Commercial Bank upgraded to outperform on valuation
Given management’s strong track record, Commercial Bank is currently trading at an attractive price
QNB Financial Services (QNBFS) on Sunday announced that it has upgraded the rating of Commercial Bank (CB) from accumulate to outperform based on the bank’s valuation.
QNBFS, however, said that it has lowered its price target for CB from QR5.220 to QR5.006. “We lower our 2019-24e earnings CAGR from 14.5 percent to 12.3 percent considering the ramifications of the COVID-19 pandemic,” it said.
“Commercial Bank of Qatar is trading at a price, which we believe is unjustified given management’s strong track record. The stock is trading at a PEG of 0.8x based on EPS CAGR (2019-24e) of 12.3 percent, which is attractive. We do note we are going through what can be termed as an extraordinary period and our estimates are subject to change as the situation becomes clearer,” QNBFS said in the report.
In the first quarter of 2020, CB’s bottom-line was impacted by weak non-funded income and losses from trading and associates lowering estimates. Commercial Bank reported net income of QR402.1 million in the first quarter of 2020, declining by 8.5 percent o and 20.9 percent sequentially.
“Given the COVID-19 pandemic, we lower our 20202023 earnings forecasts by an average of 20 percent,” it said.
Losses from investments and associates contributed negatively to total revenue and the bottom-line. CB generated investment losses of QR116.5 million in the first quarter of 2020 against a gain of QR4.4 million in the first quarter of 2019 due to volatile market conditions.
However, management expects to reverse some of the losses throughout 2020 and has already done so in April. Moreover, the bank reported losses from associates of QR133.6 million against a profit of QR50.1 million in the first quarter of 2019.
“The losses were attributed to 40 percent-owned UAB as the bank booked provisions on its NMC exposure. We expect more impairments in the fourth quarter of 2020 due to current conditions,” it said.
“Margins significantly improved on drop in cost of funds. Net Interest Income (NIM) expanded by 39.3 percent year-on-year ( o ) on the back of a drop in interest expense. Hence, NIMs moved up by 60bps to 2.55 percent despite the pressure on asset yields given lower CoFs as CBQ repaid debt. We expect NIMs to hover around current levels,” the report said.
Asset quality remained broadly stable. Non-performing loans (NPLs) moved up by 2 percent to QR4.6 billion, while the NPL ratio remained flat at 5 percent against 4.9 percent in 2019. Coverage of stage 3 loans also remained flat at 63 percent against 61 percent in 2019.
Provisions for credit losses improved as CoR decreased driven by recoveries and continued de-risking of loan book.
During CB’s first quarter of 2020, the report said, the management expressed that CoR could drop below 83bps assuming they achieve further recoveries.
“Moreover, management booked extra provisions of QR40 million in the first quarter of 2020 on the account of COVID-19. However, we opt to be conservative and model in a CoR of 90bps for 2020, which seems reasonable in light of prevailing conditions,” it said.
Management is guiding toward the lower end of 4 percent-6 percent loan growth. During the first quarter of 2020, net loans inched up by 0.9 percent TD to QR88.8 billion, while deposits ticked up by 1.4 percent to QR77.4 percent. We take a conservative approach and estimate loan growth of 2.3 percent in 2020. ”Operating efficiency continued its positive trajectory, generating JAWS. CBQ’s operating expenses dropped by 36.5 percent o and 56.3 percent QoQ from QR278.1 million in the first quarter of 2019 to QR176.5 million in the first quarter of 2020,” it said.