Beltone Financial expects an increase in deposits and credit rates at Crédit Agricole Egypt by the end of Q1.
A report issued by the company’s research department said that there is an expected gradual increase in financing imports and exports by banks, thanks to the tenfold increase in dollar resources following the flotation.
Crédit Agricole Egypt’s net income in Q4 2016 stood at EGP 397m, up by 37% year on year (y-o-y), and 22% quarter on quarter (q-o-q).
This brings the bank’s net income of fiscal year (FY) 2016 to EGP 1.35bn (+30% y-o-y), which is 9% ahead of the estimate and market consensus. Crédit Agricole Egypt’s return on average equity (ROAE) for FY 2016 has expanded to 33%, versus 29% in FY 2015, putting the bank among the most profitable players in our coverage, Beltone stated.
The most important aspects of Q4 2016 can be summarised as follows: the foremost important aspect is the robust net interest margin (NIM). Secondly comes the weaker balance sheet growth—ex-flotation impact. The third aspect is the asset quality deterioration. Lastly, there is the intact capitalisation supported by a cut in dividend payout.
Moreover, Beltone said that similar to the preceding seven quarters, earnings in Q4 2016 continued to be driven by robust growth in net interest income (+50% y-o-y, +19% q-o-q) because of further NIM expansion as the bank maintained strong control over its cost of funds amid slight widening of its asset yields.
It noted that Crédit Agricole Egypt is one of the few banks that refrained from offering the 1.5Y 20%/annum EGP-certificates of deposits (CDs). Crédit Agricole Egypt only offered 15% 3Y CDs versus other banks’ 3Y CDs that yield 16-16.5%. Crédit Agricole Egypt deliberately offers lower-than-market-average deposit rates as it does not opt to gather deposits in a slower credit growth environment, especially with a 26-30% cap on treasury exposure of total assets, which was mostly the case after the 25 January Revolution.
Beltone highlighted that Crédit Agricole Egypt enjoys one of the highest NIMs—reaching 610 bps in FY 2016.
Furthermore, the report stated that the EGP flotation has clearly inflated the bank’s balance sheet, given the FC-component of loans and deposits, which stands at 30% of each.
That has resulted in a surge in loan and deposit growth of 26% and 29% q-o-q respectively. “However, if we strip out the flotation impact, loans would have fallen by 1.1% q-o-q, while deposits would have grown 0.5% q-o-q, which reflects Crédit Agricole Egypt’s rather conservative strategy that was explained earlier,” it stressed.
Ex-flotation impact implies that Crédit Agricole Egypt’s loan book has grown by 2% y-o-y as of the end of December 2016, versus December 2015’s figures, owing to a significant drop in FC-loans, which overshadowed a healthy 12% y-o-y growth in LC-loans. Customer deposits, on the other hand, grew by 14% since December 2015—mostly driven by a growth in LC-deposits.
Additionally, the EGP flotation’s repercussions were also evident in Crédit Agricole Egypt’s non-performing loans, which surged 48% in Q4 2016 (+75% y-o-y). Accordingly, the bank’s nonperforming loan (NPL) ratio reached 4.1% versus 3.5% in September 2016, which explains the hike in booked provisions during Q4 2016. Crédit Agricole Egypt maintained a high provision coverage ratio of 176%.
Finally, the report said that, thanks to the significant cut in dividend payout (20% vs. 58% in FY 2015), Crédit Agricole Egypt’s capital adequacy ratio (CAR) remained intact at 15%, if we include FY 2016’s profits post-distributions, which is way above the CBE’s minimum requirement of 10.625% at the end of December 2016.
Beltone stated that they expect to see Crédit Agricole Egypt gradually shifting its strategy from the low-risk, high-return play to the medium-risk, high-return play as Egypt’s macro-recovery gains traction. The bank’s foreign exchange proceeds jumped at least tenfold post the EGP flotation.
As such, Beltone added they expect to see improvement in the bank’s balance sheet growth in Q1, as trade finance and lending activities gradually pick up on improved dollar availability.
“That said, we do not expect to see the bank’s balance sheet growth outpace market average as the bank prioritises profitability over market share,” it stressed.
The report stated that, accordingly, it foresees the sustained solid net interest margin going forward, due to the prevailing higher interest rate environment. Beltone said it believes that higher loan and treasury yields will reflect on the bank’s NIM in Q1, further aided by the bank’s controlled cost of funds. Improved balance sheet activity should also reflect on the bank’s fees and commissions, which are expected to see continued improvement compared to 2016’s relatively depressed growth.
“Nevertheless, we remain cautious on the asset quality front, whereby we saw the bank’s ‘watch list’ growing almost 1.8 times compared to September levels. As such, we do not rule out seeing more non-performing loan (NPL) formations and, consequently, high-booked provisions going forward,” the report read.
With regard to trading dynamics and potential share price catalysts, the report said that Crédit Agricole Egypt’s share dropped 10% from a high of EGP 40.20 per share on January 18, and thus provides an attractive upside of 28% based on future value (FV) (EGP 45.88 per share). Being a typical dividend play, the significant cut in dividend payout is negative indeed.
It added that the stock is very attractive from a risk-reward perspective, especially given the recent widening discount to CIB’s multiples. Crédit Agricole Egypt typically trades at a 15-20% discount to CIB—partially owing to the stock’s relatively weaker liquidity. However, over the past two weeks, that trading discount has widened to 30%, which is unjustified, especially since Crédit Agricole Egypt enjoys a stronger profitability profile versus that of CIB (ROAE of 32% and 28% respectively).
