Category: HC News

HC Securities & Investment assured that headline inflation continued to decelerate for the third consecutive month from its high level in May at 14.1%, with August monthly inflation coming in lower than our expected 1% m-o-m.

Economist and banking analyst at HC, Monette Doss said: “We see inflationary pressures largely subsiding following the July subsidy cuts. Yearly inflation dropped below 9% y-o-y, well within the CBE target of 9% (± 3%) in 4Q20, providing room for the CBE to proceed with monetary easing to stimulate economic growth and stock market activity. Moreover, in the global context of monetary easing, with the European Central Bank (ECB) cutting its deposit rate by 10bps to -0.5% last week, Egyptian treasuries continue to provide attractive returns and encourage carry trade. That said, we expect the CBE to cut rates by 100 bps in its upcoming meeting.”

It is worth mentioning that the Central bank of Egypt’s (CBE) Monetary Policy Committee (MPC) at its last meeting on 22 August 2019 reduced policy rates by 150 bps after keeping them unchanged for 3 consecutive meetings since the last 100 bps rate cut in February 2019. Egypt’s annual headline inflation decelerated to 7.5% in August from 8.7% in the previous month, with monthly inflation reflecting a 0.7% monthly price increase compared to 1.8% in the previous month, according to data published by the CBE. Egypt’s annual core inflation also decelerated to 4.9% in August from 5.9% in the previous month, with the monthly core CPI decreasing 0.36% compared with an increase of 0.11% in July, central bank data showed.

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• Monetary easing key for resumption of CAPEX lending, in HC’s view.
• This should reflect in lower banking NIMs while strong CAR supports balance sheet growth, on HC’s numbers.
• HC raises their 12M TP c8% for CIB to EGP87.8/share and maintain OW, leave CAE largely unchanged at EGP51.9/share but downgrade to N, and maintain ADIB at EGP18.3/share and OW; ADIB is their top pick as the bank’s turnaround story is not fully priced-in.

Egypt’s economic environment conducive for an accelerated easing cycle, in HC’s view, which should trigger loan growth but reflect in lower NIMs: Following the EGP floatation in November 2016, the Monetary Policy Committee of the Central Bank of Egypt (CBE) hiked policy rates a total 700 bps, resulting in a slowdown in private lending. With economic improvements, the MPC cut rates consecutively in February and March 2018 a total 200 bps before cutting another 100 bps last February. According to surveys conducted by banks, private businesses are looking for a further 300–400 bps cut before resuming CAPEX borrowing. HC also anticipates that inflationary pressures will subside following the full removal of gasoline subsidies. They now expect the CBE to accelerate its planned rate cuts, with a possible 100–200 bps cut in 2H19e before another 200–300 cut bps in 2020e, fully reversing the initial 700 bps hike. On their numbers, this should take average NIMs for banks under coverage to 4.5%–5.0% by 2024e from 5.5%–6.9% over 2017–18.

Strong asset quality and capital base for banks under coverage accommodate for a stricter regulatory environment: Egyptian banks started reporting their financial statements according to IFRS 9 accounting standards in 1Q19, with banks now having to take provisions for expected future credit losses rather than based on historical performance of the credit facilities. Banks under HC’s coverage display strong asset quality, with NPLs ranging 2.5%–5.0% and coverage ratios ranging 141%–200%.

Effect of final amendments to income tax law on treasuries largely mitigated (compared to initial draft), in HC’s view: The final version of the tax law amendments entails separating the tax accounting of a bank’s income from treasuries from all other income. The cost of treasuries will now be calculated by multiplying the bank’s cost to income ratio (excluding provisions and depreciation charges) by 80% of treasury income, with a maximum of 70% of treasury revenue for 2019, 85% for 2020, and 100% of for the following years. The amendments became effective 17 May 2019 and will be applied on treasuries issued since 21 February 2019 as well as treasury re-openings since that date.On their numbers, the amendments should raise the effective tax rate for banks under coverage to range 26%–31% over their forecast period from 21%–28% in 1Q19, prior to the application of the law.

