High CoR, opex and effective tax rate weigh on earnings; FC lending and funding shrink
CIB 1Q20 net profit pre-minority interest and appropriations came in at EGP2.4 billion (-27% q/q, -9% y/y) with a ROAE (pre-appropriations) of 19.6%. Bottom line sequential and annual weakness mainly came on the back of excessive provisioning as the bank continues its prudent provisioning strategy to ensure financial soundness over the coming quarters amid the current uncertainties, triggered by the virus outbreak. Also donations disbursed for combating COVID-19 weighed on expenses as compared to previous quarters. 1Q2020 results key takeaways were:
- Net interest margin (NIM) remained sequentially unchanged recording a strong 7.2% versus an average of 6.6% over the past four quarters. Net interest income (+1% q/q, +25% y/y) was driven by a faster decline in interest expense (-7% q/q, -16% y/y) than interest income (-2% q/q, +4% y/y).
- Non-interest income expansion was driven by a surge in profits from financial investments which compensated for the decline witnessed in fees and commissions (-16% q/q, -13% y/y). Thus, Non-interest income stood at 13.6% of operating income (+30 bps q/q).
- Efficiency deteriorated where cost to income ratio recorded 32% in 1Q20, up from 29% in 4Q19 and versus an average of 28% over the past four quarters. The reason is faster growth in operating expenses of 9% q/q than operating revenues of 1% q/q. Filtering into net operating income decline of 2% q/q.
- Non-Performing-Loans (NPL) ratio remained stable at 4.0% with more than adequate provisions coverage of 247% up from 225% in the previous quarter.
- Cost of risk spiked to 3.8% versus an average of 1.2% over the past four quarters, on lower anticipated asset quality, to further weigh on earnings.
- Effective tax rate increased, to record 34%, up from an average of 28% over the past four quarters, possibly with higher treasury allocation compared to last year average of 46%, and as the impact of the new tax law start to show.
- Heavy-weight corporate lending dropped by 4.0% q/q dragging total loan portfolio down by 2.3% q/q, despite an increase of 4.2% q/q in retail loans. FC loan repayments coupled with the appreciation of the EGP caused the drop, while LC loans failed to provide support as it grew modestly by 1% q/q. On the funding side, deposits expanded by 1.8% q/q skewed towards corporate segment. Growth was wholly driven by LC deposits where FC deposits contracted by 3.4% q/q. Loan to deposit ratio (LDR) fell by 170 bps to stand at 41.4% as of March-end 2020.
- CAR strengthened to stand at 26.4% up from 26.2% as of December-end 2019, since the decline witnessed in RWA was higher than that of capital.
COMI trading at multiples below historical average
The stock is trading at P/E 2020 of 7.7x on latest published assumptions (or 10.6x if we consider annualized earnings) and P/B 2020 of 1.5x, which is below its historical average P/B of 2.8x between 2004-2019. However, the stock continues to trade at a justified high premium to Egypt banking sector average multiples of 3.3x P/E 2020 and 0.7x P/B 2020.
In our valuation, we haven’t accounted for the bank’s 51% stake acquisition of Kenya's Mayfair Bank in late April 2020. However, the impact currently remains to be insignificant to COMI's size. Mayfair Bank started operations in August 2017, it currently has 5 branches and almost 0.17% market share.
We are currently revising our valuation assumptions in light of the current challenges faced by the economy resulting from the coronavirus outbreak.