EUR 454.49 For Business Accounts Only

MENA banks | Navigating through turbulence

ST triggers await Kuwait banks, despite macro challenges; Egypt lenders to emerge as most resilient to 2020 pressures. We highlight the expected: i) passing of the debt law, and ii) MSCI upgrade in November, as two catalysts for Kuwait banks. The passing of the law should create a safe, good-yielding investment opportunity for banks, in the short-term, while providing a much-needed relief to the country’s budgetary concerns, in the long-term. Egypt banks stand out on capitalisation, profitability, and valuation vs. MENA peers, with the recent rise in yields on local treasury securities supporting margins, in a rough year for GCC banks’ margins. We favour NBK and CIB, as both offer exposure to top-quality, liquid, well-provided, well-capitalised balance sheets at attractive valuations (P/BV 2021e 1.9x and 1.4x, respectively). We also include GBK and CAE (2021e P/BV of 1.0x) as picks, on valuation.  

Saudi banks lack ST catalysts, yet some names offer good entry points. The mortgage segment will likely return to being the sole driver for loan growth to Saudi banks, until the corporate lending story picks up again, as the shocks from the COVID-19 triggered disruptions (incl. lower oil prices, loss of jobs, VAT hike) are absorbed. We like NCB (high-value exposure to corporate, retail segments, unjustifiably inflated trading discount to RJHI, and potential merger with Samba further solidifying market position). We also like: i) SABB: mispriced name, as market ignores its expanded capacity, merger synergies; ii) Alinma: an exposure within the Islamic space, geared towards growth, while trading at undemanding multiples relative to larger Islamic peers, and iii) BJAZ: on valuation.

Recovery likely delayed for UAE banks. Besides a c25% contribution of hydrocarbons to GDP, the UAE is also heavily exposed to the service segments, whose recovery would arguably drag beyond 2021, translating into: i) limited lending opportunities, ii) intensified competition, and iii) increased asset quality risks for banks. That said, we flag the UAE as the market set to benefit the most from a quicker-than-expected resolution to the challenges triggered by the COVID-19 backdrop. In the UAE, we favour FAB (well-run, efficient, liquid balance sheet) and DIB (capacity to grow in high-yielding areas, flow story on potential FoL hike).

Cut forecasts, TPs across coverage to reflect COVID-19 implications. We incorporate: i) lower interest rates (-40bps, on average across coverage), ii) lower loan growth figures for 2020-21e (-6.5pps, on average), iii) high CoR levels for all names (+50bps, on average across coverage). We also rollover our valuations to 2021e, providing some support to our TPs. We cut our 2020-21e RoE assumptions by 3.2pps in Saudi, 5.7pps in the UAE, 7.0pps in Kuwait, and 6.0pps in Egypt, to 10.0%, 10.6%, 7.8%, and 20.7%, respectively, and our TPs by 6.6%, 13.7%, 18.9%, and 14.2%, respectively.