Equity Analysis /
Egypt

CIB: Q2 19 results: Lower provisions, controlled funding costs support earnings

    Controlled cost of funds support margins amid lower allocation to treasury investments and lending contraction

    CIB Q2 19 net profit pre-minority interest and appropriations came in at EGP2.71bn, growing by 3% sequentially and 13% annually with a ROAE (pre-staff appropriations) of 27%. 

    Key takeaways:

    • Net interest income continued weak sequential growth momentum on shrinking loan portfolio and lower treasury exposure, which fell by 2% qoq to stand at 40% of assets, down from 42% in Q1 19, and 45.3% in Q4 18. NIM remained strong at 6.4% supported by controlled cost of funding on the accumulation of cheap deposits.
    • Non-interest income declined annually and sequentially by 17% and 18%, respectively, amid a weak lending environment to constitute 12% of operating income versus 14% in the previous quarter.
    • Efficiency deteriorated with cost/income ratio increasing to 32% in Q2 19 (from 26% in Q1 19) on faster growth of operating expenses of 24% qoq against a stable base of operating revenue.
    • NPL ratio remained almost stable at 5.0%, with more than adequate provisions coverage of 200% on a low COR of 0.9%.
    • Effective tax rate declined reflecting lower income from treasury investments, at 25.5% down from 29.7% in Q1 19 and 30.1% in Q4 18. 
    • Heavyweight corporate lending dragged down total lending portfolio by 1.7% qoq, partially wiping out the growth of 4.4% qoq witnessed in the previous quarter, bringing total lending growth YTD to 2.7%, despite an increase in retail loans by 3.6% qoq. On the funding side, deposits increased by 4% qoq on both retail and corporate fronts, bringing total deposit growth YTD to 7%, with CASA expanding by 5% qoq to represent 55% of total deposits. 
    • CAR strengthened to record 25.8%, up from 21.5% as of March 2019, and 19.1% as of December 2018.

    Maintain Equalweight – COMI trading at multiples below historical average 

    COMI continues to be the perfect proxy for the macro transformation story in Egypt. It constitutes more than 30% 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 the top-rated private sector bank, despite a challenging year ahead. 

    The stock is trading at PE 19 of 10.7x, and PB 19 of 2.3x, which is: below its historical average PB of 2.8x between 2004-2019; below the historical 'good-times' average PB of 3.0x; and significantly below its historical high PB of 4.4x. However, the stock continues to trade at a high premium to the Egypt banking sector average multiples of 4.6x PE 19 and 1.0x PB 19.  

    In our valuation, we accounted for the negative impact of the new tax law, that was signed by the President on 24 February, based on the initial proposed calculation of the Ministry of Finance. The calculation applied in our models includes provisions in the cost ratio, which is more conservative than what the executive regulations entail. We haven’t accounted for any upside potential coming from the bank’s plans to expand outside the borders of Egypt, which, if it happens, would be a potential value driver.