3 May 2022

EGH 1Q2022 Results: Off to a slow start

In brief

EGH released its unaudited 1Q2022 financial results on Thursday last week, with an unexpected dip in earnings which missed our projections. We were particularly puzzled by the muted growth in interest income despite the tangible increase in the stock of loans and investment securities. A steep increase in operating costs also eroded the single-digit growth in pre-impairment operating income, leading to the slump in 1Q2022 earnings.

Performance: Earnings tank on weak topline performance and higher costs

  • Contrary to our expectation, profit after tax declined by 13.1% y/y to GHS 148.7m, owing to a fall in net interest income coupled with an increase in operating expenses
  • Net interest income fell by 130bps y/y to GHS 370.7m on account of 160bps y/y rise in interest income and a 22.3% increase in interest expense
  • Non-funded income came in strong, rising by 45.1% y/y on the back of strong growth in both trading income and net fees and commission income
  • Impairment loss on financial assets was little changed at GHS 46.4m. EGH’s NPL ratio (per BoG), fell by 1.5pp q/q to 11.5% in 1Q2022
  • Operating expenses increased by 31.8% y/y to GHS 263m. EGH’s cost-to-income ratio edged higher by 8.2pp to 48.9% as growth in operating costs outstripped growth in operating income

Outlook: A rebound in funded income in sight

  • In line with our expectation, EGH continued to expand its credit portfolio, adding GHS 665.1m to the loan book in first quarter. However, we are puzzled by the muted growth in interest income given the rise in the stock of loans and investment securities relative to 1Q2021
  •  Looking ahead, we expect funded income to rebound from 2Q2022, as interest rates rise to reflect the recent hike in the monetary policy rate coupled with the continued growth in the loan book. We acknowledge that loan volumes may moderate as the current inflationary pressures impact economic activity
  • Non-interest revenue increased considerably in 1Q2022, and we expect this to continue to play out, supported by an increase in credit-related fees from credit expansion as well as increased income from forex trading as import and export trade rise
  • On the rise in operating costs, management has expressed its commitment to driving down costs by re-negotiating contracts with key vendors and partners where there is room given the prevailing inflationary pressures. Consequently, we expect growth in operating expenses to moderate should management’s efforts prove successful
  • On asset quality, we attribute the decline in EGH’s NPL ratio more to the recent increase in loans and we project the cost of risk to trend between 3.0% to 3.5% in 2022. Upside risks to this outlook include rising inflation and further Cedi depreciation. However, we expect pre-impairment income to grow more strongly in line with the expected growth in funded income to adequately cover higher cost of risk

Valuation: Under Review 

  • EGH is trading at a P/B of 0.9x and we intend to re-initiate coverage in 2Q2022