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MENA banks | COVID-19 drives MENA bank stocks towards floor valuations

Steep discounts to historical, sustainable RoEs. The COVID-19 outbreak caused major supply disruptions, denting general business activity around the globe. Oil prices plummeted 55% y-t-d, further pressured by the Saudi-Russia price war. This will likely limit GCC governments’ spending ability/willingness, reflecting: i) a dented growth outlook, ii) a 150bps emergency policy rate cut, and iii) increased asset quality concerns; MENA banks lost c33%, roughly in line with their general market indices (-32%). Market-implied RoEs are at 4.5pps discounts, on average, to our sustainable RoE estimates, and 4.7pps to banks’ 2017-19 averages, which we deem too harsh for some names, including DIB, ENBD, CIB, CAE, and NBK. GBK, Burgan, and SABB hit their ten-year P/BV lows, with BJAZ is close to these levels. We highlight that further workflow/market disruptions could put the timing of the implementation of the May-20 SAIR at risk, and, as such, imply a delay in the expected NBK and ENBD flows.

COVID-19 turmoil to eventually end; Some headwinds here to stay, particularly for GCC banks. These include: i) subdued growth potential, in the short to medium-term, given pressure on oil prices, ii) margin compression on policy rate cuts, and iii) potentially rising asset quality concerns, possibly impacting banks’ CoR levels and capital ratios. We estimate a 100bps interest rate cut would reduce banks’ RoEs by c1.8pps in the UAE, 2.0pps in Saudi Arabia, and 2.4pps in Kuwait, whereas increasing CoR levels by 50% cuts our RoE estimates by 2.1pps, 1.6pps, and 2.9pps, respectively. SAMA and the CBUAE launched support packages worth SAR50bn and AED100bn, respectively, whereas the CBK instructed banks to ensure smooth access to financial services, and ban lenders from selling collaterals, in a bid to avoid sharp rises in CoR.

Egypt banks show highest discounts to fundamental RoEs, unjustifiable even after the 3pps policy rate cut. Although the rate cut is incorporated in our assumptions, banks’ 2020e earnings will likely miss our forecasts, as our numbers reflect a more gradual reduction, and a simultaneous pick-up in loan volumes, compensating for the decline in rates. We calculate that a 50bps drop in banks’ margins would lower RoEs by an average of 2.5pps. Nonetheless, current prices for banks under our coverage imply an average drop in 2020e margins of c200bps, a harsh assumption, in our view.