Earnings Report /
Egypt

Credit Agricole Egypt: Weak earnings on lower margins; sizable booked provisions; lending expansion

  • Margins weaken on lower treasury exposure

  • Other income fail to provide support

  • Hiighest single quarter provisions in six years

Al Ahly Pharos Securities Brokerage
16 August 2020

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:  

  1. 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.

  2. 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.

  3. Efficiency deteriorated by 5.3 p​pts 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.

  4. 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.

  5. Effective tax rate rose by 200bps to record 26%.

  6. 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.

  7. 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.