CAL Bank reported Q1 19 net profit of GHS42mn, above our forecast of GHS37mn, as the significant pickup in net interest income (up 33% yoy) far exceeded our 6% growth forecast. Trading income growth was also strong at 104% yoy, contributing to PAT growth of 23% yoy, despite increases in operating expenses (up 17% yoy) and the net impairment charge (up 80% yoy).
We reiterate our Buy recommendation, with our unchanged TP of GHS1.30 suggesting an ETR of 52%. Our view is supported by the acceleration in loan growth and an improvement in net interest margin. Also, we see a moderation in operating expenses over the medium term as ongoing investments in technology are completed and efficiency improvements begin to materialise. CAL Bank remains attractive in our view, as it currently trades at 2019f PB of 0.7x, representing a 40% discount to frontier peers.
Core revenues rose 24% yoy, total operating income advanced 27% yoy. Net interest income was above our expectation, on the back of increased loan book growth as well as stronger net interest margin due to lower cost of funds. Non-interest income was up 10% yoy due to higher trading income, although net fee income fell by 16% yoy.
Cost/income ratio may decline further over the medium term. While the rise in operating expenses was expected given the bank’s ongoing investments in technology and its agency network, the cost-to-income ratio came in at only 41% (below our 46% forecast). Furthermore, as efficiency gains from the bank’s investments materialise, we could see the cost-to-income ratio fall to 39% in 2023f.
Loan growth was stronger than expected, but NPLs also picked up. Net loans grew by an impressive 24% yoy in Q1 19, ahead of our 16% forecast for FY 19. However, like GCB, the NPL ratio increased to 9.4%, (up 140bps qoq) against our expectation of a decline to 7.3% by end-FY19. The increase in NPLs most likely contributed to the higher net impairment charge for Q1 19.