Equity Analysis /
Egypt

CIB: 4Q2019 – Solid NIM and lower provisions drive results

    Al Ahly Pharos Securities Brokerage
    4 February 2020

    Profits driven by lower cost of funds and lower booked provisions; Lending surges and LDR improves; 

    CIB 4Q19 net profit pre-minority interest and appropriations came in at EGP3.3 billion, growing by 2.5% sequentially and 27% annually with an ROAE (pre staff appropriations) of 25%. FY19 bottom line reached EGP11.8 billion (+23% y/y, +3% higher than Pharos estimates of EGP EGP11.4 billion). 4Q2019 results key takeaways were:

    • Net interest income (NIM) strengthened on the back of lower cost of funds and as the strategy of shortening the maturity of liabilities relative to that of assets started to pay off. NIM surged by 65 bps to record 7.3% versus an average of 6.5% over the past four quarters. 
    • Non-interest income declined sequentially and annually by 6% and 7%, respectively, to constitute 13% of operating income versus an average of 15% over the past four quarters. It was mainly supported by fees and commissions while investment income weakened. 
    • Efficiency deteriorated but remained at safe levels, where cost to income ratio recorded 29% in 4Q19, versus 26% in the previous quarter, on faster growth in operating expenses of 26% q/q than operating revenues of 10% q/q.
    • Non-Performing-Loans (NPL) ratio declined by 130 bps to stand at 4.0%, with more than adequate provisions coverage of 225%, which explains a sequentially lower COR of 0.7% in 4Q19 versus 1.3% in 3Q19.
    • Effective tax rate increased, to record 32%, up from 28% in over the past 3 quarters, possibly with higher treasury allocation compared to last year, and with the initial impact of the new tax law starting to show. 
    • Heavy-weight corporate lending boosted total lending growth by jumping 9% q/q, bringing total lending growth YTD to 10% versus 2.5% in 9M19. On the funding side, deposits contracted by 1% q/q driven by the retail sector, bringing total deposit growth YTD to 7%, with CASA expanding by 1.9% q/q to represent 55% of total deposits higher than the previous quarter of 53%. Loan to deposit ratio (LDR) rose by 335 bps to stand at 43% as of December end 2019.
    • CAR slightly waned to record 26.0% down from 27.2% as of September-end 2019, since the growth witnessed in RWA was faster than that of capital, however it remains to be well above the CBE required minimum of 12.5% in 2019. 

    COMI trading at multiples below its historical average 

    COMI continues to be the perfect proxy for the macro transformation story in Egypt. It constitutes more than 40% of Egypt’s key index- EGX30. CIB is the only Egyptian stock that will continue to reserve a spot in the MSCI Emerging Markets Index, as long as Egypt is included. It is the best managed private bank in Egypt and we assume the bank will remain to be the top-rated private sector bank. 

    The stock is trading at P/E 2020 of 10.8x, and P/B 2020 of 2.1x, which is below its historical average P/B of 2.8x between 2004-2019, below the historical “good-times” average P/B of 3.0x, and significantly below its historical peak P/B of 4.4x P/B. However, the stock continues to trade at a justified high premium to Egypt banking sector average multiples of 4.1x P/E 2020 and 0.8x P/B 2020. We maintain our FV at EGP95.00. 

    In our valuation, we haven’t accounted for any upside potential coming from the bank’s plans to expand outside the borders of Egypt, which would be a potential value driver.