In Q3 21, CAL Bank recorded an EPS of GHS0.10, translating to an 11% yoy increase. This was driven by the 61% yoy increase in non-interest income, boosted by 66% yoy and 63% yoy increase in trading income and fee income, respectively. Net interest income declined marginally due to the increase in cost of funds. CAL Bank’s NPL ratio increased during the quarter from 8.9% in Q3 20 to 13.7% in Q3 21. The weakening asset quality trend for CAL Bank matches that of our covered banks whose average NPL ratio increased from 13.6% in Q3 20 to 17.8% in Q3 21 due to sector- and bank-specific loan repayment challenges, particularly in the services and agriculture sectors.
We maintain our Buy recommendation with a TP of GHS1.06 and an ETR of 40% on account of: 1) Management increasing coverage ratio from 75.3% to 90%, which matches the weaker loan book and provides security in the event that write offs are required; 2) its cost/income ratio at 40.7% is better than the industry average of 49.8%; 3) strong non-interest income (making up 43% of total income).
CAL Bank is currently trading at a 1.3x FY21f PE and 0.31x FY21 PB, a discount to the average 3.3x FY 21f PE and 0.8x tangible PB for our Ghana Banks coverage.
Non-interest income climbed up 61% yoy, supported by a 66% yoy growth in trading income (accounts for 79% of the total non-interest income). This impressive performance was on the back of an increase in fixed income trading volumes, which constitutes 14% of total assets in Q3 21 compared to 2% of total assets recorded in Q3 20. Fees and commission income also recorded a 63% yoy growth owing to increase in the value of cards and electronic banking transactions (+22% yoy).
Impairment charge fell 7% yoy on account of loan write-offs and aggressive recoveries in the year, but spiked qoq due to a possible increase in stage 3 impairments in the quarter. The construction sector, which is one of bank's biggest borrowers with 28.1% of their loan book, had their NPL ratio increase to 18.3% in H1 21 from 11.0% in H1 20, while services – which constitutes about 22.9% of loans – still has a high NPL ratio at 16.3%
CAR remains strong at 19.3%, above the regulatory requirement of 11.5%.
Loans declined by 18% yoy as CAL Bank reduced credit extension to both the retail and corporate segments to preserve its asset quality from loan repayment challenges brought on by the Covid-19 pandemic. The bank channelled its funds to trading instead, with the trading book growing by 951% yoy and 22% qoq.
NPL ratio increased to 13.7% in Q3 21 from 8.9% in Q3 20, in line with our expectations. This still reflects the inability of SMEs and corporates to fulfill their debt obligations since the onset of the pandemic, with the commerce and finance industry still highly exposed with NPLs at 33.3%.
Net interest margin fell to 7.4% in Q3 21 from 9.7% in Q3 20. This was due to an increase in cost of funds to 7.9% in Q3 21 from 5.4% in Q3 20 on the back of high-cost deposits and inter-bank funding. The fall in net interest margin outweighed the 26% growth in interest income.