CAE and ADIB NIMs should outperform CIB over 2019–24e due to higher proportion of local currency loans, in HC’s view: As mentioned earlier, the resumption of monetary easing should reflect in NIMS cooling off across banks under coverage, with CIB averaging 4.9% over 2020–24e. HC expects CAE and ADIB, however, to outperform, with average NIMs of 5.4% and 5.2%, respectively, over their forecast period, driven by higher interest-earning, local currency loans as a percentage of total loans. HC also expects banks to lengthen their deposit duration to be able to finance CAPEX lending without breaching the maximum interest rate risk imposed by the CBE (15% of Tier-1 capital). This should reflect in tightened interest rate spreads to average 4.6% in 2024e from 6.3% in 2019e.

HC expects a loan CAGR of c22% for CIB and c18% for both CAE and ADIB over 2019–24e, with the banks allocating less to government treasuries: HC expects the pickup in private lending following the resumption of the easing cycle to be the main balance sheet growth driver for CIB and CAE given their strong capital adequacy ratios (CAR). On HC’s numbers, they expect CIB’s CAR to decline to 18.4% in 2024e from 22.6% in 2019e, CAE’s CAR to decline to 14.3% in 2024e from 18.5% in 2019e, well above the CBE minimum requirement of 14.5% and 12.5% for both banks, respectively. For ADIB, they see the capital increase expected by management to take place in 2020 and the reversal of its net retained loss position to support the bank’s CAR, which they expect to reach 15.9% in 2024e. On their numbers, CIB, CAE, and ADIB should show average 2019–24e effective tax rates of 29%, c26%, and 31%, respectively.

Banks under HC’s coverage display strong asset quality, but they maintain conservative provisioning for all 3 banks reflecting a stricter regulatory environment: HC expects NPLs to decline to 4.0% in 2021e for CIB and to be maintained at 3.0% for CAE, with average 2019–24e coverage ratios of c178% and c154%, respectively. On their numbers, this should translate to average 2019–24e provision charges of 8.9% of operating profit for CIB and 8.3% for CAE. As discussed in their 20 June ADIB update, they expect the bank’s NPLs to increase to 4.0% in 2022 from 2.5% in 1Q19, converging to the banking sector average. ADIB’s coverage ratio stood at c141% as of 1Q19 and they expect it to reach c150% in 2024e, translating to an average 2019–24e provisioning charge of c24% of net operating profit.

Downgrade to Neutral for CAE, maintain Overweight for CIB and ADIB: HC values the banks using an excess-return-based model and adopt a moving cost of equity. Accordingly, they raise their 12-month target price c8% for CIB to EGP87.8/share, which puts the bank at a 2019e P/B multiple of 2.67x . HC therefore maintains their Overweight rating, with the stock trading a 2019e P/B multiple of 2.16x. As for CAE, their 12-month target price of EGP51.9/share puts the bank at a 2019e P/B multiple of 2.3x and . HC downgrades their rating to Neutral, with the stock trading at a 2019e P/B multiple of 1.95x. HC estimates the terminal value of CAE using its 10-year average trading P/B multiple of 2.2x. Finally, for ADIB, they maintain their 12-month target price at EGP18.3/share, which puts it at a post rights issue 2019e P/B multiple of 1.75x, . HC therefore reiterates their Overweight rating. ADIB is HC’s top pick, trading at a post rights issue 2019e P/B multiple of 1.1x. In their view, ADIB offers the highest potential return as its turnaround story is not fully priced in.

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HC Brokerage was among the first local brokerage firms has received a license from Egypt’s Financial Regulatory Authority under decision no. (268) of 2019.
Short selling allows investors to sell equities before they are acquired, and the investment mechanism should lead to increased market liquidity.

The FRA issued earlier this year regulatory decision no. (268) of 2019 governing the rules of short selling, with its implementation and required automation and technical infrastructure slated to become operational soon. The Egyptian Exchange (EGX) also issued its criteria for selecting the securities eligible for short selling in May this year, with some 29 stocks initially eligible in addition to the index fund, all of which are to be revised regularly.

Hassan Choucri, Managing Director of HC Brokerage, expressed his enthusiasm for the investment mechanism. “We are working hard to ensure our firm has perfected the necessary internal infrastructure for the implementation of short selling, which we expect should improve Egyptian market competitiveness and entitle investors to a wider range of investment tools.”

