In brief
We update our rating on CalBank Plc (“CAL”) to “ACCUMULATE” following an increase in our fair value to GHS 0.88 per share, above the current market price of GHS 0.75, implying a 17.3% upside. The upward adjustment in fair value is due to a stronger-than-expected 1Q2026 performance, and a risk-free rate of 12.49% reflecting the yield on the recently issued long-term bond. We transitioned from Capital Asset Pricing Model (CAPM) to a more stable framework, using the 7-year bond yield plus a 5.0% risk premium, as observed equity betas lacked statistical robustness. We also refined our relative valuation by refining the peer group to a more suitable subset. This enhanced the integrity of our multi-factor linear regression P/B model and improved market-implied alignment. Taken together, these adjustments suggest the stock has been overcorrected by the market. Following the improvement in Capital Adequacy Ratio (CAR) on the back of the capital injection, we believe CAL is now back on track and moving towards sustainable year-on-year profitability. The numbers support this view. However, our optimism remains measured.
There are still key constraints that need to be addressed before real value creation can begin:
- Retained earnings remain negative, limiting internal capital generation and keeping dividend prospects muted.
- Non-Performing Loans (NPLs), while significantly reduced, remain elevated at 15.1% and above the regulatory glide path, necessitating continued caution
- Loan growth will likely remain muted as capital preservation takes immediate priority
These factors suggest that while earnings have improved, core lending activity remains subdued, and this will weigh on the strength and sustainability of future earnings. We expect Earnings Per Share (EPS) to remain stretched, given the enlarged share base following the 4Q2025 capital raise with dividend distribution highly unlikely over the next two to three years. Having steadied the ship, management’s tone on the banks near-term performance is positive, but we hold a more cautious view. The bank has stabilised, but it is not yet operating at the level of its peers. A full recovery will require a rebuild of earnings capacity and a return to positive retained earnings.
-
- Earnings Rebound Driven by Funding Gains and Cost Efficiency: Profit after tax surged 200.1% y/y to GHS 106.8mn, supported by a 93.7% jump in total income and sharply lower impairment charges. Net interest income nearly doubled as funding costs declined materially, while strong growth in fees and trading income reinforced revenue diversification. Cost growth remained contained relative to income, driving a sharp improvement in the cost-to-income ratio to 50.7% and signalling improved operating efficiency.
-
- Capital Restoration Complete, but Internal Capital Generation Still Weak: The bank has restored its capital position, with CAR at 17.2% and shareholders’ funds at GHS 1.69bn, resolving the regulatory overhang. However, retained earnings remain negative, which will delay dividend resumption and constrain internal capital build. In our view, sustained earnings growth is required before meaningful per-share value accretion can be achieved.
-
- Lower Rate Environment to Pressure Margins and Shift Revenue Mix: Easing inflation and declining yields should support economic activity but will compress asset yields and weigh on interest income. Given subdued loan growth, we expect limited offset from volumes. As a result, non-funded income will play a larger role, supported by transaction banking, digital flows, and trading activity, while a strong CASA base should help cushion, but not fully offset, margin compression.
-
- Cautious Growth Amid Asset Quality and Regulatory Constraints: Loan growth remains weak, reflecting deliberate deleveraging and a shift towards lower-risk assets, with investment securities expanding significantly. While asset quality has improved materially, NPLs at 15.1% remain above regulatory targets, and ongoing clean-up efforts will constrain risk appetite. We expect management to prioritise recoveries, balance sheet stability, and selective lending, with execution on prudent credit expansion key to sustaining the recovery.