22-Mar-2016
EGB 4Q2015 first glance: loan growth momentum strong, but credit quality worsens
Egyptian Gulf Bank (EGB) reported 4Q2015 net income of EGP58 million, up 129% Y-o-Y from a low base in 4Q2014, which was negatively hit by high provisioning and operating costs. On a Q-o-Q basis, earnings fell 41% due to higher Q-o-Q provisioning costs and lower non-interest income. Actual net income in 4Q was 19% below our forecast of EGP72 million owing mostly to a higher-than-expected tax charge in 4Q2015. Revenue growth was very strong, up 66% Y-o-Y driven by net interest income and fee income, thanks to the strong 94% Y-o-Y expansion in the loan book. FY2015 net income reached EGP278 million, coming in 35% higher Y-o-Y but was 5% below our forecast of EGP292 million on higher tax charges. Our view on the results: A mixed bag in our view. Loan growth was once again strong, up 7% Q-o-Q and 94% Y-o-Y, following very strong growth in 9M2015. Loan growth Q-o-Q was mostly fueled by a surge in retail loans Q-o-Q (+39%). Looking at the FY2015 trends, EGB managed to increase its market share to 1.1% in end-2015, up from 0.7% in end-2014, as EGB has grown its corporate portfolio as a result of its participation in syndicated loans. Loan growth was the key driver of the strong net interest income and fee income performance in 4Q2015 (+61% Y-o-Y and +89% Y-o-Y respectively), although the net interest spread narrowed 89bps Y-o-Y (-34bps Q-o-Q) on higher funding costs. Deposits increased by 15% Q-o-Q and +128% Y-o-Y. While revenue growth was very strong, operating expenses also picked-up strongly in 4Q2015 (87% Y-o-Y), as the bank is embarking in new IT investments, and loan loss provisioning costs also increased. For the FY2015, the NPL ratio fell to 5.3% from 6.7% as a result of the expansion in the loan book, but absolute NPLs did increase (+50% Y-o-Y), with the deterioration happening mainly in 4Q2015, and there was also an increase in past due loans. The capital adequacy ratio (CAR) fell to 11.4% in 2015, down from 13.8% in Sept-2015 and 20.2% in Dec-2014. While this level is close to the regulatory minimum of 10%, EGB announced earlier in the year a plan to increase common equity via a rights issue in different tranches in order to boost CAR. Main Positives: Very strong loan growth and deposit growth; ii) Strong growth in net interest income and fee income Y-o-Y; iii) Higher-than-expected trading income. Main Negatives: i) Compression in the net interest spread Y-o-Y and Q-o-Q; ii) Increase in the NPL ratio Q-o-Q (+127bps); iii) Pick-up in provisioning costs; iv) Surge in operating expenses Y-o-Y. (Elena Sanchez-Cabezudo, CFA, Rajae Aadel, Company) Egyptian Gulf Bank: USD1.31 as of 20 March 2016, Rating: Neutral, FV: USD1.60 per share, MCap: USD335 million, EGBE EY / EGBE.CA