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20% increase in loans, 15% more deposits at Al Baraka Bank: Beltone - Daily News Egypt

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20% increase in loans, 15% more deposits at Al Baraka Bank: Beltone

Foreign currency loans account for 25% of loans, while deposits in foreign currency represent 18% of sheer deposits

The loans portfolio at Al Baraka Bank Egypt increased by 20% in the fourth quarter (Q4) of 2016, while the deposits portfolio witnessed an increase of 15%, thanks to the flotation decision taken by the Central Bank of Egypt (CBE) on 3 November 2016, according to a report issued by Beltone Financial.

The report noted that denominated loans in foreign currencies accounted for 25% of the bank’s total deposits, while the deposits in foreign currency accounted for 18% of the sheer deposits at the bank.

Beltone added that lower provisions drive earnings beat amid a net interest margin (NIM) compression and a weak balance-sheet growth.

Al Baraka’s Q4 net income came stood at EGP125m, up by 121% year on year (y-o-y) and down by 6% quarter on quarter (q-o-q). This takes the bank’s earnings of fiscal year (FY) 2016 to EGP 512m, almost doubling y-o-y and significantly beating previous Beltone estimates on lower booked provisions. Full-year earnings soared primarily because of a significant drop in provisioning levels (-50% y-o-y), lower effective tax rate, accompanied by improved operating income (+24% y-o-y) and controlled operating expense, operational expense, and operational expenditure (OPEX) (+4% y-o-y).

Moreover, Beltone said that Al Baraka’s Q4 earnings’ y-o-y surge was driven by several factors. The first is the higher net interest income, despite the substantial NIM contraction. The second factor is improved non-interest income (both fees and foreign exchange (FX) income), while the third factor is controlled provisioning and efficiency levels on a y-o-y basis. The fourth and last factor is a lower effective tax rate.

In contrast to most peers, the bank witnessed a significant NIM contraction on annual and sequential bases during Q4, given the bank’s unfavourable funding structure whereby higher costs of funds overshadowed an improvement in asset yields, according to Beltone.

The research noted that, like peers, the bank’s Q4 balance-sheet growth was inflated due to the EGP flotation impact, whereby 25% of the bank’s loans and 18% of deposits are FC-denominated. As such, loans and deposits surged 20% and 15% q-o-q respectively (+47% and +49% y-o-y respectively).

“Nevertheless, if we strip out the effect of the flotation, loans and deposits would have both fallen by 2% q-o-q (+17% y-o-y for loans and +24% y-o-y for deposits),” the report read.

Furthermore, asset quality was also negatively affected by the EGP flotation, as the bank’s nonperforming loan (NPL) balance grew 80% q-o-q, leading to a 200-basis-point (BPS) rise in its NPL ratio to 6% in December 2016, with the provision coverage ratio dropping to 86%, down from 141% the preceding quarter.

On a positive note, Beltone stated that the bank’s capital adequacy ratio improved q-o-q to 11.9% (excluding the full-year profits) in December, whereby it is evident that the bank received supporting deposits from the parent bank against the inflation of its risk-weighted assets.

As for expectations for the current year, Beltone said that like peers, they expect the improvement on the macro front to be reflected in the bank’s performance in Q1 2017, with fee income picking up gradually as FX availability improves and trade finance activities gain traction. “However, we expect margins to remain pressured going through Q1 2017, especially given the bank’s unfavourable funding structure (high-cost deposits comprise 70% of total deposits). Like peers, we remain cautious with regards to further deterioration in asset quality, especially following the doubling of the bank’s watch list versus September 2016 levels (2% of loans). As such, we expect to see a rise in provisioning levels during 2017,” it added.

In addition, Al Baraka’s stock got significantly hammered, losing 26% since mid-January, following its 50% post-flotation rally. As such, the bank’s current trading multiples are by far the most attractive among the small-cap banks’ universe with a FY 2017e P/E of 3.7x and P/B of 0.7x, versus ROAE of 20%, according to Beltone. The research report explained that the absence of a clear expansion strategy and the lack of bank-specific catalysts, accompanied by the stock’s extreme illiquidity (3-month ADTV of EGP 190,000), usually hold significant stock re-rating back.

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