Sizable booked provisions overshadow controlled opex for 4Q19; loan-to-deposit ratio improves
QNBA 4Q19 net profit pre-minority interest and appropriations came in at EGP2.07 billion, sequentially declining by 8% while annually expanding by 14%. This brings FY19 bottom line to EGP8.52 billion growing by 18% y/y (slightly below our 2019 estimates on higher than expected booked provisions) with an ROAE (pre-minority and appropriations) of 27%. 4Q2019 results key takeaways were:
- NIM remained strong at 5.9% on a faster decline in interest expense (-7% q/q) than Interest income (-2% q/q), resulting in net interest income to increase by 4% q/q. NIM was mainly supported by higher treasury allocation which recorded 33% of total assets as of Dec-19, stable YTD.
- Non-interest income failed to provide support as it declined by 5% q/q. Its contribution to operating income recorded 13% in 4Q19 down from 14% in 3Q19.
- Efficiency improved, where the cost to income ratio decreased from 23% in 3Q19 to 20% in 4Q19, on the back of lower other operating expenses.
- The non-performing loans ratio decreased by 10bps to record 2.9% with higher provisions coverage of 163% on a spike of Cost of Risk to 1.0%.
- The effective tax rate increased recording 28% in 4Q19 versus an average of 26% over the past four quarters, and 340 bps higher than the previous quarter.
- Lending expanded on both retail and corporate sides, recording sequential growth of 2.5%, bringing the total loan growth for the year to 11.9%. However, on the funding side, deposits contracted by 0.9% q/q, bringing 2019 deposit growth to only 1.4%. The bank is one of few to exceed the 2019-year end CBE SME portfolio target of 20%, as currently the SME portfolio represents 21.4% of total lending portfolio.
Maintain Overweight; Higher free float should unlock upside potential
We reiterate our Overweight recommendation on QNBA on a FV of EGP60.00/share. The stock is currently trading at P/B20 and P/E20 of 1.1x, and 5.3x, respectively. Egypt's banking sector (including COMI) is trading at an average P/B20 and P/E120 of 0.8x and 4.0x, 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.