Equity Analysis /
Egypt

Suez Canal Bank: 2Q19 – Bottom line fell sequentially despite strong margins; maintain Underweight

    Al Ahly Pharos Securities Brokerage
    7 August 2019

    Bottom line decreases sequentially on the back of  lower non-interest income and higher effective tax rate; Lending shrinks sequentially

    CANA 2Q19 net profit pre-minority interest and appropriations came in at EGP107 million, weakening by 17% sequentially and growing by 13% annually with an ROAE of 15%. Key takeaways from the 2Q2019 results were:

    • Despite a fall in treasury exposure to total assets by 2pps in 2Q19, NIM rose sequentially by 36 bps, standing at 3.0%. Net-interest income surged by 17% sequentially.
    • Non-interest income dropped by 41% q/q due to high base one-off FX gains recorded a quarter earlier, and lower net fees and commissions, decreasing by 24% q/q, leading operating income to fall by 9% q/q. 
    • OPEX declined sequentially by 10% in 2Q19, at a similar drop to that of operating income, which resulted in a stable cost to income ratio, standing at 48%. 
    • NPL ratio declined by 97 bps, recording 20% in 2Q19, coupled with  a drop in Cost of Risk (COR), where booked provisions plunged by 53% sequentially, resulting in a COR of 0.6% in 2Q19, down from 1.4% a quarter earlier, with an increase in coverage ratio by 110 bps, recording 81%. 
    • Higher effective tax rate, surging by 12% to stand at 52% in 2Q19, up from 39% in 1Q19.
    • The balance sheet witnessed sequential weak growth with gross loans shrinking by 1% q/q, versus an average of 7% over the past five quarters, and customer deposits increasing by 16% q/q, versus an average of 4% over the past five quarters, bringing the loan-to-deposit ratio down to 39%.

    CANA is trading at attractive multiples compared to peers but we maintain Underweight on FV of EGP7.00 

    We reiterate our Underweight recommendation on CANA on FV of EGP7.00/share. The stock is trading at P/E19 of 3.5x, and P/B19 of 0.5x, on ROAE of 15%. Egypt’s sector average P/E19 and P/B19 are 3.9x and 0.9x, respectively.