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HC Securities & Investment expects the Central bank of Egypt (CBE) to keep interest rates unchanged at its next 11 July 2019 Monetary Policy Committee (MPC) meeting. According to Sara Saada, head of macro and financials at HC Research, yearly inflation figures will be largely influenced by favorable base effect in the coming few months (from June–October 2019). That said, she expects June m-o-m inflation to remain close to c1%, while y-o-y inflation will decelerate to c11%, which is within the CBE’s target inflation of 9% (±3%) by 4Q20. Egypt increased on 5 July the prices of petroleum products by 16%–22%, compared to average fuel price increases of 35%–51% last fiscal year, and has announced electricity price hikes on 1 July, leading to an average monthly inflation range of 2%–3% for July–August, which Sara believes will influence the CBE’s MPC upcoming decision.

It is worth mentioning that at its last meeting on 23 May 2019, the CBE MPC kept policy rates unchanged for the second consecutive meeting, after reducing rates by 100 bps in February 2019. Egypt’s annual headline inflation accelerated to 14.1% in May from 13.0% in in the previous month, with monthly inflation reflecting 1.1% monthly price increase, compared to 0.5% in the previous month, according to data published by the CBE. Egypt’s annual core inflation marginally decelerated to 7.8% in May from 8.1% in the previous month, with the monthly core CPI increasing 1.2% compared with a 0.4% increase in April, central bank data showed.

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• Continuation of the easing cycle by 4Q19e, following the completion of fiscal consolidation measures, should stimulate private investment and GDP growth.
• External position to further improve on a rebound in FDIs, with portfolio inflows currently leading to EGP appreciation.
• Capital market reforms along with the resumption of the partial asset sale program should help the stock market reflect improved economic fundamentals.

Lower interest rates key to more sustainable growth: Public spending has been the major driver of GDP growth, helping it to grow 5.3% in FY17/18 from 4.2% a year earlier, with public investments growing c62% and private investments dropping c15% in real terms. HC believes the resumption of the easing cycle will be a catalyst for private investment growth, which in turn should promote more sustainable GDP growth. Moreover, they believe foreign direct investments (FDIs) will reverse trajectory in FY19/20e and grow on increased confidence in the Egyptian economy, aided by strong external position fundamentals, credit ratings upgrade and local stability. That said, HC expects Egypt’s GDP growth to reach 5.5% in FY18/19e, 5.9% in FY19/20e, and 6.3% in FY20/21e. In addition to the private investment pickup, they also see that approving the proposed amendments to decrease trading costs, increasing tax incentives for listed companies, and the resumption of the partial asset sale program as important catalysts for the capital market, leading it to reflect the improved macroeconomic indicators.

Inflation to moderate following fiscal consolidation measures: On the fiscal front, the government’s prudent commitment to fiscal consolidation efforts should put the budget deficit on a descending trend and secure a stable primary surplus. HC expects the budget deficit to drop to 8.0% of GDP in FY18/19e, to 7.2% of GDP in FY19/20e, and to 6.5% of GDP in FY20/21e, from 9.7% of GDP in FY17/18. They expect tax revenue to range 14.0%–14.2% of GDP over their forecast period, and expect expenses to drop from c28% of GDP in FY17/18 to c24% of GDP by FY20/21e. During FY19/20e, the government aims to reach full cost recovery for petroleum products (excluding butane) and will accordingly lift most of the energy subsidies. HC estimates gasoline and diesel prices will rise 15%–30% in June–July 2019 compared to average price increases of 35%–51% in FY17/18. That said, they expect inflation to average 14.2% in FY18/19e, 12.4% in FY19/20e, 10.3% in FY20/21e, and 8.4% in FY21/22e. Accordingly, HC expects the Central Bank of Egypt (CBE) to resume its rate cuts in 4Q19e for a combined total cuts of at least 500 bps over both 2019e (200 bps) and 2020e (300 bps), getting closer to pre-2011 revolution interest rates.

