheet growth. Net loans grew 17% yoy, above our 11% forecast, supported by the strong economic backdrop. However, they fell 2% qoq, which could be due to write-offs based on the three-fold increase in net impairment charges. Deposit growth was strong relative to Q2 18 (+32%) and Q1 19 (+30%). Net loans/deposits declined by 22ppts qoq to 67%, which we expect to support the bank’s liquidity position and further loan growth in H2.
Asset quality improved, NPLs fell by 40bps qoq and 90bps yoy to 9%, but the ratio is still higher than our 7.3% expectation for end-FY 19f. We expect the NPL ratio to continue to moderate in H2 as the macroeconomic backdrop supports recoveries.