Earnings Report /

Egyptian Gulf Bank: Quarterly growth decelerates on lower margins and higher provisions

  • Lower treasury exposure and provisions slow down quarter earnings, Annual earnings gets support from lower provisioning

  • Lending starts to pick up

  • Positive Outlook; Maintain Overweight

Lower treasury exposure and provisions slow down quarterly earnings, Annual earnings gets high support from lower provisioning

EGBE 1Q22 standalone net profit pre appropriations recorded EGP197 million (+24% y/y, +5% q/q), which is 4% higher than our bottom-line estimate of EGP191 million. The annual growth is mainly supported by 1) lower provisioning as it declined by 85% y/y, 2) a 2 pps decline in effective tax rate, and 3) a 2% growth in top-line. The sequential growth came in despite topline shrinkage of 3%, supported by 1) a 41% q/q increase in net fees and commissions income, 2) a 9% decline in OPEX, and 3) a 7 pps decline in the effective tax rate. The balance sheet implied that the lending growth started to pick up sequentially and annually, as gross loans grew by 9% y/y and 11% q/q, recording EGP28 billion as of March 2022. On the other side, funding also expanded annually and sequentially by 4% and 8%, respectively, recording EGP70 billion as of March 2022. This signals partial recovery in the bank’s lending activity.

1Q22 Key takeaways:

• NIM declined by 12 bps and stood at 3.9% in 1Q22, on the back of lower treasury exposure over 1Q22 standing at 41% (-7 pps y/y, -9 pps q/q). Additionally, the bank has increased its interbank deposits significantly to maintain the margins as due from banks recorded EGP10.7 million (+47% y/y, +64% q/q).

• Non-interest income declined annually but expanded sequentially (-59% y/y, +1532% y/y). The annual decline came on the back of not booking other operating income compared to EGP143 million booked back in 1Q22, lower net fees and commissions income which declined by 6% y/y and lower investment income (-2% y/y). Alternatively, the sequential improvement is mainly attributable to 1) growth in investment income (+73% q/q), driven by the net trading income that came in on the back of the recent FX changes (+91% q/q), and 2) 41% q/q growth in net fees and commissions income. Accordingly, noninterest income represented 13% of the total operating income compared to 27% in 1Q21 (-14 pps y/y) and 0.9% in 4Q21 (+12 pps q/q).

• Efficiency deteriorated on an annual basis as OPEX grew by 9% y/y as a result of higher admin expenses while operating income declined by 14% y/y. On the other hand, OPEX declined on a sequential basis by 9% due to lower admin expenses (-12% q/q), while operating income expanded by 11% q/q. Therefore, the cost to income ratio stood at 46% in 1Q22 (+10 pps y/y, -10 pps q/q).

• Provisions amounted to EGP38 million, compared to provisions of EGP260 million in 1Q21 and reversals of EGP115 million in 4Q21. Therefore, cost of risk stood at 0.6%, (-7.6 pps y/y, +2.4 pps q/q). Accordingly, provisions coverage stood at 123% (-23 pps y/y, -2 pps q/q) as a result of the lower provisions and higher NPLs on an annual basis. However, the provisions coverage mainly declined on a sequential basis due to the higher NPLs.

• EBT witnessed a growth of 19% annually and declined by 10% sequentially. Annual growth was mainly supported by the lower provisions and lower taxes, while the sequential decline can be attributed to the provisions booked in 1Q22 of EGP38 million, compared to reversals of EGP115 million in 4Q21. Therefore, the sequential decline in EBT does not signal negative performance of the bank.

• Lending growth stabilized annually and sequentially as it grew by 9% y/y and 11% q/q. Customer deposits also grew by 4% y/y and by 8% q/q. Accordingly, LDR increased by 2 pps y/y and by 0.9 pps q/q as it recorded 40% as of March 2022.

• Treasury exposure shrank by 7 pps y/y and 9 pps q/q to stand at 41% of the total assets as of March-end 2022. However, this decline did not reflect on the bank’s margins significantly as the bank maintained high levels of interbank deposits to minimize the negative effect on margins. Additionally, this reflected positively on the effective tax rate.

Positive Outlook; Maintain Overweight

We reiterate our Overweight recommendation on EGBE on FV of USD0.55/share. EGBE started to shift its asset allocation away from treasury investments which reflected positively on the effective tax rate in 1Q22. Moreover, it maintained relatively higher levels of interbank deposits along with stronger lending momentum to minimize the negative effect on the margins. We believe that the bank will continue applying this asset allocation strategy over the next years as to avoid paying very high taxes. Additionally, the bank’s non-interest income will witness partial recovery over 2H22 if the CBE canceled the exemption of fees and commissions initiative after June 2022, which will also minimize the effect of the limited growth in the top-line on the net profit. Lastly, we believe that asset quality will slowly improve over the next years, while efficiency will start improving in 2022 and going forward, given the improvement that already took place in 1Q22, which will all reflect positively on the bottom-line growth over the next years.

EGBE is currently trading at P/E22 of 4.3x and P/B22 of 0.5x.