EUR 36.94 For Business Accounts Only

HRHO EY | High beta with catalysts ahead; Maintain OW

Strong exposure to pick up in capital markets. We cut our TP for EFG by 20% to EGP20.0/share, to reflect primarily: i) a roll-over to our valuation to 2021e, ii) lower-than-expected IB deals pipeline in 2020-to-date, iii) writing off Crédit Libanais investment (EGP0.80/share), and iv) assuming higher cost of risk and lower margins for the NBFS business. After a challenging 2020, we flag EFG as a key beneficiary of the potential pick-up in ECM transactions (mainly in Egypt), starting 2021e. A possible acquisition of Arab Investment Bank (AIB), expected in 1H21, would trigger a more efficient utilisation of EFG’s cash balance, and potentially improve the company’s consolidated RoE by 300-400bps over our forecast horizon.

Sell-side business key driver. We expect revenues from the IB platform (IBP) to grow by a 2021-23e CAGR of 21%, to represent c67% of total revenues over our forecast horizon. Brokerage and advisory fees are estimated to increase by a 2021-23e CAGR of 19% and 29%, respectively, to reach a combined contribution of 81% of the platform’s total fee income. That said, a buoyant capital market in Egypt (>40% of EFG’s total IBP revenues during 2021-23e) is a strong trigger for EFG. This would be supported by our expectations of lower interest rates and robust capital flows into EMs during 2021e. For EFG’s NBFS (37% of our valuation), we forecast loan portfolio to grow by a 2021-23e CAGR of 16%, and net profit to expand at a CAGR of 19%.

Commercial bank potential acquisition a step to unlock value. EFG and the Sovereign Fund of Egypt plan to jointly acquire a 76% stake in AIB, mostly through a capital increase, with the potential acquisition of secondary shares from the bank’s majority shareholder, National Investment Bank. This step comes as part of EFG’s long-term strategy to transform into a universal bank. If the acquisition of AIB materialises, subject to finalising due diligence and regulatory approvals, EFG will own at least a 51% stake. Looking at AIB, as of 2017, loan market share and LTD stood at 0.4% and 25%, respectively. This leaves ample room for lending, which bodes well for EFG’s NBFS. NPLs stood at 15%, with c100% coverage, while RoE recorded 11%. Assuming growth in AIB’s earnings, in line with peers over 2018-19, we calculate current RoE at 14-15% and justified P/BV at 1-1.5x, implying an absolute value for AIB’s equity of EGP1.5-2.5bn. We estimate the value of the 51% stake of AIB at cEGP4-6bn, assuming the transaction is mainly a primary issuance, and expect it to be mostly financed internally (EFG’s net excess cash is estimated at EGP6.5bn).