Equity Analysis /

Al Baraka Bank Egypt: Sequentially weaker, but strong annually; reiterate Equalweight

    Bottom-line drops sequentially on low efficiency and high provisions; slower momentum for balance sheet growth

    SAUD’s consolidated bottom-line in Q1 19 was EGP266mn (-28% qoq, and +35% yoy), which witnessed a weak operational performance. Key highlights include:

    • Treasury exposure fell by 136bps in Q1, but remained high at 33% of total assets (accordingly, NIM dropped by 47bps, standing at 3.5%).
    • Net-interest income fell by 8% sequentially.
    • Non-interest income surged by 56% qoq to compensate for the drop in interest income, leading operating income to rise by 2% qoq. 
    • OPEX rose sequentially by 19% in Q1, at a pace much faster than operating income, which resulted in a higher cost/income ratio increasing by 3% and standing at 22%.
    • Lower asset quality – NPL ratio deteriorated by 303bps to 7.3% in Q1 19, up from 4.3% in Q4 18. There was a rise in cost of risk (COR), where booked provisions surged by 566% sequentially resulting in a COR of 2.7% in Q1 19, up from 0.4% in Q4 18, with a decrease in coverage ratio by 60%, standing finally at 102%. The surge likely reflects the implementation of IFRS9.
    • Higher effective tax rate increased by 6% to stand at 32% in Q1 19, up from 26% in Q4 18.
    • Balance sheet witnessed a sequential steady growth with gross loans expanding by 2% qoq versus an average of 3% over the past five quarters. Customer deposits grew by 3% qoq versus an average of 5% over the last five quarters, bringing loan/deposit ratio to 33%.

    SAUD is trading at attractive multiples compared with peers; maintain Equalweight on FV of EGP15.81 

    We reiterate our Equalweight recommendation on SAUD, FV of EGP15.81/share. The stock is trading at PE19 of 3.0x, and PB19 of 0.6x, on ROAE of 20%. These multiples are considerably below Egypt’s sector average PE19 of 4.7x, and PB19 of 0/9x. Our Equalweight recommendation is underpinned by the lowered focus on aggressive growth or market share gains, and a strategy that had focused on treasury investments, which is no longer going to pay off in light of the new tax treatment.