Margins fail to support earnings; lending expands
EXPA’s consolidated bottom line in 2Q19/20 recorded EGP327 mn (+19% q/q, and +16% y/y). Sequential rise is mainly attributed to provisions reversal and controlled OPEX. 2Q19/20 key takeaways were:
- Margins deteriorated in 2Q19/20 by 54 bps, recording 4.2%, down from 4.8% a quarter earlier, despite higher treasury exposure (+200bps q/q), standing at 26% to total assets, and lending expansion.
- Non-interest income increased sequentially by 45%, mainly supported by other income, bringing non-interest income to operating income to 27% in 2Q19/20, up from 19% a quarter earlier.
- OPEX declined sequentially by 16% in 2Q19/20, while operating income inched up by 2% q/q, which resulted in cost to income ratio improvement, decreasing by 8pps to stand at 39% in 2Q19/20.
- Asset quality deteriorated; NPL ratio increased by 60bps, recording 3.3% in 2Q19/20, up from 2.7% in 1Q19/20. However, a negative Cost of Risk (COR) was seen at -0.7% in 2Q19/20, for the second quarter in a row, resulting in a lower coverage ratio, recording 121% down from 172% a quarter earlier.
- Effective tax rate also supported profits by declining sequentially to record 25% versus 29% in the previous quarter.
- Balance sheet witnessed a strong expansion on the lending side with gross loans growing by 13% q/q, versus an average of 5% over the past four quarters. Customer deposits inched up by 1% q/q, versus an average of 5% over the past four quarters, bringing Loan-to-Deposit ratio to 69%, the highest recorded over the past 5 quarters
EXPA is trading at attractive multiples compared to peers; maintain Overweight on FV of EGP12.50
We reiterate our Overweight recommendation on EXPA on FV of EGP12.50/share. The stock is trading at P/E20 of 2.2x, and P/B20 of 0.4x, on ROAE of 17%. These multiples are considerably below Egypt’s sector average of P/E20 of 4.12x, and P/B20 of 0.8x.