Equity Analysis /

CIB: Controlled opex supports earnings amid margin contraction

    Topline sequential growth capped by lower treasury exposure; Lending recovers

    CIB 1Q19 net profit pre-minority interest and appropriations came in strong at EGP2.64 billion, growing by 3% sequentially and 31% annually with a ROAE (pre staff appropriations) of 29%. Key takeaways from the 1Q2019 results were:

    • Net interest income growth capped sequentially due to lower treasury exposure, which fell by 3.5% q/q to stand at 41.9% of assets down from 45.3% in 4Q18, where NIM contracted by 50 bps q/q to record 6.0%. 
    • Non-interest income was weak annually and sequentially amid a weak lending environment and constituted 14% of operating income.
    • Efficiency improved, with the cost to income ratio decreasing from 33% in 4Q18 to 26% in 1Q19.
    • NPL ratio increased by 90 bps to 5.0% since December end 2018, but provisions coverage remained resilient at 199% providing more than adequate provisioning on a high COR (1.7%).
    • Effective tax rate remained reasonable, at 29.7%; slightly down from 30.1% in 4Q18. The new tax treatment is not reflected in the accounts yet.
    • Corporate lending boosted total lending growth sequentially, increasing by 4.0% q/q along with retail lending growth of 6.3% q/q, bringing total lending growth to a 4.4% q/q. On the funding side, corporate deposits declined by 0.5% q/q while the heavy-weight retail deposits surged by 5.1% q/q, bringing total deposit growth to 2.8% q/q. 
    • CAR strengthened despite cash dividend distribution, standing at 21.5%, up from 19.1% as of December end 2018.

    Maintain Equalweight with a TP of EGP71.69; COMI multiples are below the historical average

    COMI continues to be the perfect proxy for the macro transformation story in Egypt. It constitutes more than 30% of Egypt’s key index- EGX30. CIB is the only Egyptian stock that will continue to reserve a spot in the MSCI Emerging Markets Index, as long as Egypt is included. It is the best managed private bank in Egypt and we assume the bank will remain the top-rated private sector bank, despite a challenging year ahead. 

    The stock is trading at P/E19 of 10.7x, and P/B19 of 2.3x, which is below its historical average P/B of 2.8x between 2004-2019, below the historical “good-times” average P/B of 3.0x, and significantly below its historical high P/B of 4.4x P/B. However, the stock continues to trade at a high premium to Egypt banking sector average multiples of 4.5x P/E19 and 0.9x P/B19. 

    In our valuation, we accounted for the negative impact of the new tax law, that was signed by the President on 24 February 2019, based on the initial proposed calculation of the Ministry of Finance, which includes provisions in the cost ratio, until the executive regulations of the amended tax law are announced. We haven’t accounted for any upside potential coming from the bank’s plans to expand outside the borders of Egypt, which, if it happened, would be a potential value driver.