Earnings Report /
Egypt

Suez Canal Bank: Strong quarter despite weak top-line; Lending activity grows

  • Bottom-line expands sequentially on higher efficiency and lower effective tax rate

  • Bottom-line increases annually on lower provisioning and effective tax rate despite a weak top-line; LDR expands

  • Positive set of results; Estimates under review

Bassma Bakry
Al Ahly Pharos Securities Brokerage
15 November 2021

Bottom-line expands sequentially on higher efficiency and lower effective tax rate; and annually on lower provisioning and effective tax rate despite a weak top-line; LDR expands

CANA 3Q21 net profit pre-minority interest and appropriations recorded EGP136 million (+9% q/q, +4% y/y), which is 49% higher than our estimates for 3Q21. This brings 9M21 net profit to EGP377 mn (+6% y/y). The bottom line grew sequentially on the back of 1) lower effective tax rate dropping by 8 pps q/q standing at 42% in 3Q21, 2) lower OPEX driven by a 5% decline in the general and admin expenses and a cost to income ratio of 51% (-1 pps q/q), and 3) higher net fees and commissions growing by 8% q/q, recording EGP53 million in 3Q21. The sequential improvement came despite a 3% decline in top-line, and non-interest income, as well as higher provisioning (+251% q/q).

On the other side, the annual increase is mainly attributed to 1) lower effective tax rate, standing at 42% compared to 49% in 3Q20 (-8 pps y/y), 2) lower provisioning recording EGP18 million, compared to EGP63 million (-72% y/y), and 3) higher net fees and commissions expanding by 22% on an annual basis, recording EGP53 million. The annual improvement also came in despite a drop of 7% and 13% in net interest income and non-interest income, respectively.

On a positive note, gross loans expanded in 3Q21 by 5% q/q and 18% y/y, bringing YTD growth to 18%, while funding also grew by 6% q/q and 13% y/y, which beefed up LDR on an annual basis.

3Q21 results key takeaways:

  • NIM almost stabilized standing at 3.4% (+4 bps), despite the bank’s lower treasury exposure as of September 2021 of 23%, down from 31% (-8 pps) as well as the decline in net interest income by 3% q/q, to stand at EGP377 million in 3Q21. Accordingly, NIM was maintained sequentially by a 7% increase in due from banks. On the other side, NIM declined on an annual basis by 6 bps, given the 16 pps decline in treasury exposure and 18% increase in gross loans.

  • Non-interest income declined sequentially and annually, recording -3% q/q and -13% y/y. This took place despite an 8% and 22% increase in net fees and commissions, respectively. This is attributed to the lower investment income dropping by 33% sequentially and 35% annually. Therefore, non-interest income represented 26% of the total operating income in 3Q21 (+0.1 pps q/q) and (-1.3 pps y/y).

  • OPEX dropped sequentially by 5% and expanded annually by 9%. The sequential decline was driven by lower admin expenses on a quarterly basis. Accordingly, cost to income witnessed a limited drop of 1 pps q/q to stand at 51%. However, cost to income witnessed a strong decline of 8 pps y/y which came on the back of increased operating income eliminating the 9% increase in OPEX and decreasing cost to income ratio.

  • Booked provisions in 3Q21 amounted to EGP18 million, compared to of EGP5 million in 2Q21. Cost of Risk came in at 0.3% which is 0.2 pps higher than 2Q21 and 1 pps higher than 3Q20. This translated into a 5 pps increase in the coverage ratio sequentially and a 19 pps increase annually , recording 110%. Coverage increased as a result of the higher booked provisions and improved asset quality, supported by the lower NPL ratio recorded as of September 2021 which decreased by 0.5 pps q/q and 7 pps y/y to stand at 8.9%.

  • Effective tax rate dropped by 8 pps q/q and y/y, recording 42%, which is lower than the average of the past four quarters of 43%. This supported the bottom-line growth sequentially and annually wiping out the drop in the top-line and the non-interest income

  • Lending witnessed a healthy q/q and y/y growth of 5% and 18%, respectively. This brought the YTD growth to 18%. Deposits also grew by 6% sequentially and 13% annually, bringing YTD growth to 10%. Accordingly, LDR ratio remained almost stable on a quarterly basis, but came in higher by 2 pps y/y to 49% as of September-end 2021. It is worth mentioning that the cash at the central bank has significantly increased by 263% q/q and 173% y/y to record EGP6,495 million. This took place to maintain the required reserve ratio at the regulatory requirement of 14%.

  • The bank’s BOD has approved a capital increase of EGP704 million translating to EGP0.32/CANA share. Therefore, the bank’s paid-in capital will stand at EGP2.904 billion, which still falls short of the new banking sector requirement of EGP5 billion.

Positive set of results; Estimates under review

CANA’s lending momentum has improved significantly in 2021 compared to 2020, while treasury exposure has been decreasing over time, which mirrors the bank’s plans to change its investment strategy and minimize the treasury investments portfolio. Additionally, the NPL ratio has also been improving over the past years indicating better asset quality and a stronger position in the market. Estimates for CANA must be revised in light of the 9M21 financial results, therefore, the fair value is currently under review to better reflect the performance of the bank.

The stock is currently trading at P/B22 of 0.49x and P/E21 of 4.51x.