Equity Analysis /
Egypt

QNB Alahli: 3Q19 – controlled opex supports profits; lending recovers

    Al Ahly Pharos Securities Brokerage
    10 October 2019

    Non-interest income and controlled opex support profits; loan-to-deposit ratio improves

    QNB Al Ahli (QNBA) 3Q19 net profit pre-minority interest and appropriations came in at EGP2.24 billion, recording healthy growth of 2% sequentially and 16% annually with an ROAE (pre-minority and appropriations) of 28%. 3Q2019 results key takeaways were:

    • NIM declined slightly on faster growth of lending activity than the high-yield treasury investments coupled with the decline in CASA from 37% in the previous quarter to 35%. However, NIM remained strong at 5.9%. Interest income grew by 1% q/q, against a faster growth of interest expense of 2% q/q resulting in net interest income to decline by 1% q/q.  
    • Treasury allocation stabilized in September at 29% of total assets, shrinking by 17% YTD. 
    • Non-interest income improved sequentially by 2%, increasing its contribution to operating income from 13% in 2Q19 to 14% in 3Q19.
    • Efficiency improved, where cost to income ratio decreased from 25% in 2Q18 to 23% in 3Q19. Mainly on the back of lower other operating expenses.
    • Non-Performing Loans ratio increased by 10bps to record 2.9% with lower provisions coverage of 159% on a sequentially stable Cost of Risk of 0.29%.
    • Effective tax rate recorded 25% in 3Q19 down from 2018 quarterly average of 27%, but slightly lower than the previous quarter (-20 bps).
    • Lending recovered on both retail and corporate sides, recording sequential growth of 5%, bringing the total loan growth YTD to 9%, after the CBE cut rates by an aggregate of 2.5% during 3Q19. On the funding side, deposits expanded at a slower pace than loans, growing by 3% q/q, bringing YTD deposit growth to 2%. The bank is one of few to exceed the 2019-year end CBE SME portfolio target of 20%, as currently the SME portfolio represents 21% of total lending portfolio.

    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 P/B19 and P/E19 of 1.2x, and 5.6x, respectively. Egypt banking sector (including COMI) is trading at an average of P/B19 and P/E19 of 0.9x and 4.7x, 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 realize that this may not happen anytime soon.