EUR 148.26 For Business Accounts Only

Egypt banks | Decent upsides, despite regulatory overhauls

Updated TPs factor impact of contemporary regulatory changes. Several amendments and impositions emerged over the past two quarters, affecting banks on several fronts, including: i) a new tax treatment for treasury income, ii) the transition to IFRS 9, starting 1Q19, and iii) streamlined new capitalisation requirements for client and sectoral concentrations. We foresee banks upping utilisation and efficiency levels to absorb the potential impact. Our numbers account for contributions to the Universal Healthcare Act of 0.25% of top lines. Egypt banks trade at attractive multiples (adjusted for growth and profitability), with 2019e P/B and P/E recording 1.7x and 5.9x, respectively, against a 2019-21e EPS CAGR of 11.9% and an average sustainable RoE of 27%. This compares to 1.8x, 12.7x, 8.8%, and 16%, respectively, for MENA peers.

Tax amendments the major update; Eye expedited asset reallocation into loans. The new taxation methodology stipulates separating treasury income from other operating revenues, whereby the former will remain subject to the 20% withholding tax, while the latter will be taxed after netting out part of treasury costs. We foresee average 2019-23e effective tax rates spiking by c6% across the four banks vs. our previous estimates. Attempting to mitigate the impact, we project average treasury investments/TA falling to 24% in 2023e vs. 35% in 2018. Contribution to the Universal Healthcare Act amounts to an average of 1% of banks’ net incomes, rendering a minimal effect on TPs.

Declining rates positive for active utilisation; Monitor CARs. The favourable timing of the 100bps rate cut in February would serve to expedite fund deployment to loans at the expense of treasuries, in our view. Our in-house macro view expects additional 200bps in rate cuts in 2019. Our updated figures account for an acceleration in lending volumes, where we foresee banks under our coverage recording average loan growth of 22% in 2019e (2019-23e CAGR of 29%).This would entail a 2.7% decline in average CARs of banks under our coverage over 2019-23e (vs. our previous estimate of 2.0%).

CAE best positioned; HDB to lag. We favour banks with low T-bill exposure, low CoF, and active liability management. We flag CAE (Δ to TP of +5%) as our top pick, on its low treasury exposure, above average NIM (7%), and contained CoF (6%). We also like CIB’s (Δ to TP of +11%) proven deposit franchise (CASA at 54%) and established corporate foothold (81% of loan book). QNB AA’s (Δ to TP of -6%) high utilisation (LTD of 72%) leaves relatively less room for asset reallocation, coupled with its high CoF, implying an inevitably higher tax burden in the short-term. HDB’s (Δ to TP of -1%) low corporate exposure (45% of loan book), high dependency on short-term treasuries (2x the peer average), and high CoR (1.4%) render the highest hit from the new tax treatment.