KEY THEMES
Yesterday, Commercial International Bank [COMI] closed 2.4% higher, as investors cheered the solid 22% growth in net earnings during H1 2021. Management has held a conference call afterwards, discussing Q2 2021 results; here are the main call highlights, presented by our senior banking analyst, Shihab M. Helmy.
NIM weakening vs. stable core banking income: Weaker NIM is a reflection of two important variables. First, the maturity of exceptionally high yielding government bonds that COMI bought before. Second, NIM contraction comes with higher lending volumes, as growth in local currency loan book alleviated the negative impact on the net interest income level. However, from a core banking income perspective, growth in net fees and commissions income was apparent in H1 2021, growing some 13% y/y, as the demand on LCs and LGs products reflated mainly by exporters from Kenya.
Features of COMI’s financing portfolio: Lending growth in Q2 2021 came sponsored by working capital and SMEs finance. The bank expects higher lending volumes on the retail front down the road, supported by the real estate mortgage initiatives, with the CBE affording the entire subsidizing burden. Furthermore, COMI still view T-bills investments up to the moment as more attractive than inter-bank assets, given that the net yield on T- bills still lucrative, with effective tax rates kept at 30%.
Quality funding is a top management priority: COMI is using all sorts of incentives to obtain high quality low-cost funding; focusing on elevating CASA levels in new deposit booking. In doing so, management opt to use different kind of promotions plans. Such plans include bonus points, higher credit cards limits, and an upgrade of customer’s other benefits.
The state of asset quality isn’t anywhere near scary: Addressing the issue with asset quality, management isn’t particularly worried regarding higher NPLs ratio. Management attributed the rise in NPLs ratio in light of certain transition from stage two loans to stage three. Such transition is derived from the fact that under the current conditions, most sectors like cement, tourism, and steel are considered stage two loans already. Management also ruled out the possibility of higher defaults post the six-month installment postponement initiative. In saying so, nearly 60% of corporate clients refused to postpone any installments to avoid paying higher interest charges after the aforementioned six-month period run its course.
What to expect in 2021? With EGP6.1bn already secured as net earnings during H1 2021, management expects full year bottom-line to range between EGP12bn to EGP12.5bn. Management’s expectations spout from projecting EGP1.5bn to EGP2bn in credit provisions this year, where the bank has already booked around EGP200mn in provisions during Q3 2021 so far. The bank is planning to obtain the digital banking license in the near future, as digitization provides less costly expansion. Such digital expansion plan is in line with other expansion plans in traditional branches. Finally, COMI will most likely ask for CBE's permission to distribute a special dividend during this year.
COMI offers the best exposure to Egypt’s banking sector, at very depressed multiples: COMI is currently traded at a forward P/E of 5.9x and forward P/BV of 1.2x. We have an Overweight recommendation on the name, with a12- month price target (12M PT) at EGP83/share, implying an upside potential of +49%.