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NIMs to compress further on inflation outlook
We estimate that net interest margin will average 8.5% over the next five years, down from an average of 9.4% in the last three years. Our forecast is driven by our view that rising inflation will force cost of funds to re-rate faster than yields on investments. In addition, as interest rates remain elevated, we expect credit growth to slow down, reducing margins even further.
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Discounted multiples are not enough to suggest upside potential
CAL is currently trading at a PB ratio of 0.4x, indicating a 63.0% discount to book value. However, the bank’s ROaE has dipped from 25.7% in 2017 to 18.4% in FY2021. Meanwhile, cost of equity has surged by 960bp to 31.1%. In light of this, we are of the view that the discount on multiples is justified.
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Balance sheet is nimble and can adapt
In our opinion, CAL’s balance sheet is robust to weather the volatile outlook but also nimble enough to adapt to a change in Ghana’s macroeconomic trajectory. With nearly 50% of assets held in government securities and loan-to-deposit ratio at 55.9% as at 1Q2022, CAL’s balance sheet is capable of responding quickly and taking advantage of improved macroeconomic conditions should that occur.
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HOLD for now
Despite the resilience of the balance sheet and the strong earnings growth in 1Q2022, elevated yields on risk-free assets provide a high hurdle rate for equity valuations. In our opinion, ROaE will continue to trail CoE in the medium-term and thus, provides justification for the discounted multiples