Profits decline despite NBFIs solid revenue growth, and controlled opex
Group attributable profit for 1Q20 recorded EGP 90 million (-74% q/q, -76% y/y), which marks the lowest quarter profits since 4Q2016 on the back of several factors:
- Operational weakness of the IB platform especially brokerage and IB divisions
- Adoption of IFRS 9 which resulted in EGP 437 million unrealized losses developing from the move of seed capital/Investments from Investments at fair value through OCI (FVTOCI) to Investment at fair value through profit & loss (FVTPL). Consequently, it weighed down on capital markets and treasury operations’ revenue growth despite higher interest income and capital gains
- IFRS 9 adoption also resulted in booking higher provisions of EGP 138 million, up from low double digit figures, in anticipation of NBFIs expected credit loss. This led to the net loss of the NBFIs platform of EGP 22 million so the investment bank platform was the sole contributor to the group profitability despite very weak top-line (-40% q/q, -38% y/y)
However, on the positive side
- NBFIs witnessed very healthy performance across all lines of business, where ValU started to post profits for the first time on a standalone basis. NBFIs revenue contribution to group revenues surged to stand at 38% up from 24% in the previous quarter.
- Employee expenses declined on variable salaries and wages, compensating for the increase in other non-employee expenses to result in a controlled OPEX.
During the quarter management took a prudent decision to write-down 100% of the remaining investment in Credit Libanais which amounted to EGP 753,511,936 as of 31 December 2019 as the economic condition in Lebanon continued to worsen in 1Q20. It reflected in other comprehensive income through equity leaving no impact on the income statement.
Business lines in focus
- IB, Capital Markets and Treasury operations' (63% of 1Q20 Group operating revenue) revenues recorded a weak EGP 604 million in 1Q20 (-40% q/q, -38% y/y), mainly on lower capital markets and treasury operations (-51% q/q, -8%) dragged by unrealized losses resulting from the early adoption of IFRS 9, despite higher interest income and capital gains. Brokerage revenues weakened (as fixed income desk recorded losses of EGP 44 million, and Egypt margin book contracted), which together constitute almost 80% of platform revenues. Also weak IB and AM revenues (on lower AuMs), were notable. Annual drop was mainly associated to PE exceptionally strong incentive fees of EGP236 million from the Private Equity’s wind portfolio exit.
- NBFI(37% of 1Q20 Group operating revenue) revenues came in strong at EGP361 (+15% q/q, +19% y/y) where all business lines delivered healthy sequential growth, mainly driven by Tanmeyah despite a slower portfolio growth amid fears of the corona virus outbreak. Then equally boosted by Valu, and leasing. However, it filtered into a net loss of EGP22 million due to hefty booked provisions of EGP 139 million for expected credit losses versus EGP 19 million a year ago.
- Tanmeyah (31% of 1Q20 Group operating revenue) represented 82% of the NBFI revenue in 1Q20. Total outstanding portfolio reached EGP3.3bn as of March end 2020 (+2%q/q, +9% y/y). In 1Q20, 2 new branches were opened to close the quarter with a total of 273 branches.
- Leasing (4% of 1Q20 Group operating revenue) represented 12% of NBFI’s revenue in 1Q20. New bookings in 1Q20 recorded 503 million (+150 q/q, +50% y/y) taking total outstanding portfolio to EGP3.7 billion (+9% q/q, 19% y/y).
- ValU (2% of 1Q20 Group operating revenue) represented 5% of NBFI’s revenue in 1Q20 and reported net profit for the first quarter since the launch of its operations in early 2018, with an outstanding portfolio of EGP494 million (+36% q/q, +184% y/y)
- Factoring (0.4% of FY19 Group operating revenue) representing 1% of NBFI’s revenue in 1Q20.
- Operating Expenses were controlled in 1Q20 ( -2% q/q, +2% y/y) on lower employee expenses. However, cost to income ratio surged on contracting operating revenue (-27% q/q, -24% y/y), to record a high 86% (+22pps).
At the current market price, HRHO is trading at annualised multiples of 0.6x P/B20 and 11x P/E20 on an annualised ROAE 2020 of 6% and an EPS contraction of 45%. We are currently revising our valuation assumptions in light of the current challenges faced by the economy resulting from the coronavirus outbreak.