High taxes and excess impairments along with other expenses wipes 4Q earnings; LDR slightly declines
SAUD 4Q21 net profit pre-minority interest and appropriations recorded EGP9 million (-98% q/q, -93% y/y), bringing 2021 bottom line to EGP1.13 billion (-9% y/y).
4Q21 bottom line significant decline came on the back of 1) 21% decline in net funded income and 33% decline in non-funded income, 2) EGP128 mn booked in other operating expenses in 4Q21 compared to none in 3Q21 and only EGP27 mn in 4Q20, 3) higher booked impairments, and 4) significantly higher effective tax rate standing at 96% in 4Q21.
On the other side, the annual decline in the bottom-line came in despite a 2% y/y growth in top-line and a 79% y/y growth in non-funded income, mainly attributable to the 1) 64% increase in OPEX, driven by other operating expenses and admin expenses, in addition to 2) higher impairments and 3) higher effective tax rate.
On the balance sheet side, net financing facilities grew by 4% on a sequential basis, and by 7% on an annual basis, while deposits expanded by 6% q/q, 9% y/y.
4Q21 results key takeaways:
NFM declined and stood at 3.5% (-105 bps q/q) as net funded income recorded EGP615 million (-21% q/q) driven by the stronger growth in the costs of funds (+18% q/q) compared to the growth in income from financing facilities (+1% q/q). This took place despite the higher treasury exposure which recorded 24% to total assets ( +0.8 pps q/q).
Non-funded income plummeted by 33% sequentially, despite the 30% q/q growth in net fees and commissions, mainly as a result of lack of 'other operating income' in 4Q21 compared to EGP75 million booked in 3Q21. Therefore, the contribution of the non-funded income to operating income decreased by 2 pps q/q and increased by 6 pps y/y to settle at 14.6% in 4Q21.
Efficiency deteriorated over 4Q21, since operating income declined by 23% q/q, and increased by 9% y/y coupled with an increase in OPEX of 57% q/q and 64% y/y, driven by other operating expenses of EGP128 million. Therefore, cost to income ratio stood at 46% in 4Q21 (+24 pps q/q, +16 pps y/y). However, it is worth mentioning that the operating income in 3Q21 and 4Q20 included other income of EGP75 million and EGP7 million, respectively. After excluding the one-off gains from the operating income, 3Q21 operating income would stand at EGP865 million rather than EGP940 million and 4Q20 operating income would stand at EGP657 million rather than EGP664 million. Therefore, 4Q21 operating income (EGP720 million) would be only 17% lower than the operating income of 3Q21, and 10% higher than last year’s operating income, then cost-to income would stand at 25% in 3Q21 ( 22 pps q/q higher) and 31% in 4Q20 (15 pps y/y higher). Therefore, one-off gains did not change the fact that efficiency has deteriorated significantly in 4Q21.
Impairments coverage increased significantly to record 175% (+12 pps q/q, +48 pps y/y), reflecting a higher CoR of 2.4% (+0.02 pps q/q, -0.11 pps y/y). The growth in impairments coverage is mainly supported by the faster growth of 9% in accumulated provisions compared to only 1% growth in non-performing assets.
Effective tax rate significantly increased to 96% ( +81 pps q/q, +36 pps y/y ), which is way higher than the average of the past four quarters of 35%. The significant increase in the effective tax rate on a sequential basis could be attributed to the excess impairments as well as the higher treasury exposure, however, the increase on an annual basis is likely to be attributed to the excess impairments solely, since the treasury exposure is lower in 4Q21 compared to 4Q20.
Lending expanded by 4% q/q and 7% y/y, mainly driven by the growth in corporate segment. On the funding side, deposits grew by 6% q/q, and 9% y/y. This brings down loan to deposit ratio to 33% (-0.5 pps q/q, -0.8 pps y/y).
2021 results key takeaways:
2021 bottom-line recorded EGP1,132 million (-9% y/y). This is 16% lower than our 2021 estimates for the bottom-line and 9% lower than 2020 bottom-line. The decline came on the back of 1) lower non-funded income (-23% y/y) driven by the lower other operating income (one-off gains) booked in 2021 (EGP129 million) compared to (EGP342 million) in 2020, 2) higher OPEX signaling lower efficiency as admin expenses expanded by 19% y/y, and other expenses expanded by 283%, and 3) higher provisions amounting to EGP555 million compared to EGP372 million (+49% y/y)
To better look at the bank’s performance, one-off gains and one-off expenses are excluded from the calculations to arrive at a bottom-line of EGP1,248 million in 2020, and a bottom-line of EGP1,141 million in 2021 (-9% q/q). This further supports that the main significant reason behind the bottom-line decline is the higher booked impairments rather than one-off gains and expenses.
Two rounds of bonus share to beef up capital to new requirement
The management has approved increasing the bank’s issued and paid in capital from EGP2.9 billion (including the latest capital increase that was approved in 2Q21 and still undergoing regulatory approvals) to EGP5 billion (reflecting an increase of EGP2.1 billion) financed through:
Stock dividends amounting to EGP742 million, which translates into 0.25 bonus share per share, financed through the profit available for distribution of EGP1.1 billion as of December 2021.
Stock dividends amounting to EGP1.4 billion, which translates into 0.46 bonus shares per share financed through legal and general reserves before 2020, pending the approval of the CBE.
This means that the bank’s paid in capital would stand at EGP5.1 billion, which is above the new minimum capital requirement of EGP5 billion.
Maintain Overweight; performance will recover
We reiterate our overweight recommendation on SAUD on FV of EGP20.00/share. Our outlook for SAUD reflects a recovery in performance in 2022 and going forward. It is important to highlight that the bank’s performance was significantly affected by 1) excess impairments in 2021, resulting in a significantly high effective-tax rate, and wiped out bottom-line growth, and 2) higher OPEX mainly driven by high other expenses (one-off), and lower other income (one-off).
However, it is notable that the bank’s asset quality has improved over the past years, as the NPL ratio stood at 4.5% (-0.1 pps q/q, -1.4 pps y/y) which provides an opportunity for the bank to decrease its impairments over the next years, given its current high impairments coverage.
Accordingly, we expect the top-line to fully recover in 2022 on the back of the bank’s high treasury exposure and due from banks supporting the top-line, in addition to lower impairments and higher net-funded income supported by recovery in net fees and commissions over 2H22 and going forward.
Moreover, we believe that the bank will slowly start to migrate from investing in treasuries to increased financing to avoid paying very high taxes, supported by the increased financing momentum realized in 4Q21 which supports that SAUD’s future financing facilities would be sufficient to wipe out the effect of expected rate cuts over the next 5 years.
The stock is one of the cheapest amongst listed banks. The stock is currently trading at P/B22 of 0.5x and P/E22 of 2.9x, with ROAE of 18%.