CB likely to see RoE rise to 11.9% in 2021

Satyendra Pathak Doha The return on equity (RoE) of Commercial Bank (CB) is expected to increase from 6 percent in 2020 to 11.9 percent in 2021 against t...

Satyendra Pathak Doha The return on equity (RoE) of Commercial Bank (CB) is expected to increase from 6 percent in 2020 to 11.9 percent in 2021 against the previous estimate of 10 percent, QNB Financial Services (QNBFS) has said in its company report released recently.After 2021, QNBFS said, “We model RoE to increase beyond 13 percent. Management is targeting 13-15 percent during 2022-26. Our new sustainable RoE is 14.3 percent against 12.5 percent previously.”According to the report, the asset quality of CB has improved as the majority of nonperforming loans (NPLs) are legacy. NPLs remained stable at QR4.3 billion at the end of the first nine months of 2021, while the NPL ratio decreased to 3.98 percent against 4.33 percent in FY2020. “Coverage of stage 3 loans improved, increasing from 66 percent in FY2020 to 75 percent in the first nine months of 2021. Going forward, we expect asset quality to improve further, driven by prudent underwriting and recoveries,” the report said.“We forecast 2020-25 earnings to grow at compound annual growth rate (CAGR) of 27.5 percent against our previous CAGR estimate of 23.7 percent. The double-digit growth and acceleration are partially attributable to a base effect as 2020 earnings were depressed, along with management’s ability to deliver strong core banking income,” the report said.Highlighting that the bank’s diversification of loan book remains on track, the report said, “During the first nine months of 2021, net loans increased by 4.5 percent from 2020 to QR101.1bn. Moreover, deposits expanded by 6.5 percent during the same period to QR80.7 billion.”“Moreover, in line with management’s strategy, the percentage of government loans to total loans increased from 2016’s 10 percent to 19 percent in the first nine months of 2021, while real estate loans dropped from 28 percent to 19 percent during the same period. We adopt a conservative approach and estimate net loan growth of 5.1 percent in 2021 (gross loan growth of 6 percent). Our loan growth assumptions have not changed; we pencil in a 2020-25 CAGR of 6 percent against 4.8 percent for 2015-20 period,” it said. “The bank’s bottom-line in the first nine months of 2021 was driven by strong core banking income and lack of losses from trading and associates and flat provisions and impairments,” the report said.The report said, “Goodwill impairments on United Arab Bank (UAB) in which CB has 40 percent stake should come to end in the fourth quarter of 2021 and significantly lower net income sequentially. National Bank of Oman (NBO) in which CB has 34.9 percent stake could also face goodwill impairments over the coming 3 to 5 years as its market value is significantly below the book value on CB’s balance sheet. “Management will book further impairments on UAB in the fourth quarter of 2021. CB carried goodwill attributed to UAB of QR1.4 billion in 2018. In 2019 and 2020, CBQK impaired QR413.9 million and QR591.2 million respectively. Hence, QR394 million of goodwill remains. We model the remaining impairments of QR394 million in the fourth quarter of 2021, ending this exercise. We do note QR574 million is being recorded as goodwill for NBO, which if impaired, could depress the bank’s earnings going forward.”“The bank’s stock has rerated and traded at 20 percent discount to its BV at the beginning of the year. Having said that, we believe there is room for more upside. The stock remains attractive. We increase our PT to QR7.42 but lower our rating from outperforming to accumulate because of the recent rerating of the stock,” it said.