14-Aug-2017
ADIB Egypt - 2Q17: Solid EGP loan growth, spreads broadly stable Q-o-Q
Rating: Neutral
Target Price: EGP11.8
Closing Price: EGP10.9
Earnings up 253% Y-o-Y, well above our estimate on provision reversals
ADIB Egypt reported 2Q17 net income of EGP263mn, up 253% Y-o-Y and 234% Q-o-Q, coming in well above our estimate of EGP129mn. The key drivers of the earnings beat were: i) a net provision reversal of EGP42mn, of which EGP38mn was loan loss related, vs. our forecast of EGP87mn in provisioning costs; and ii) a low tax rate of 37% in 2Q17, vs 68% in 1Q17, 53% in FY16 and our forecast of 55%. Revenue growth was strong at 35% Y-o-Y driven by strong net interest income (+40% Y-o-Y) with broadly stable spreads Q-o-Q and Y-o-Y. Fee income rose 13% Y-o-Y, slower than some of the other banks, but from a fairly strong 2016 fee income base (FY16 fees up 50% Y-o-Y). Investment income was also strong, driven by gains from the sale of available for sale investments. Cost efficiency improved, with cost-to-income ratio down to 43% in 2Q17, compared to 47% in 2Q16 and 1Q17.
Downward restatement of NPLs brings ADIB-E’s credit quality metrics closer to peers
ADIB-E has restated its Dec.-16 NPLs downwards by 53% to EGP489mn. Post-restatement, the bank’s NPL ratio stands at 2.6% compared to 4.9% based on the previous 2016 disclosure. NPL coverage was 129% in Dec-16, compared to 68% before restatement. In June 2017, the NPL ratio rose very slightly from Dec-16 to 2.8%, with absolute NPLs up 14% YTD, with NPL coverage at 119% in 2Q17. Q-o-Q comparison of credit quality metrics is not like-for-like as we do not have restated NPLs for 1Q17.
Loan book falls on lower USD loans, but EGP loan growth still strong; CAR improves Q-o-Q
Loans fell 0.9% Q-o-Q in 2Q17 as i) FX loans declined 20% Q-o-Q (after a 15% Q-o-Q decline in 1Q17); and ii) EGP loan growth slowed to 8% Q-o-Q in 2Q17, from 16% Q-o-Q in 1Q17, which was an exceptionally strong quarter for EGP loan growth for most banks. Y-o-Y, EGP loans have risen 40%. CAR rose to 12.1% in 2Q17 from 11.7% in 1Q17, above the min. required of 11.25%. Tier 1 ratio, which was at the min. required of 7.25% in 1Q17 (excluding concentration risks), widened to 7.61% in 2Q17 (and 7.34% including concentration risks in 2Q). ADIB-Egypt has always run its balance sheet with a small capital buffer. We believe CAR will continue to improve as all earnings are retained into capital and factor in 13.0% CAR by end-2017.
Rajae Aadel
Elena Sanchez-Cabezudo, CFA
Target Price: EGP11.8
Closing Price: EGP10.9
Earnings up 253% Y-o-Y, well above our estimate on provision reversals
ADIB Egypt reported 2Q17 net income of EGP263mn, up 253% Y-o-Y and 234% Q-o-Q, coming in well above our estimate of EGP129mn. The key drivers of the earnings beat were: i) a net provision reversal of EGP42mn, of which EGP38mn was loan loss related, vs. our forecast of EGP87mn in provisioning costs; and ii) a low tax rate of 37% in 2Q17, vs 68% in 1Q17, 53% in FY16 and our forecast of 55%. Revenue growth was strong at 35% Y-o-Y driven by strong net interest income (+40% Y-o-Y) with broadly stable spreads Q-o-Q and Y-o-Y. Fee income rose 13% Y-o-Y, slower than some of the other banks, but from a fairly strong 2016 fee income base (FY16 fees up 50% Y-o-Y). Investment income was also strong, driven by gains from the sale of available for sale investments. Cost efficiency improved, with cost-to-income ratio down to 43% in 2Q17, compared to 47% in 2Q16 and 1Q17.
Downward restatement of NPLs brings ADIB-E’s credit quality metrics closer to peers
ADIB-E has restated its Dec.-16 NPLs downwards by 53% to EGP489mn. Post-restatement, the bank’s NPL ratio stands at 2.6% compared to 4.9% based on the previous 2016 disclosure. NPL coverage was 129% in Dec-16, compared to 68% before restatement. In June 2017, the NPL ratio rose very slightly from Dec-16 to 2.8%, with absolute NPLs up 14% YTD, with NPL coverage at 119% in 2Q17. Q-o-Q comparison of credit quality metrics is not like-for-like as we do not have restated NPLs for 1Q17.
Loan book falls on lower USD loans, but EGP loan growth still strong; CAR improves Q-o-Q
Loans fell 0.9% Q-o-Q in 2Q17 as i) FX loans declined 20% Q-o-Q (after a 15% Q-o-Q decline in 1Q17); and ii) EGP loan growth slowed to 8% Q-o-Q in 2Q17, from 16% Q-o-Q in 1Q17, which was an exceptionally strong quarter for EGP loan growth for most banks. Y-o-Y, EGP loans have risen 40%. CAR rose to 12.1% in 2Q17 from 11.7% in 1Q17, above the min. required of 11.25%. Tier 1 ratio, which was at the min. required of 7.25% in 1Q17 (excluding concentration risks), widened to 7.61% in 2Q17 (and 7.34% including concentration risks in 2Q). ADIB-Egypt has always run its balance sheet with a small capital buffer. We believe CAR will continue to improve as all earnings are retained into capital and factor in 13.0% CAR by end-2017.
Rajae Aadel
Elena Sanchez-Cabezudo, CFA