Strong external position supports currency, while significant portfolio flows lead to exchange rate volatility: Egypt’s external position fundamentals have been strengthening since 2Q16, but HC believes EGP rate movements remain largely dependent on foreign portfolio flows, which reached USD17.4bn in April 2019. On the current account front, Egypt’s Ministry of Petroleum aims to reduce the petroleum-product deficit as it expands its refining capacity and substitutes more petroleum-product imports for crude oil. Accordingly, they expect a marginal petroleum trade balance surplus starting FY19/20e. HC also sees tourism revenues continuing to improve on stable security conditions, to exceed pre-revolution levels starting FY18/19e. That said, they forecast a current account deficit of USD7.0bn in FY18/19e, USD5.7bn in FY19/20e, and USD5.4bn in FY20/21e. HC sees FDIs accelerating over the coming 2 years to cover the current account deficit starting FY19/20e, reaching USD7.8bn in FY19/20e and USD8.6bn in FY20/21e. On the financial account, they expect the government to continue resorting to Eurobond issuances over bilateral agreements, especially after the end of the IMF Extended Fund Facility (EFF) in FY18/19e. While foreign portfolio inflows to the Egyptian debt market will likely remain volatile and largely linked to emerging market dynamics, they expect Egypt to remain attractive among other emerging markets. That said, HC thinks the recent EGP appreciation is due to the current carry trade inflows, however the rate should stabilize for a while, in their view, before it reverses trajectory by the end of the year as they see the resumption of the easing cycle triggering profit-taking by foreign investors. HC therefore sees the EGP/USD rate smoothly reflecting the inflation differential with trade partners over the medium-term (3 years), and expects the EGP/USD rate to average EGP17.43/USD in FY19/20e and EGP18.25/USD in FY20/21e.

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Egypt’s annual headline inflation decelerated to 14.2% in March from 14.4% in the previous month, according to data posted by the Central Agency for Public Mobilization and Statistics (CAPMAS). Monthly prices rose 0.8% compared with a rise of 1.7% in February, with food and beverage prices rising 1.5% m-o-m compared with 3.5% m-o-m last month, the data showed. (CAPMAS).

HC’s comment: The March monthly headline inflation figure has normalized compared to that of February, with the 0.8% monthly price increase translating to annualized inflation of 10%. The rise was mainly due to a 1.5% m-o-m increase in food and beverage prices, contributing to a 0.86% increase in total monthly inflation, according to the published breakdown, which highly mimicked urban inflation figures. The remaining items of the CPI basket have only marginally changed in February with almost a flat net effect.

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“HC first NBFS event with participation from over 20 financial institutions”
— 9 April 2019 — Fairmont Nile City Hotel – Cairo.

“HC Brokerage organized on Tuesday, 9 April 2019 its first corporate access event to its local financial institutional clients, providing them with extensive details on the operations and financial performance of Egypt’s non-banking financial services (NBFS) sector via multiple sessions led by key sector players”

 

Egypt reported a balance of payments (BOP) deficit of USD2.06bn in 2Q18/19, down from a surplus USD0.51bn a year earlier and USD0.28bn in the previous quarter, data posted by the Central Bank of Egypt (CBE) showed. (CBE).

HC’s comment: Egypt’s capital and financial account registered net inflows of USD0.23bn, down from USD4.18bn in 2Q17/18. This drop was largely due to (1) a decrease in borrowings, which decreased to USD0.61bn in 2Q18/19 from USD4.49bn a year earlier, and (2) net portfolio investment outflows of USD2.63bn compared with a net portfolio investment inflow of USD0.55bn a year earlier. Despite net foreign direct investments (FDIs) decreasing c12% y-o-y to USD1.63bn in 2Q18/19, they increased c57% compared with the previous quarter, covering c77% of the current account deficit for the same period, which widened to USD2.10bn from USD1.79bn last year. Egypt’s trade balance deficit narrowed slightly to USD9.36bn from USD9.84bn a year earlier, mainly on the back of an increase in petroleum-export proceeds to USD3.20bn in 2Q18/19 from USD2.03bn a year earlier, while petroleum imports dropped to USD2.36bn in 2Q18/19 from USD3.23bn in the previous year. The services balance recorded a surplus of USD1.21bn in 2Q18/19, up from USD0.94bn a year earlier, mainly on the back of slightly higher travel receipts, which increased some c25% y-o-y to USD2.86bn, but dropped c27% q-o-q. Net unrequited transfers decreased c15% y-o-y to USD6.05bn in 2Q18/19.

