Suez Canal Bank (SCB) reported a bottom line of EGP 115m at the end of the first quarter (Q1) of 2018, still 2.5% more year-over-year (y-o-y), and 36% higher quarter-over-quarter (q-o-q), according to Beltone Financial, which issued a report analysing the performance of 10 banks operating in Egypt. According to the report, the relatively flat y-o-y earnings growth was a result of several factors, namely a 16% y-o-y drop in net interest income (NII) to EGP 204m coupled with a 33% y-o-y jump in admin expenses to EGP 166m, while cost-to-income (CTI) stood at 45% (+6% y-o-y). "This has overshadowed a strong 63% y-o-y jump in non-interest income to EGP 131m. On a sequential basis, however, SCB's earnings were boosted by higher fees (+60% q-o-q) and investment income (+49% q-o-q) in addition to lower effective tax rate (37% vs 43% the preceding quarter), compensating for lower NII (-7% q-o-q)," the report read, adding that if the bank's earnings continue to grow at the same pace over the coming three quarters of 2018, they will likely meet Beltone's fiscal year (FY) 2018 estimate of EGP 483m. The report stated that SCB's net interest margin (NIM) weakened significantly, dropping 140 basis points (bps) y-o-y and 39 bps q-o-q to come in at 213 bps. NIM contraction has been a function of higher cost of funds on a y-o-y basis (+260 bps) and weaker asset yields (especially treasury) on a q-o-q basis (82 bps). It added that SCB's deposit growth has been outpacing its asset growth, which partially explains the massive y-o-y jump in cost of funds. Moreover, treasury yields softened significantly in Q1 2018 versus July 2017's levels (-450 bps), which pushed the bank's asset yields down. Beltone explained that gross loans contracted 2.2% q-o-q (+0.6% y-o-y) to EGP 15bn as the bank's foreign currency (FCY) loan book (46% of total loans) continued to weaken (-10% q-o-q, -26% y-o-y), overshadowing a 6% q-o-q (+44% y-o-y) jump in local currency (LCY) loans, noting that syndicated loans have been contributing the bulk of the bank's loan growth over the past year (representing 24% of corporate loans). "SCB has been investing the bulk of its excess liquidity in interbank deposits (specifically the Central Bank of Egypt (CBE) deposits). Customer deposits grew 3% q-o-q (+39% y-o-y) to EGP 32bn, driven by growth in both LCY (+2% q-o-q) and FCY deposits (+7% q-o-q), whereby the latter comprised about 30% of deposits," the report explained. Furthermore, SCB asset quality improved, according to Beltone, with non-performing loans (NPL) going down 10% q-o-q (-38% y-o-y) to EGP 4.8m. The NPL ratio reached 32% in March 2018 versus 35% in December 2017 and 52% in March 2017, while provisions coverage remained almost flat at 86% q-o-q. The report said that the bank's capitalisation weakened this quarter, with the capital adequacy ratio (CAR) dropping to 12.1% versus 12.5% in December 2017. Beltone highlighted expectations that SCB will raise subordinated debt imminently given its subpar CAR levels. Established in 1978, SCB is jointly owned by Arab International Bank (41.5%) and Libyan Foreign Bank (27.7%). The bank operates through 36 branches and has 1,170 employees, with an asset market share of 0.8%. The bank primarily caters to medium-sized corporations, with plans to widen its exposure to the retail segment. Suez Canal Bank has been struggling with a provisioning gap, which led the bank to report zero profits from 2010 to 2015. Yet, in 2017, the bank experienced growth in earnings, reporting a net profit of EGP 356m (+70% y-o-y), deposits of EGP 31.3bn (+30% y-o-y), and gross loans of EGP 15.4bn (-4% y-o-y). SCB has been focused on bringing down its high NPL ratio and improving its coverage, which reached 35% and 86% respectively in December 2017. Beltone said that it has a fair value (FV) estimate of EGP 15.13 per share for SCB, derived using a discounted equity cash flow (DECF) valuation.
