Equity Analysis /
Egypt

QNB Alahli: Q2 19 – Lower funding costs support earnings; maintain Overweight

    Al Ahly Pharos Securities Brokerage
    11 July 2019

    Change in deposit structure boosts margins; lending improves

    QNBA's Q2 19 net profit pre-minority interest and appropriations came in strong at EGP2.2bn, growing by 9% sequentially and 18% annually with an ROAE (pre-minority and appropriations) of 29%. 

    Key takeaways:

    • NIM expanded by 60bps qoq to record 6.1%, and was the main reason for bottom-line growth. The change in funding structure towards cheaper short-term funds has dragged interest expenses down by 7% qoq, while interest income declined by 1% qoq resulting in net interest income to jump by 9% qoq.  
    • Treasury allocation continued to fall in Q2 19 by 8% qoq, and 18% YTD. Standing at 29% of total assets, down from 32% in the previous quarter and 34% as of end-December 2018. 
    • Non-interest income improved sequentially by 3%, however its contribution to operating income declined to 13% in Q2 19 from 14% in Q1 19, on the back of faster growth in net interest income.
    • Efficiency improved, where cost/income ratio decreased to 25% in Q2 19 from  27% in Q1 18, mainly on the back of lower admin expenses coupled with solid growth of operating income.
    • Non-performing loans ratio remained sequentially stable at 2.8%, with provisions coverage of 171% on a sequentially higher cost of risk of 0.29%, which is 10bps higher qoq, but lower than 2018 quarterly average of 0.4%.
    • Effective tax rate recorded 25% in Q2 19, down from 2018 quarterly average of 27%, but slightly higher than the previous quarter (+0.4 bps) .
    • Lending improved in Q2, recording sequential growth of 3%, bringing the total loan growth YTD to 4%, boosted by the retail and corporate sectors. On the funding side, corporate deposits continued to decline by 1.5% qoq, while retail deposits compensated for the decline by jumping by 4.4% qoq, bringing YTD deposit decline to 0.6% and changing the deposit composition to become 50% funded by retail deposits versus 46% as of end-December 2018. CASA increased by 8% qoq to represent 37% of total deposits. 

    Maintain Overweight; higher free float should unlock upside potential

    We reiterate our Overweight recommendation on QNBA on FV of EGP50.40/share. The stock is currently trading at PB19 and PE19 of 1.2x, and 5.6x, respectively. The Egypt banking sector (including COMI) is trading at an average of PB19 and PE19 of 1.0x and 4.6x, respectively. While the bank has already taken the step to raise the free float to 5%, we believe that further regulatory adjustments to raise the free float to 10% would unlock the high upside potential of the stock. However, we note that this may not happen anytime soon.