EUR 93.84 For Business Accounts Only

Egypt banks | Attractive valuations amid an improving 2022

Deep value picks: CIB and CAE. We raise our valuation for CIB by c5% following solid 9M21 performance and maintain our TP for CAE. CIB’s strong capacity (LTD: 39%, CAR: 32%, CASA: 54%, NPL coverage: 2.1x) remains top among our MENA coverage, providing ample room for credit expansion and asset reallocation. CIB trades at an undemanding valuation, on a 2022e P/BV of 1.3x, (c59% discount to trailing average between 2016-20). We also like CAE, due to its attractive valuation (c20% discount to CIB), active credit strategy, optimal tax positioning, and potentially improving stock’s liquidity following the 3:1 bonus share distribution scheduled for 30 Dec-21. Egypt banks trade on a 2022e P/BV and P/E of 0.89x and 4.7x, respectively, against a 2021-24e EPS CAGR of c12.9% and an average sustainable RoE of c19.5%. This compares to 1.87x, 15.6x, c15.5%, and c13.8%, respectively, for GCC banks.

Elevated treasury yields in 2022 supportive to NIMs. While our macro expectations point towards stable-to-higher treasury yields at least during 1H22; hence, limiting any downside risk to banks’ margins in 2022e, our base case assumes a gradual convergence of treasury yields to market rates (2-3% drop) over the next two years, a key trigger for crowding-in of private credit. We factor in the continuation of the fee waiver in our numbers over the forecast horizon. The reinstatement of fees and commissions on EGP transfers and ATM withdrawals (current waiver extension expires end of Dec-21) provides an upside risk to our profitability estimates.

Further operational normalisation in 2022. We estimate consolidated earnings for our Egypt banks coverage to grow by c14.2% y-o-y in FY22e, on: i) broadly stable NIMs (-c38.7bps to c5.8% over 2022-23e), ii) favourable base effect in terms of fee income, and iii) further normalisation of CoR. We look for lower CoR levels for CIB, CAE, and QNB AA, normalising to an average of c64bps in 2022-26e (vs. c113bps in 2016-20), supporting average RoE expansion. We look for the average NPL ratio to decline by c23bps y-o-y in 2022e for our coverage. We forecast a higher-than-historical average dividend payout in FY21e (c33.4% vs. c23% in FY19), accounting for a portion of 2020 halted distributions. Loans are seen growing at a 2022-26e CAGR of c18.9% (vs. c11% in 2016-20), mainly driven by LCY working capital credit, at least during 1H22, lending further support to margins (on account of higher spread).

Maintain OW on HDB and QNBA, but with risks. Our revised TPs for HDB and QNBA imply the highest upside potential, at an average of c56%. HDB’s stronger-than-expected performance of the commercial banking business continues to be overshadowed by lack of detailed disclosure of the real estate operations. QNBA’s limited improvement in the stock’s liquidity, in addition to the relatively lacklustre operational performance in 9M21 did not much help the stock. However, we project QNBA to pick up credit (10.0%), as well as earnings growth (8.1%) in 2022e.