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“We expect a 1-year delay in the easing cycle and remain bullish on prospects of the Egyptian economy”

• We are bullish on construction, energy-related, consumer staples, financials, tourism, automotive, and select real-estate names.
• With a big portion of our coverage undervalued, our focus is on compelling stories with low forward PEG ratios rather than merely potential returns, filtering through to 12 high-conviction picks.
• HC Securities & Investment expects another round of subsidy cut slated for July, leading to renewed inflationary pressures. Based on HC’s view, this coupled with high global interest rates, should lead to a delay in the resumption of the monetary easing cycle to 2020e where we estimate a total 500 bps cut, compared to our previous estimate of a total 400 bps cut by the end of 2019.

“Our real effective exchange rate (REER) model implies a 9.5% gradual EGP devaluation by December 2019e to an EGP/USD rate of 19.6. This view is supported by the banking sector’s widening net foreign liability position, Egypt’s high level of foreign debt, and the delay in FDIs, which came in flat y-o-y in FY17/18 and even dropped c40% y-o-y in 1Q18/19. That said, we believe the Egyptian government will inevitably have to move toward full currency liberalization with the first sign being the Central Bank of Egypt (CBE) canceling the foreigner repatriation mechanism in November 2018. The IMF’s USD12bn Extended Fund Facility (EFF) also requires the CBE adopt a flexible exchange rate policy,” according to a report issued by HC’s Research Department.

“We remain bullish on the prospects of the Egyptian economy and believe it has managed to achieve considerable reforms, leading to a narrower current account deficit and nearly breaking even by FY20/21e, on our numbers. Following the resumption of monetary easing in 2020e, we expect private investments to be the main growth driver and believe that inflation moderation coupled with higher employment should help improve private consumption,” HC’s report added.

The report also shed light on compelling stories in 2019, stating that “this leads to 12 high-conviction picks in the construction, energy-related, consumer staples, financials, real-estate, tourism, and automotive sectors that offer compelling stories and low forward PEG ratios. Given our macro view, we prefer companies with strong balance sheets, that stand to benefit from EGP devaluation, and/or are able to pass rising costs onto consumers without hampering volumes (mainly consumer staples), and/or with exposure to robust government investments. We are also bullish on companies with exposure to underserved and profitable non-banking financial services, those with exposure to the rebounding tourism and automotive sectors, and select real-estate names. With a big portion of our coverage being undervalued, we stick to 12 high-conviction picks that offer compelling stories and low 2019e PEG ratios. In the banking sector, our picks are Commercial International Bank (COMI EY) and Crédit Agricole Egypt (CIEB EY). In the financial services sector, our picks are EFG Hermes Holding (HRHO EY) and CI Capital Holding (CICH EY). In the industrial sector our picks are El Sewedy Electric (SWDY EY) and Orascom Construction (ORAS EY, OC DU). In the consumer sector, our picks are GB Auto (AUTO EY), Juhayna Food Industries (JUFO EY), and Arabian Food Industries (Domty) (DOMT EY). In the real-estate sector, our picks are Orascom Development Egypt (ORHD EY), TMG Holding (TMGH EY), and Emaar Misr (EMFD EY).”

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Egypt’s net international reserves (NIR) declined to USD42.551bn in December from USD44.513bn in the previous month, according to Central Bank of Egypt (CBE) data. The decline was mainly attributable to: (1) redemption of treasury bills held by foreign investors whose holdings of Egyptian T-bills dropped to USD10.8bn as of the end of November from USD21.4bn in March 2018; (2) foreign debt servicing; and repaying foreign liabilities of some ministries and government entities, according to an unidentified CBE official. (Al Mal).

HC’s Comment: The USD0.9bn foreign portfolio outflow corresponds to net foreign liability position of domestic banks widening to USD7.3bn in November from USD5.5bn in October. Debt repayment scheduled for 2H18 amounted to USD7.2bn of which USD4.3bn are deposit repayments to Arab countries. HC accordingly attributes the USD2bn decline in foreign reserves to mainly debt repayment assuming USD1bn of debt rollover. HC expects the government to receive the fifth USD2bn installment of the USD12bn Extended Fund Facility (EFF) in January which could offset the decline in reserves. It is worth mentioning that debt repayment scheduled for 1H19 amounts to USD5.1bn of which USD2.6bn are deposit repayments to Arab countries.

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