Egypt banks | Rerating ahead, as credit cycle unfolds
Update TPs; Among top sectors in 2020. As 2020 unfolds, we look for a pick-up in private credit activity, in line with further monetary easing by the CBE (excess liquidity release of up to EGP220-250bn and another 2-3% cut in policy rates). We roll over our valuations to 2020, raising our average TPs for our coverage by c5%. Additionally, we account for a 1% net profit deduction, in accordance with the Banking Act amendments (pending Parliament approval). Our numbers account for the income tax amendments, ratified in Feb-19, and contributions to the Universal Healthcare Act. Egypt banks trade at attractive multiples, with 2020e P/BV and P/E recording 1.4x and 5.6x, respectively, against a 2020-22e EPS CAGR of 10% and an average sustainable RoE of 24%. This compares to 1.7x, 11x, 9.2%, and 16%, respectively, for MENA peers.
A strong credit cycle is brewing, capitalisation conducive. We had expected in Apr-19 expedited asset reallocation into loans starting 2020e, as an aftermath of the income tax amendments. The 4.5% policy rate cuts in 2019 have yet to reflect positively on blended loan growth rates, which will likely record c15% in 2019e, falling below the 2018 level of 19%, on the EGP appreciation (11% in 2019, weighing down FCY books), and high liquidity absorption by the CBE. We foresee the EGP stabilising in 2020e, in addition to higher monetary easing transmission by the CBE, supported by soaring capitalisation (2019e average CAR of 22% for our coverage). This is in addition to the early signs of capex recovery, which banks’ managements collectively assert. We expect our banks coverage to grow loans at a 2020-24e CAGR of 28% vs. 23% historically.
Account for long-awaited fee recovery over 2020-22e; Monitor CoR, payout. We anticipate loan recovery, particularly capex in 2H20 onwards, to significantly boost fee income, given the lower demand shift to IDCs, driving the growth of off-balance sheet items. This, in addition to lower CoR levels, which we see normalising to an average of 64bps in 2020-24e (vs. 156% in 2015-19e, high on profit retention), will serve to ameliorate NIM compression, on the dropping policy rates. We expect NIMs to compress by 151bps to 4.9% until 2024e. The stricter capitalisation needs warrant a decline in average dividend payouts, which we estimate will fall to 21% in 2022e vs. 30% in 2019e.
CIB, CAE top picks. CIB’s corporate foothold (78% of total book) and ties with multinationals strongly position the bank amid the expected improvement in credit activity. This is in addition to its proven deposit franchise (CASA at 54%), sound provisioning (NPL coverage of 2x), soaring capitalisation (CAR at 27%), and being an EGX proxy, benefiting from favourable trading dynamics. We like CAE on its attractive valuation (c20% discount to CIB), more active credit strategy, optimal tax positioning, and high dividend yield (c10% in 2020e).
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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