12 July 2022

CalBank Initiation of coverage: Walking a tightrope

In brief

CalBank’s earnings momentum has moderated in recent years as the double whammy of the financial sector clean-up and the COVID‑19 pandemic have impacted credit growth. In 2022 however, we envisaged a post-pandemic economic recovery which we anticipated will fuel credit expansion and support bottom-line growth. Instead, hyperinflation and a liquidity squeeze are likely to reduce margins further, while elevated yields on risk-free assets have negatively impacted the bank’s valuation. Notwithstanding the above, CAL’s balance sheet remains quite nimble to adapt to the volatile outlook. Consequently, we initiate coverage on CAL with a HOLD recommendation and an FV of GHS 0.81 per share and TP of GHS 0.89 per share.

  • NIMs to compress further on inflation outlook

    We estimate that net interest margin will average 8.5% over the next five years, down from an average of 9.4% in the last three years. Our forecast is driven by our view that rising inflation will force cost of funds to re-rate faster than yields on investments. In addition, as interest rates remain elevated, we expect credit growth to slow down, reducing margins even further.

  • Discounted multiples are not enough to suggest upside potential 

    CAL is currently trading at a PB ratio of 0.4x, indicating a 63.0% discount to book value. However, the bank’s ROaE has dipped from 25.7% in 2017 to 18.4% in FY2021. Meanwhile, cost of equity has surged by 960bp to 31.1%. In light of this, we are of the view that the discount on multiples is justified.

  • Balance sheet is nimble and can adapt 

    In our opinion, CAL’s balance sheet is robust to weather the volatile outlook but also nimble enough to adapt to a change in Ghana’s macroeconomic trajectory. With nearly 50% of assets held in government securities and loan-to-deposit ratio at 55.9% as at 1Q2022, CAL’s balance sheet is capable of responding quickly and taking advantage of improved macroeconomic conditions should that occur.

  • HOLD for now 

    Despite the resilience of the balance sheet and the strong earnings growth in 1Q2022, elevated yields on risk-free assets provide a high hurdle rate for equity valuations. In our opinion, ROaE will continue to trail CoE in the medium-term and thus, provides justification for the discounted multiples