Performance: Higher cost of risk offsets revenue gains

• Profit after tax fell by 10.5% y/y to GHS 31.7m driven mainly by a sharp rise in the cost of risk, notwithstanding the strong growth in interest and non-interest income
• Net interest income increased by 16.6% y/y to GHS 106.7m on account of a 13.2% y/y growth in interest income and a marginal increase in interest expense. Net interest margin improved by 12bps y/y on the back of expansion in SOGEGH’s loan book and continued growth in the stock of investment securities
• Non-interest revenue grew by 45.6% y/y driven by robust growth in net trading income and other operating income whereas income from transactional banking declined by 20.7% y/y
• Impairment loss on financial assets increased to GHS 20.0m in 1Q2022 from a gain of GHS 6.1m in 1Q2021. SOGEGH’s NPL ratio fell by 14bps y/y to 7.2% at the end of 1Q2022
• The bank’s cost to income ratio improved by 7.7pp y/y to 57.5%

Outlook: Net interest margin to improve on rising interest rates and increased lending

• We expect SOGEGH’s interest margin to improve supported by continued growth in the loan book coupled with the general rise in interest rates stemming from the 250bps hike in the monetary policy rate in March 2022
• SOGEGH began to expand its loan book in response to the rise in economic activity in 1H2021 and the bank’s net loans and advances grew by GHS 202.0m in 1Q2022. We anticipate further loan book expansion in the subsequent quarters, although at a moderate pace as inflationary pressures impact consumption and investment
• We also expect non-interest revenue to remain robust supported by improved inflows from forex trading as import and cross-border trade activities continue to rise
• On asset quality, we were initially surprised to see the cost of risk rise sharply in 1Q2022 compared to 1Q2021, as we expected default rates to generally improve given the rebound in economic activity
• We are of the view that the increase in loan loss provisions reflects the recent economic pressures from rising inflation as well as the rapid depreciation of the Cedi. Notably, the bank’s loan book exposure to foreign exchange risks in 2021 stood at GHS 1.1bn. Thus, the cost of risk may remain elevated, however, we expect pre-impairment income to stay strong to absorb higher impairment losses

Valuation: Under Review 

• SOGEGH is trading at a P/B of 0.8x and we intend to re-initiate coverage in 2Q2022