Equity Analysis /

Egyptian Gulf Bank: 4Q19 – Strong FY2019 profits despite weak lending activity

    Al Ahly Pharos Securities Brokerage
    6 February 2020

    Robust margins drive earnings despite high OPEX and weak non-interest income; Lending remains weak 

    EGBE 4Q19 net profit pre-minority interest and appropriations came in at EGP197 million, surging by 18% sequentially and 27% annually with an ROAE of 15%. FY2019 net profit came in strong at EGP675 million (+16% y/y) with an ROE of 16%. 

    4Q19 results key takeaways were:

    • NIM strengthened annually and sequentially to stand at 4.0% in 4Q19, increasing by 70bps q/q. Net interest income grew by 6% q/q while interest expense grew by only 1% q/q, resulting in 20% sequential expansion of net interest income. 
    • Treasury exposure to total assets jumped from 36% in 3Q19 to 47% due to doubling the allocation of T-bills. 
    • Non-interest income to operating income fell by 390bps q/q to score 14%, mainly due to lower investment income (-14% q/q) despite the support from fees and commissions (+6%% q/q). 
    • Cost to income remained almost stable at 47% as operating expenses expanded by 16% q/q and operating income expanded by 15%.
    • Booked provisions grew by 6% q/q resulting in a slightly higher COR of 1.0%, up from 0.9% a quarter earlier, with a rise in coverage ratio by 8pps, recording 125%. Asset quality remained stable with the NPL ratio recording 3.7% as of December end 2019.
    • Lower effective tax rate was reported, falling by 150 bps to stand at 30.6% in 4Q19.
    • On the lending side, 4Q19 marked the first quarter of the year for lending expansion, as it grew by 0.4% q/q bringing FY19 growth rate to -10%. Customer deposits contracted by 2.3% q/q, bringing FY2019 deposit growth to 11%, where the loan-to-deposit ratio recorded 44% in 4Q19.

    EGBE is trading at rich multiples, Maintain Underweight

    We reiterate our Underweight recommendation on EGBE on a FV of USD0.48/share. The stock is trading at P/E20 of 5.5x, and P/B20 of 0.7x, on projected ROAE of 13%. Egypt’s sector average are P/E20 and P/B20 are 4.2x and 0.8x, respectively.