Quarter earnings capped by insurance losses, despite strong financing business performance; Annual earnings surge on strong financing growth
Contact’s net income post minority interest for 3Q21 recorded EGP112 million (+3% q/q, +68% y/y) bringing 9M21 profits to EGP330 million (+71% y/y). Limited sequential improvement came as a result of: 1) 14% growth in the financing business operating income driven by an 8% increase in net interest income, along with a 26% increase in revenue from portfolio transferred, supported by a discounting gain realized in 3Q21 and a limited growth in the OPEX, 2) 8% decline in the insurance business operating income due to a shortage in the gross premiums (-6% q/q) coupled with a 59% increase in incurred claims, and 3) a 10% increase in OPEX driven by the general and admin expenses.
Annual expansion was driven by the financing and insurance businesses’ positive performance. Total operating income grew by 60% y/y while EBT expanded by 50%. This significant increase is attributable to: 1) 58% increase in the financing business operating income which is supported by the discounting gains and fees income, and 2) 115% growth in the insurance business operating income mainly driven by the strong increase in gross premiums, investment income and outward reinsurance commissions income.
Subsidiaries in focus
3Q21 net Attributable income recorded EGP117 million (+5% q/q, +54% y/y). Sequential growth was mainly driven by increase in net-interest income and revenues from securitization, discounting and sukuk in addition to fees income increase. However, the bottom-line growth was eaten up by a 60% increase in interest expense and a 48% increase in sales and distribution expenses.
On an annual basis, bottom-line growth was much higher despite recording only 1% growth in net interest income and a 35% and 39% increase in admin expenses and sales and distribution expenses, respectively. This is attributable to a discounting gain amounting to EGP73 million realized in 3Q21, along with fees income increase. Accordingly, this translated to a stronger growth in the operating financing income compared to the growth in operating and other expenses, explaining the significant annual growth in the bottom-line.
9M21 net attributable income recorded EGP332 million (+61% y/y). The growth is mainly supported by growth in net interest income, securitization gains, and fees income. Additionally, contact recorded other services income of EGP12 million in 9M21, compared to EGP6 million in 9M20 which further supported the bottom-line growth.
NIM stood at 6% (0 pps q/q, -2pps y/y), where the annual decline could be attributed to the interest rate cuts that took place last year. Additionally, fees income ratio stabilized at 2%, while cost to income ratio recorded 33% (-2 pps q/q, -2 pps y/y) showing higher efficiency.
Total financing portfolio as of September 2021 recorded EGP9.6 billion (+7% q/q, +32% y/y), where the new financing amounted to EGP5.1 billion, signaling robust growth and expansion of the business.
According to the management, new lending growth was supported by the mortgage division which grew by 342% y/y, followed by the shopping division growing by 157%, medical division growing by 109% along with Contact Trucks and Contact Auto expanding by 49% and 34%, respectively. However, the portfolio is still dominated by Contact Auto which represented 74%, followed by 8% in mortgage, 6% in trucks, 5% in shopping, 4% in medical and 4% in others.
The high quality of the portfolio was witnessed in a lower delinquency rate as of September 2021 (2.6% compared to 3.8% as of September 2020), additionally, provisions coverage stood at 122% as of September 2021 (+49 pps y/y) supported by the economic recovery post- pandemic and the extended repayment terms applied.
Recorded a 3Q21 net attributable loss of EGP4.5 million, which is 164% higher than 2Q21’s losses of EGP1.8 million, but 47% lower than 3Q20’s losses of EGP8.9 million. The sequential deterioration in performance came on the back of a decline in the net underwriting insurance income as a result of lower gross premiums and outward reinsurance commissions realized in 3Q21, coupled with a larger increase in incurred claims.
Alternatively, losses narrowed down on an annual basis as a result of a 115% expansion in net underwriting insurance income mainly driven by a stronger increase in gross premiums, investment income and outward reinsurance commissions income compared to the increase in incurred claims. However, the bottom-line still came in the red a as a result of the large OPEX compared to revenues.
G & A expense ratio settled at 28% in 3Q21 (-1 pps q/q, -15 pps y/y), while the commission expense recorded 32% in 3Q21 (-10 pps q/q, -6 pps y/y). Therefore, the combined ratio stood at 120% (+5 pps q/q, -28 pps y/y) resembling the current unprofitability of the insurance business.
9M21 performance was outstanding as net losses declined by 90% recording EGP1.3 million, compared to EGP13.9 million as of September 2020. The improvement came on the back of the expansion in net underwriting income driven by gross premiums and reinsurance commissions. Therefore, NEP recorded 61% as of September 2021 (+4 pps y/y)
According to the management, gross premiums were mainly contributed by Sarwa non-life premiums which were driven by the motor insurance making up 86% of the total non-life premiums as of September 2021. On the other side, Sarwa life premiums were driven by the medical insurance which made up 70% of the total life premiums as of September 2021.
However, the operating expenses still managed to bring 9M21 bottom-line in the red since net OPEX expanded by 43%, while direct commissions increased by 61%. However, an improvement is evident since the G & A expense ratio stood at 32% (-19 pps y/y), and commissions expense ratio declined by 2 pps, settling at 34%. Accordingly, the combined ratio fell down by 23 pps y/y reflecting a significant improvement in performance.
Contactcars.com launched the dealer services in 3Q21, providing subscription packages tailored to the requirements of all dealer segments across the market.
The launch of the car ownership services is expected in 2022. Positive future outlook; Maintain Overweight
Positive future outlook; Maintain Overweight
Contact Financial Holding recorded an overall positive performance in 3Q21 and 9M21 with the financing business growing at outstanding rates and paving the road for significant growth over the next years. The insurance business is still in the red, due to the high initial costs of starting the business and its small market share compared to its peers. However, it still managed to decrease its costs and minimize its losses by 90% compared to last year, which resembles its positive outlook over the next years. At the current market price, CNFN is trading at multiples of 1.7x P/B22 and 7.1x P/E22 on an ROAE 2021 of 29%.