Higher booked provisions weigh on earnings growth; lending shrinks
EGBE Q1 19 net profit pre-minority interest and appropriations came in at EGP146mn, declining by 6% sequentially and growing by 7% annually with a ROAE of 16%. Key takeaways from the results:
- Despite a fall in treasury exposure to total assets by 537bps in Q1 to record 24%, NIM has slightly increased by 7bps sequentially to stand at 3.3% on lower cost of funds driven by higher interest-free deposits.
- Non-interest income/operating income surged by 519bps qoq to 22%, mainly due to higher net fees and commissions (+18% qoq).
- OPEX rose sequentially by 8%, at a slower pace than that of operating income, which resulted in a lower cost/income ratio dropping by 2.6ppts to 45%.
- Higher booked provisions rose sequentially by 172%, resulting in a COR of 1.2% (up from 0.4% in Q4 18), with a decrease in coverage ratio by 33ppts recording 246%. Asset quality remained stable, with a slight decline in NPL ratio by 11bps, standing at 1.6%.
- Lower effective tax rate fell by 190bps to stand at 40.1%, down from 41.9% in Q4 18.
- Weak sequential balance sheet growth with gross loans dropping by 5ppts qoq, versus an average of 2% over the past four quarters. At the same time, customer deposits grew by 15% qoq, versus an average of 3% over the past four quarters, bringing loan/deposit ratio to 44% in Q1 19, down from 54% in Q4 18.
EGBE is trading at expensive multiples compared to peers; upgrade to Equalweight on share price slump
We upgrade our recommendation to Equalweight from Underweight on FV of US$0.66/share (EGP11.14), up from US$0.65 previously, creating an upside of 29% from the recent slump in share price and factoring in the declining exchange rate that reached US$/EGP17.00. The stock is trading at PE 19 of 4.8x, and PB 19 of 0.6x, on projected ROAE of 12%. Egypt’s sector average PE 19 and PB 19 are 4.4x and 0.9x, respectively.