Egypt banks | Rerating pushed to 2019 until easing recommences
View affirmed despite easing interruption; macroeconomic buffers persist. We maintain our view that Egypt banks provide the best play on macroeconomic rectification. GDP is expected to accelerate to 5.4% in FY18/19, amid rising investment contribution (16% of GDP in 9M17/18 vs. 15% in FY11/12 to FY16/17). The inception of 2Q18’s EM sell-off, coupled with potential fiscal overruns on higher oil prices, interrupted the easing cycle, which commenced in 1Q18. This will likely push the strong pick-up in credit volumes to 2H19, in our view. Despite the outflows from the EGP carry trade, we believe the current NIR (cUSD45bn) and NFAs (cUSD16bn) are buffers for potential rate cuts. This is coupled with USD20bn of expected BoP inflows in FY18/19, covering the year’s outstanding debt.
Sustainable lending revival once easing resumes, intact profitability. Surging lending volumes (+15% in 9M18) for banks under coverage (mainly in 2Q18) confirm the correlation between lower rates and credit volumes. We look for 23% average loan growth in 2019e (+4.3pps y-o-y) and 25% in 2020e, driven by policy rate cuts of 3% in 2019, as per our in-house macro forecast. Egypt banks trade on a 2019e P/E of 5.4x and a P/BV of 1.6x (vs. 9.9x and 1.4x for MENA peers), with higher 2019 EPS growth of 12% y-o-y and RoE of 32%. Rising ST treasury yields (+2.9pps in 11M18) should support profitability over the coming 4Qs, pushing our NIM reversal expectation to 2H19.
Sound asset quality ahead of IFRS 9 application in 2019. NPLs shed 98bps over the past three quarters, and CoRs waned on reversals (-2.9pps y-o-y in 3Q18), in line with macroeconomic improvements. Provision coverage remains adequate (213% in 3Q18), and should keep CoR within bounds. CARs peaked (19.5% in 3Q18) amid relatively high treasury-to-asset contribution. We opt to deduct the IFRS 9 reserve from our valuations (1% of 2017 RWAs, or an average of 1.4% off our TPs), given limited visibility on potential impact.
CIB, CAE remain top picks; maintain QNB AA, upgrade HDB to OW. CIB stands out on: i) high balance sheet liquidity (L+I/D at 87%), geared for the credit expansion cycle, ii) strong corporate foothold and franchise, and iii) favourable deposit base (CASA at 56%) and BS re-pricing gap (+6 months). We like CAE’s current shift to a more active lending strategy. CAE boasts the highest liquidity (L+I/D at 85%), and superior asset quality (NPLs at 2.5%, coverage at 217% and CAR at 21%). QNB AA is among the key beneficiaries of a potential pick-up in credit activity, yet the stock’s low liquidity poses an overhang to rerating. We upgrade HDB to reflect better results during 4Q17-3Q18, flagging it as top beneficiary of a delay in rate cuts, given its high treasury exposure (c33% of assets). Low exposure to large corporates and volatile NUCA inflows will likely dent the bank’s performance beyond 2019, in our view.
Commercial International Bank (Egypt) is a financial institution based in Egypt. Co. is engaged in the business of commercial banking. Co.'s principal activity is the provision of banking and financial services to private and corporate customers. Services provided include deposits, checking and savings accounts, credit cards, letters of credit, commercial, mortgage and personal loans, and custody of securities. Co. maintains branches throughout Egypt and Qatar. Co.'s principal shareholder is the National Bank of Egypt which maintains a 99.9% investment.
Credit Agricole Egypt is a commercial banking group based in Egypt. Co. is engaged in full-service retail banking in France and Europe. Co. provides corporate banking, retail, and investment banking services in the Arab Republic of Egypt and foreign countries through its 73 branches. Co. maintains operations in 70 countries, and is a partner in supporting clients with their projects in all areas of retail banking and associated specialized business lines: day-to-day banking, savings, home and consumer loans, insurance, private banking, asset management, leasing and factoring, and corporate and investment banking.
Housing and Development Bank SAE. Housing and Development Bank SAE is an Egypt-based commercial and investment bank that principally operates in the housing and development sector. The Bank is organized into four business segments: the Large, Small and Medium sized organizations segment includes current and deposit accounts, loans, credit facilities and financial derivatives; the Investment segment includes mergers and acquisitions, financing and other financial instruments; the Personal segment offers current, savings and deposit accounts, credit cards, personal and real estate loans, and the Other activities segment includes other banking operations, such as fund management. The Bank also contributes in alleviating the housing problem by narrowing between housing offer and demand across Egypt through the establishment of an integrated group of housing projects.
National Societe Generale Bank is an investment and commercial ank. Co. is organized in three business lines which are Corporate Banking, Retail Banking, and Other Businesses. The Corporate Banking segment includes current account activities, deposits, debit current accounts, loans, credit facilities and financial derivatives to large, medium and small entities. The Retail Banking segment includes current account activities, deposits, savings, credit cards, personal loans and real estate loans. The Other Businesses segment include other banking activities such as fund management. As of Dec 31 2011, Co.'s total assets was LE62,552,216,903.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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