Earnings Report /
Egypt

Suez Canal Bank: High base effect reflects on bottom-line growth; Lending momentum revives

  • Bottom-line growth shrinks on high base effect, higher expenses, and taxes

  • LDR expands

  • Strategy reverting to the right direction

Bassma Bakry

Bottom-line growth shrinks on high base effect, higher expenses, and taxes; LDR expands

CANA 1Q22 net profit pre-appropriations recorded EGP96 million (-17% y/y, -58% q/q), which is 16% lower than our estimates for 1Q22. The bottom line plummeted on an annual basis mainly on the back of 1) high base effect as the non-interest income declined by 22% due to not booking other operating income in 1Q22, compared to EGP105 million in 1Q21, 2) a 45% growth in OPEX, driven by other operating expenses of EGP94 million compared to none in 1Q21, and admin expenses growth (+10% y/y). The decline in the bottom-line came in despite the lower provisions (-92% y/y) and lower effective tax rate dropping by 4 pps y/y recording 47% in 1Q22.

On the other hand, the sequential significant decline is mainly attributed to 1) high base effect since the bank engaged in provisions reversals of EGP129 million in 4Q21 compared to provisions of EGP10 million in 1Q22, 2) a 50% growth in OPEX, driven by other operating expenses of EGP94 million compared to none in 4Q21 as well as a 14% q/q growth in admin expenses, 3) a 15 pps increase in the effective tax rate, recording 47%, and 4) a 3% decline in the top-line. The sequential decline took place despite a 155% growth in non-interest income, supported by a 72% growth in investment income and a 51% growth in fees and commissions income.

On a positive note, the balance sheet implied healthy growth as gross loans expanded in 1Q22 by 28% y/y and 9% q/q, while funding grew by 17% y/y and 6% q/q, which beefed up LDR on an annual and quarterly basis.

1Q22 results key takeaways

• NIM slightly expanded by 5 bps on an annual basis, but shrank by 28 bps on a sequential basis, settling at 3.2%. The sequential decline is mainly attributable to the lower treasury exposure as of March 2022, as it declined by 4 pps q/q settling at 20%. Moreover, the growth that took place in the cost of funds was stronger than that in the interest income which reflected negatively on the net-interest income.

• Non-interest income declined annually by 22% but expanded sequentially by 155%. The annual decline does not reflect weak performance since the bank’s investment income increased by 32% y/y, and net fees and commissions income expanded by 20%. However, the decline could be attributable to the high base effect, as the bank recorded EGP105 million in other operating income back in 1Q21. On a sequential basis, the expansion took place on the back of a 72% and a 51% growth in investment income and net fees and commissions income, respectively. Accordingly, non-interest income represented 36% of the total operating income in 1Q22 (-6 pps y/y, +18 pps q/q).

• Efficiency deteriorated sequentially and annually as OPEX grew by 45% y/y, and by 50% q/q. The growth in OPEX is mainly driven by other operating expenses amounting to EGP94 million, compared to none in 1Q21 and EGP46 million in 4Q21 (+103% q/q), in addition to higher admin expenses which grew by 10% y/y, and 14% q/q. On the other hand, the operating income witnessed a decline of 9% y/y and grew by only 25% sequentially. Accordingly, the cost to income ratio increased by 25 pps y/y and 11 pps q/q to stand at 67% in 1Q22.

• The bank reported provisions of EGP10 million in 1Q22, compared to provisions of EGP137 million in 1Q21, and reversals of EGP129 million in 4Q21. Therefore, the cost of risk came in at 0.1% (-2.4 pps y/y, +2.2 pps q/q). This translated into a coverage ratio of 105% reflecting a 1 pps and 0.2 pps increase on a y/y and a q/q basis, respectively. Coverage increased on an annual basis as a result of the improved asset quality as the NPL ratio recorded 8.1% as of March 2022 (-1.8 pps y/y). Sequentially, the coverage almost stabilized since the NPLs increased by 8% limiting the effect of the higher provisions on the coverage.

• The effective tax rate dropped by 4 pps y/y, and expanded by 15 pps q/q, recording 47%, which is higher than the average of the past four quarters of 42%. The annual decline in the effective tax rate could be attributable to the lower treasury exposure (-9 pps q/q), and lower excess provisions (since excess provisions are taxed which brings the effective tax rate up), whereas the sequential growth took place despite the lower treasury exposure (-4 pps q/q), mainly due to the excess provisions in 1Q22, compared to reversals of EGP129 million in 4Q21. It is also worth highlighting that the effective tax rate in 4Q21 was lower than the bank’s average effective tax rate of 42% given the provisions reversals.

• Lending witnessed a healthy y/y and q/q growth of 28% and 9%, respectively. Deposits also grew by 17% annually and 6% sequentially. Accordingly, the LDR ratio increased by 4 pps on an annual basis and by 1 pps on a quarterly basis, standing at 52% as of March 2022.

Strategy reverting to the right direction

We reiterate our overweight recommendation on CANA on FV of EGP15.00/share. We expect that the bank will continue its new asset allocation strategy, reverting away from high treasury investments and focusing more on due from banks and loans to maintain the effective tax rates and bottom-line growth. Despite the negative effect this will have on the top-line, we believe that the bottom-line will increase over the next 5 years, given the expected growth in the top-line supported by the increased lending momentum, maintained and slowly declining treasury exposure, in addition to higher due from banks. Non-interest income should also witness a recovery over 2H222 given a recovery in net fees and commissions. Efficiency is also expected to recover over the years, with the operating income growing at a faster rate than the operating expenses. Lastly, provisions should stay at their current levels or decrease over the coming years given the bank’s improved asset quality and lower NPLs, giving the bank room to maintain provisions at a low level, thus avoiding paying high taxes on excess provisions.

The stock is currently trading at P/B22 of 0.4x and P/E22 of 4.4x