Earnings Report /

CAL Bank: Earnings grow due to spike in non-interest income; reiterate Buy

  • Growth in non-interest income offset higher operating expenses

  • Loans and advances declined as the bank diversified funds into financing projects

  • We retain our Buy rating with an unchanged target price of GHS1.70, as capital ratios remain adequate

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
11 May 2021
Published byTellimer Research

Ghana's CAL Bank has released its FY 20 results, reporting 22% yoy (25% qoq) growth in net attributable profit to GHS213.8mn, driven by a 105.2% yoy spike in non-interest income and a 382% increase in trading income. Net interest income, though, only increased by 1% yoy on the back of an 18% decrease in loan and advances (due to the repayment of some major exposures). Loan impairment charges increased slightly (1% yoy) to GHS86.88mn (-45% qoq), reflecting an 11% yoy decline in impairment losses and loan recoveries in the year.

The directors recommend the payment of a dividend of GHS0.11 per share (2019: GHS0.089) subject to the Bank of Ghana's approval.

We reiterate our Buy rating on CAL Bank with an unchanged target price of GHS1.70 and an ETR of 90%. Our positive outlook on the company is based on the following:

  1. It remains adequately capitalised and recorded the highest capital adequacy ratio (CAR) in our banking coverage, of 22.3% FY 20;

  2. The bank is well-positioned to manage asset quality risk given it mostly lends to less vulnerable sectors; and

  3. It has a strong liquidity management approach, ensuring that it will always have sufficient liquidity to meet its liabilities when due and in the event of losses.

CAL Bank is currently trading at a 0.84x FY 20 PE and 0.48x tangible PB, a premium to the average 0.8x FY 20f PE and 3.3x tangible PB for our Ghana banks coverage.

Key positives

  • Non-interest income increased 105.2% yoy, supported by aggressive growth (480% yoy) of fixed income trading volumes and the expansion of trading portfolios.

  • The CAR remains strong (22.3%), well above the regulatory minimum requirement of 11.5%. indicating that CAL Bank has enough of a buffer to absorb losses in the event of a significant asset quality decline.

  • The cost of risk declined from 3.3% in 2019 to 2.8% in 2020, as loans and advances decreased 17.8% yoy. This was primarily because the bank reduced its lending to vulnerable sectors to leverage partnerships with development finance institutions (DFIs) to raise long-term funding for projects.

  • The bank’s pre-provision profit increased 16% yoy, despite the 15% yoy increase in operating expenses. This favourable outcome is a result of increased gains of GHS171mn from fixed income trading activities made possible by the expansion of the fixed income portfolio. 

Key negatives

  • Fee income declined 21% yoy due to fee waivers earlier in the year (a Covid-19 relief measure), and the inability of the bank to close major expected advisory mandates during the pandemic.

  • In terms of asset quality, the NPL ratio increased 35bps to 13.5% yoy, driven by the pandemic and its impact on loan facilities in the hospitality and tourism sectors, and other sectors most impacted by Covid. These sectors accounted for the high-level provision for credit losses of GHS86.8mn.

  • Operating expenses increased by 19% yoy, attributable to the newly introduced deposit insurance premium, depreciation and other staff-related expenses.