Bottom-line growth hinges on other operating income; Lending activity remains stable
FAIT 1Q22 net profit stood at EGP1,311 million (+116% y/y, +11% q/q), while attributable net profit recorded EGP1,290 million (+123% y/y, +8% q/q). The bottom-line witnessed strong annual growth on the back of 1) 438% growth in non-funded income that is driven by other operating income of EGP739 million, a 394% y/y growth in investment income, and a 21% growth in fees and commissions income, 2) an 18 pps drop in effective tax rate recording 23% , and 3) a 3% growth in top-line. This significant growth came in despite a 49% y/y increase in OPEX driven by admin expenses and a 91% y/y increase in booked impairments. On a sequential basis, the growth in the bottom line also came in on the back of the growth in the non-funded income of 124% which is also driven by the other operating income booked in 1Q22, and 14% growth in fees and commissions income, as well as a 5 pps decline in the effective tax rate. The annual growth came in despite impairments of EGP201 million in 1Q22 compared to reversals of EGP25 million in 4Q21.
Gross financing facilities grew by 14% y/y, and by 5% q/q, driven by both the retail and corporate segments, while deposits expanded by 15% y/y and 5% q/q. Additionally, due from banks witnessed a 37% y/y growth and a 4% q/q growth.
1Q22 results key takeaways:
• NFM shrank on an annual and sequential basis to settle at 5.0% (-68 bps y/y,-48 bps q/q), given the lower treasury exposure as of March 2022, which recorded 59% to total assets (-3 pps y/y, -0.2 pps q/q). NFM shrinkage can be also attributed to the limited 3% y/y growth and 17% q/q decline in net funded income, on the back of the stronger growth in costs of deposits (+30% y/y, +66% q/q), compared to the growth in the income from earning assets (+16% y/y, +15% q/q).
• Non-funded income significantly expanded by 438% on an annual basis, and by 124% on a sequential basis, mainly on the back of other operating income amounting to EGP739 million, along with fees and commissions income growth (+21% y/y, +14% q/q), and higher investment income on a y/y basis driven by net trading income (+459% y/y) and gains from financial investments (+289% y/y). Therefore, the contribution of the non-funded income to operating income increased by 32 pps y/y, and by 22 pps q/q, to settle at 47% in 1Q22.
• Efficiency has stabilized on a quarterly basis but improved on annual basis reflected in the lower cost to income ratio settling at 21% in 1Q22 (-2 pps y/y, 0 pps q/q). OPEX increased by 49% q/q, driven by the increase in the admin expenses (+54% y/y), while operating income increased by 65%. OPEX expanded by 20% y/y, given the 35% q/q increase in admin expenses, while operating income expanded by only 18% q/q.
• Effective tax rate declined by 18 pps y/y and by 5 pps q/q, to record 23%, which supported the sequential and annual bottom-line growth. The decline could be attributable to the lower treasury exposure on a year over year basis, where it stood at 59% as of March 2022 (-3 pps y/y), despite the higher excess booked impairments in 1Q22, compared to EGP105 million in 1Q21 and reversals of EGP25 million in 4Q21.
• It is worth mentioning that the other operating income of EGP739 million booked in 1Q22 makes around 56% of the bottom-line recorded, indicating that the bank’s positive performance hinges on the other operating income, which if excluded, bottom-line would have witnessed a 23% y/y growth and a 37% q/q decline, where the annual growth would have been supported by other sources of income including the net trading income and gains from financial investments rather than the bank’s core activities that reflected weak performance over the quarter.
• Lending expanded by 14% y/y, and 5% q/q, driven by both the retail and corporate segments. On the funding side, deposits grew by 15% y/y, and 5% q/q. Therefore, the loan to deposit ratio slightly declined by 0.2 pps y/y and 0.1 pps q/q, recording 12% as of March 2022. Accordingly, excess funding has been utilized to maintain almost the same level of treasury investments to support the margins and increase loans to other banks (due from banks as it expanded by 37% y/y, and 4% q/q)
Maintain Overweight on expected growth in earnings, however, watch out for one-off gains
We reiterate our overweight recommendation on FAIT on FV of EGP18.00/share, given the bank’s increased lending momentum over the previous quarters, as it expanded by 14% since 1Q21 and by 5% YTD. Additionally, the asset allocation strategy started to revert away from treasury investments to other interest earning assets such as due from banks that witnessed significant growth over the past years. This reflected positively on the bank’s effective tax rate that declined over the past quarters and settled at 23% in 1Q22. Despite the negative effect that started to reflect on the margins as the bank stopped investing heavily in treasury investments, we believe that net income will remain strong over the coming years, mainly on the back of stabilized non-funded income supported by a recovery in fees and commissions income, controlled income taxes driven by the expected declining treasury exposure, improved efficiency and higher due from banks, along with a stronger going-forward recovery in the lending momentum and asset quality. However, it is important to highlight that the positive performance in 1Q22 is mainly related to one-off gains, therefore, this should be monitored carefully over the next quarters to ensure that the bank’s performance does not depend on one-off gains and other sources of income rather than the bank’s core operations.
The stock is currently trading at P/B22 of 0.4x and P/E22 of 2.4x, with ROAE of 18%