FREE

A mix of value and growth

Reiterate our Overweight rating, on higher TP of EGP75.0/share. We upgrade our valuation of QNB AA by 44%, primarily on rolling over our valuation for 1 year, and lowering our ERP by 50bps to 7.0% (still higher than peers), on the rise of the stock’s free float by 210bps to 5.0%, as of 25 Feb-18. QNB AA is positioned to be among the key beneficiaries of a potential pickup in credit activity, yet, the stock trades on a 2018e P/BV of 2.0x (1.6x for 2019e), a c26% discount to tier I banks, against a sustainable RoE of 27.6% (vs. 30-32% for tier I banks).

Strong growth potential, but broad cycle recovery pushed to 2H19. Recent macro developments — the CBE holding rates in its latest MPC on the 17 May, and higher oil prices — suggest a slower-than-expected monetary easing cycle, and pickup in credit activity. We expect QNB AA’s loans to grow by 17.8% in 2018 (-1.5% in 1Q18, on a huge one-off repayment), in line with its aggressive credit strategy and active participation in the syndications market. A lower level of interest rates in 2019 will drive the bank’s loan book to grow at an expected 2019-21 CAGR of 26%, on our figures. This should translate into an EPS CAGR of 23% over 2018-21e.

Maintain superior asset quality metrics. QNB AA tops the Egyptian market, having the lowest NPL ratio of 2.3% in 1Q18 (vs. 5.1% for CIB and 2.7% for CAE), against a decent coverage of 203%. Given the lack of clarity on the CBE’s guidelines for IFRS 9 application, we opt to deduct the 1% of 2017a RWAs (EGP1.3bn), set aside as reserves, according to the CBE’s instructions, from our valuation. We expect CoR to average 0.6% in 2018-19e vs. an average of 1.3% in 2016-17a.

Monitoring CoF and stock liquidity. Sustaining the strong credit growth amid the relatively high utilisation (LTD=60% and L+Inv/D=101%) could pressure the bank’s CoF. Management acknowledges this and plans to aggressively grow cheap funding (lowest CASA contribution among peers, at 39%). We expect NIM to decline by 10bps to 4.6% in 2018 (-20bps to 4.4% in 2019). The free float hike has not yet triggered a significant improvement in the stock’s liquidity. Another corporate action (mainly a stock split), in our view, would improve liquidity and act as a further catalyst for the stock.