Margins weaken on lower treasury exposure and other income fail to provide support amid highest single quarter provisions in six years
CIEB 2Q20 consolidated net profit pre-minority and appropriations recorded EGP261 million (-41% q/q, -57% y/y) with an annualized ROAE for FY2020 of 19%. Profits declined on 1) weak NIM due to lower treasury allocation and 300 bps rate cut, 2) a plunge of non-interest income partially affected by the CBE’s decision of removing all fees on bank transactions from mid-March until mid-September, 3) sizable provisions despite NPLs ratio improvement, and lastly 4) higher effective tax rate despite lower treasury investments. However, lending expansion came as a positive surprise growing by 7% QoQ, bringing YTD expansion to 11%.
2Q20 results key takeaways were:
Margins added 70 bps in 2Q20 to stand at 6.2% as lending expanded on account of treasury investments, where treasury investments to total assets declined from 23% as of Mar-20 to 18% as of Jun-20.
Non-interest income declined by 5% q/q and 7% y/y mainly on weaker net fees and commissions, which dropped by 26% q/q. However non-interest income to total operating income rose slightly on a smaller base to record 22% up from 21% in 1Q20.
Efficiency deteriorated by 5.3 ppts where the cost to income ratio recorded 40%, triggered by a decrease in operating income by 9% q/q against an expansion of OPEX by 5% q/q.
Booked provisions came in at EGP153 million which is 410% higher than the previous quarter, despite continued improvement in asset quality where NPL ratio recorded 2.5% (-20 bps q/q). This implies a cost of risk of 2.3% vs 0.5% in 1Q20. Provisions coverage increased to 179% in 2Q20 from 152% in 1Q20.
Effective tax rate rose by 200bps to record 26%.
Loan portfolio continued stellar performance by growing 7% q/q in 2Q20, mostly driven by the corporate segment, bringing YTD growth to 11%. Customer deposits expanded by 1% q/q, bringing YTD growth to 3% to result in an improved loan to deposit ratio (LDR) of 67% (+4 ppts) as of June-end 2020.
Capital adequacy ratio strengthened to record 19.5%.
CIEB offers a decent dividend yield; Maintain Overweight
We reiterate our Overweight recommendation. CIEB is trading at 1H20 annualized P/E20 of 5.9, and P/B20 of 1.2x with expected dividend yield north of 10%.
We are currently revising our valuation assumptions in light of the current challenges faced by the economy resulting from the virus outbreak.