• Global values National Societe Generale Bank at LE34.3 and recommends a 'BUY' on the stock
Global Investment house - Egypt - National Societe Generale Bank (NSGB)-National Societe Generale Bank "NSGB" was established in 1978, as a joint venture between the National Bank of Egypt "NBE" and Societe Generale "SG", which is one of the major lenders in France and Europe. In November 2006, NSGB and MIBank announced their legal merger, which has been reflected on the Bank's financial statements starting January 2006.
NSGB posted net income of LE674.2mn in 2007, implying a 2.8% rise in net income, adjusted for extraordinary items and goodwill amortization. This was attributed to a 25.6% increase in net interest income and a 10.1% increase in non-interest income. The extraordinary costs associated with the merge were represented by the liquidation of MIBank employees’ pension fund, which resulted in a deficit of LE497.9mn in 2006.
In terms of net interest income, the surge in deposits balances increased the Bank's interest expense by 9.1%. In addition, the declining yields of treasury bills experienced in 2007 resulted in a lower income from treasury bills and bonds by 4.5%. Nevertheless, the Bank was able to overcome these additional costs through increasing its income from loans and interbank assets by 21.9%.
In the mean time, non-interest income was mainly affected by fees and commissions income, which grew by 15.7%, as a result of the growth in loans and the 32.5% increase in contingent liabilities. Other volatile non-interest income, represented by gain from sale of investments, income from foreign exchange operations, investments valuation differences and other income grew only by 2.4%, from LE102.9mn in 2006 to LE105.4mn in 2007. Meanwhile, investment income declined by 45.3%, resulting from a decrease in some trading investments, along with the decline in investments held to maturity and investments in affiliates.
The year 2007 witnessed a launching of 21 branches. This expansion had its effect on depreciation costs which rose by 288.3%, reaching LE92.3mn, compared to LE23.8mn, incurred the previous year. Concerning provisions, they increased by 187.5%, reflecting a conservative provisioning policy applied by the Bank.
Based on the current market price of LE30.0/share, NSGB is trading at 2008E P/E and P/BV multiple of 7.5x and 2.3x, respectively. Our estimated value for this banking scrip is worked out to be LE34.3 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers an upside of 14.4% over the closing price of LE30.0/share (as of September 7th, 2008). We therefore recommend a BUY on the scrip.
The Bank's profitability ratios (adjusted for extraordinary items and goodwill) witnessed a decline in 2007, as ROAA was 2.5%, down from 3.7% in the previous year. Meanwhile, ROAE declined to 40.5%, compared to 64.4%. This was attributed to the minor increase in net income by 2.8%, which lagged far behind the increase of average assets and average equity by 53.9% and 63.4%, respectively. We expect further decline of the ROAA and ROAE-adjusted for goodwill, reaching around 2% and 30% by 2011, respectively. This would be a result of the higher increase that will be witnessed in average assets and average equity over net income, which is in turn, attributed to the effect of our 20% assumptions for income tax.
ROAA-ROAE
Source: NSGB Financials, Global Research
Net income reached LE549.4mn in H1 2008, realizing an increase of 40.4% y-o-y, after adjusting for goodwill amortization. This achievement was a result of a 17.7% y-o-y increase in net interest income, accompanied by a 106.8% y-o-y increase in total non-interest income.
The Bank was able to decrease its interest expense by 3.6%, compared to the same period the previous year. While the income from treasury bills fell by 34.7% y-o-y in the same period, the Bank was able to realize a 17.3% y-o-y increase in income from loans and interbank assets, which resulted from the increased loans balances, compared to the same period last year, as they grew by 26.4% y-o-y. The income derived from these interest-earning assets compensated for the slump realized in income from treasury bills, which in turn pushed interest income higher.
In addition, the surge in total non-interest income was mainly affected by volatile income, including gain from sale of investments, profits from foreign exchange operations, financial investments valuation differences and other income. These items combined surged by 257.6%. The other income's rise was primarily a result of provisions reversal of around LE278.6mn. In addition, fees and commissions income rose by 39.2%, compared to H1 2007, as a result of the increased loans balances, as well as the 14.0% y-o-y surge in contingent liabilities. Also, investment income grew to LE6.0mn in H1 2008, up from LE4.1mn, realized in the same period the previous year.
The fact that the Bank's majority stake is owned by Societe Generale, a sound international lender, provides confidence that the parent bank will provide it with the necessary financial support, in case needed, in addition to the qualified management as technical assistance. The fact that the Bank was not negatively affected by the fraud crisis that happened in Societe Generale in the beginning of this year assures that NSGB is well positioned in the Egyptian market. In addition, NSGB's plan to expand its branch network, in an attempt to enlarge its client base and gain higher market shares, is expected to boost its lending opportunities and consequently its future profits. Besides, the latest capital increase that occurred in June 2008 is expected to enhance the Bank's growth and to ameliorate its capital adequacy.
We expect an average growth rate of 16% in the Bank's deposits, relying on the expectations that Banks will raise their rates on deposits, in response to the increases in the CBE rates, which was actually the case with NSGB. Meanwhile, we projected an average growth rate of loans of 20% over our projection period, implying a growing loans/deposits ratio, reaching more than 60% by 2011.
Loans, Deposits and Loans/Deposits Ratio
Source: NSGB Financials, Global Research
Based on our assumptions for the Bank's performance over the forecast period, we project net income to grow at an average of 11% approximately, reaching around LE1.6bn by 2011.
