EUR 94.48 For Business Accounts Only

Egypt banks | Unjustified valuations amid limited challenges ahead

Egypt banks trade at attractive valuations under all scenarios. Our base case assumes a gradual convergence of treasury yields to market rates (2-3% drop), a key trigger for crowding-in of private credit. Egypt banks remain among our top picks in 2021, with: i) c13.2% y-o-y expected growth in earnings (excluding HDB), ii) 2021e average LTD of c61%, and iii) capitalisation supportive of growth (2021e average CAR of c23%). Egypt banks trade at significantly undemanding multiples, on 2021e P/BV and P/E of 0.93x and 5.2x, respectively, against a 2021-24e EPS CAGR of 16.5% and an average sustainable RoE of 19%. This compares to 1.7x, 15.6x, 15.2%, and 13.5%, respectively, for GCC banks. We note the downside risk to our macro outlook (i.e. high treasury yields sustaining, further delay in pickup of lending) would provide support to banks’ margins, similar to their 2016-19 profitability (all-time high for most banks).

Our revised forecasts reflect 4Q20 results, recent sector developments. We expect consolidated earnings for our Egypt banks under coverage to grow c13.2% y-o-y, in FY21e, excluding HDB (-21.0% y-o-y). We expect NIMs to compress by c69bps to c5.6% over 2021-22e. We factor in the continuation of the fee waiver in our numbers throughout 2021e. This translates into a c1.9pps y-o-y reduction in 2021e (vs. -4.3pps y-o-y in 2020) contribution to total non-interest income. We look for lower CoR levels for CIB, CAE, and QNB AA, normalising to an average of c59bps in 2021-25e (vs. c113bps in 2016-20a). We raise FY21e average dividend payouts to c35% (vs. c23% in FY19a), to account for a portion of 2020 canceled DPS. We expect our banks coverage to grow loans, at a 2021-25e CAGR of 21% (vs. 11% in 2016-20a) and the average NPL ratio to advance by c29bps y-o-y (excluding HDB) in 2021e.

Recent sector developments took their toll on the market, but support potential. These include the: i) SME directive, requiring banks to increase the micro and SME share of loan portfolios by 5pp to 25% by end-2022, ii) extension of fee waiver on EGP transfers and ATM withdrawals until Jun-21, iii) 2020 DPS cancellation, and iv) CBE’s new EGP100bn subsidised mortgage initiative for low and middle-income owners, at a subsidised rate of 3%, over a 30-year repayment period. In the medium-term, we anticipate the CBE’s SME directive and new mortgage initiative to stimulate credit activity and improve banks’ profitability, on higher margins.  

Maintain CIB as our top pick, followed by CAE. HDB’s TP was revised upwards by 6.2%, to mainly reflect potential upside from new mortgage initiative, while the other three banks’ TPs were downgraded by an average of c6.0%. CIB’s strong capacity (LTD: 40%, CAR: 31%, CASA: 52%, NPL coverage: 2.8x) remains to be top among our MENA coverage, providing ample room for credit expansion and asset reallocation post-COVID-19. CIB currently trades at a significantly undemanding valuation, 2021e P/BV of 1.2x, reflecting a ten-year historical low. We also like CAE, due to its attractive, undemanding valuation (c30% discount to CIB), active credit strategy, optimal tax positioning, and high dividend yield (c13.3% in 2021e).