Performance: Lower impairments drive bottom-line growth       

• Profit after tax increased by 27.9% y/y to GHS 94.1mn, on the back of lower impairments on financial assets.
• Pre-impairment income increased by 9.2% y/y to GHS 338.8mn, supported mainly by strong growth in funded income. SOGEGH’s net interest income increased by 43.8% y/y to GHS 269.8mn.
• Non-interest revenue declined by 43.8% y/y to GHS 69.0mn due a significant decline in net trading income to GHS 9.0mn (-84.8% y/y).
• The bank’s operating expenses increased by 14.5% y/y to GHS 154.6mn while cost-to-income ratio gained 2.1pp y/y to 45.6% as growth in operating expenses outstripped the growth in operating income.
• Impairment charges on financial assets declined by 42.3% y/y to GHS 36.4mn. SOGEGH’s NPL ratio inched up by 3.0pp to 22.6% at the end of 1Q2024 from 19.6% at the end of 4Q2023 as the bank’s loan book contracted over the period.
• SOGEGH’s CAR (with regulatory forbearance) was little changed at 18.83%, gaining 0.12pp from 18.71% at the end of 4Q2023.

Our View: A revival in non-interest revenue is key to beating FY2023 earnings

• While SOGEGH’s pre-impairment income fell in line with our initial estimates, we are concerned about the contraction in trading income which was unexpected. We believe that a revival in trading revenue is crucial for the bank to surpass its FY2023 bottom-line figures. Considering the persistent demand for forex by corporate clients, we anticipate some recovery in trading income in the coming quarters.
• We expect SOGEGH’s topline numbers to remain strong, supported by double-digit yields on government securities albeit the ongoing downward correction in yields due to cooling inflation.
• On asset quality issues, we maintain our view that credit risk will remain elevated in the near term as economic growth remains subdued. Drawing on the bank’s history, SOGEGH’s NPLs are likely to normalize to pre-COVID levels in 2-4 years under strong economic conditions.
• The contraction in the bank’s credit portfolio somewhat suggests ongoing efforts to cleanse the loan book and contain credit risk. We maintain our view that growth in SOGEGH’s loan book will moderate significantly compared to 2023. Additionally, we emphasize that SOGEGH faces no pressure to expand its loan book due to the new cash reserve requirement, as its gross loan-to-deposit ratio remains well above 55%.
• Overall, we continue to expect SOGEGH to record decent earnings at the end of the year, and maintain that the anticipated slowdown in credit growth and elevated credit risk will continue to serve as the main drag on earnings growth in 2024.

Valuation & Recommendation: HOLD for now

• We maintain our HOLD rating on SOGEGH and expect a recovery in trading income to propel earnings growth in the subsequent quarters. SOGEGH is currently trading at a P/B ratio of 0.7x.