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HC believes a 200 bps rate hike is necessary to absorb the current pressures

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled September 22nd. Based on Egypt’s current situation, they expect the CBE to gradually raise the overnight deposit and lending rates by 100 bps in the coming meeting and then raise it by another 100 bps in the following meeting

Financials analyst and economist at HC, Heba Monir commented: “The annual August inflation is the highest recorded since May 2019, as the pricing of imported commodities at a higher exchange rate and supply bottlenecks negatively impacted it. At these levels, the annual inflation rate is well above the CBE’s pre-announced target of 7% (+/-2% for 4Q22), and we estimate it to average 14.3% until year-end. Furthermore, a few days ago, the Egyptian government decided to amend the natural gas pricing formula for nitrogen fertilizers producers, which should translate into higher crop prices and inflation rates. Regarding Egypt’s external position, we believe that pressure is accumulating given (1) our FY21/22e current account deficit estimate of 4.8% of GDP, up from 4.6% a year earlier, (2) July remittances declining c15% m-o-m  and y-o-y to USD2.38bn, (3) the banking sector’s (excluding the CBE) net foreign liability position reaching USD10.1bn in July, (4) the drop in foreign currency deposits, not included in the official reserves, to USD0.89bn in August from USD11.7bn in December, dropping 0.35% m-o-m and c92% y-t-d, (4) net international reserves settling at USD33.1bn in August representing 4.71 months of imports coverage, and (5) Egypt’s external debt repayment schedule showing dues (excluding GCC deposits) of USD12.1bn over FY22/23. Against this backdrop, we believe a 200 bps rate hike is necessary to absorb the current pressures. For the time being, we believe the MPC Committee will prefer to gradually raise the overnight deposit and lending rates by 100 bps in the coming meeting and then raise it by another 100 bps in the following meeting. Currently, Egypt offers a real yield on 12-month T-bills of 208 bps (given the current 12-month T-bills rate, our 12-month inflation estimate of 12.25%, and a 15% tax rate for European and US investors) compared to a real return on the US 1-year notes of negative 245 bps (given 1-year notes yield of 3.83%, Bloomberg average 12M inflation estimate of 6.28%, and assuming no taxes). Based on our assumptions and calculations, Egyptian 12-month T-bills need to increase in 2022 to 17.3% from 16.9% currently to remain attractive. 

It is worth mentioning that, in the previous two consecutive meetings in June and August, the MPC decided to keep policy rates unchanged after it increased them by 300 bps y-t-d, including 200 bps in May and 100 bps in March, concurrent with the Federal Reserve’s cumulative interest rate hikes of 225 bps y-t-d. Egypt’s annual headline inflation accelerated to 14.6% in August from 13.6% in the previous month, with monthly inflation increasing 0.9% in August compared to an increase of 1.3% m-o-m in July.


HC: Egypt Financials, dormant phase

  • Egypt’s external position vulnerability renders further EGP devaluation accompanied by interest rate hikes necessary, in our view about Egypt Financials

  • For Egypt Financials, we expect further working capital loan growth, moderate deposit increases, maintained NIMs and pressured asset quality over the rest of 2022e

For Egypt Financials, we expect loans to be mostly geared towards working capital financing and deposits to increase moderately on higher competition from public banks: We expect CAPEX lending to be delayed beyond 2022 while tight corporate liquidity to be the main driver for increasing working capital loans in 2022. Accordingly, we expect average 2022e loan growth of c17% y-o-y for banks under our coverage, largely similar to the 2021 average growth of c16% y-o-y. On the liability side, we expect deposits to increase at a 2022e average of c10% y-o-y down from c19% y-o-y in 2021 due to higher competition from high-interest deposits issued by public banks, which we expect to be reintroduced soon in an attempt to combat dollarization. We expect Crédit Agricole Egypt (CAE) to maintain its conservative balance sheet growth, increasing its deposits by c6% in 2022e compared to c12% for Commercial International Bank (CIB) and c11% for Abu Dhabi Islamic Bank-Egypt (ADIB). We expect banks to mostly take advantage of rising treasury yields which we expect to increase to c18% from c16% currently, however, face some pressure due to our expected increase in the cost of funding. Should our view on interest rates materialize, we expect banks’ NIMs to remain intact, averaging 5.7% in 2022 for banks under our coverage, slightly up from 5.4% in 2021. Accordingly, we expect CAE to face less pressure from increasing funding costs, leading to a 2022e NIM estimate of 6.2% compared to 5.8% for CIB and 5.2% for ADIB Egypt. For ADIB Egypt, we note that the bank relied on high-interest fixed deposits in the past to increase its market share, which led to lower NIMs than peers. In a rising interest rate environment, we expect banks with short or negative asset-liability duration gaps to show the highest bounce in their NIMs as their assets reprice quicker than their liabilities. As such, we expect ADIB-Egypt’s NIMs to increase by 50 bps y-o-y to 5.2% in 2022e, backed by its negative asset-liability duration gap of ten months as of December 2021. We expect CAE’s 2022e NIMs to increase by 40 bps y-o-y to 6.2% (backed by its asset-liability duration gap close to zero). However, we expect CIB’s NIMs to remain at 5.8% in 2022e, the same as last year, backed by its positive asset-liability duration gap of ten months. For CIB and CAE, we largely maintain our 2022–26e earnings estimates as our higher NIMs estimates are largely offset by higher provisioning estimates. For ADIB-Egypt, we raise our 2022–26e earnings estimates by c32%. This reflects our higher growth assumptions following the full completion of its capital increase to EGP5.0bn, which management expects to take place after it finalized an EGP2bn capital increase.

We believe the challenging business environment imposes a threat to the banks’ asset quality; however, we expect it to be contained due to adequate capital buffers: We expect an average 2022e non-performing loan (NPL) ratio of 4.2% for banks under our coverage, up from 3.8% a year earlier, reflecting challenging economic conditions. Accordingly, we expect 2022e provision expenses for the three banks to average c12% of net operating income, up from c10% in 2021e, with an average 2022e coverage ratio of c145%, down from c161% in 2021. We believe banks under our coverage are adequately capitalized, with a capital adequacy ratio (CAR) of 22.7% for CAE (as of March 2022), 13.8% for ADIB-Egypt and 28.8% for CIB (as of June 2022). In our numbers, we account for ADIB-Egypt’s second capital increase planned to take place by the end of 2022 or the beginning of 2023, increasing its paid-in capital to EGP5.0bn after successfully implementing the first phase of the rights issue in August, doubling its paid-in capital to EGP4.0bn. For CIB, the bank’s management is unlikely to distribute a special dividend hence maintaining its high capitalization. Given our 2022–26e balance sheet growth estimates, we expect a CAR average of c17% for CAE, c16% for ADIB-Egypt, and c20% for CIB.

HC expects the CBE to increase interest rates by 200 bps

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled May 19th and based on Egypt’s current situation, they expect the CBE to increase interest rates by 200 bps

Head of macro and financials at HC, Monette Doss commented: “ The April inflation figure came in higher than our estimate of 12.3% and Reuters’ median consensus estimate of 11.8%, driven by a 48.8% y-o-y increase in fruit and vegetable prices, while bread and grains increased by 28.5% y-o-y, according to CBE and Central Agency for Public Mobilization and Statistics (CAPMAS) data. We believe that several factors triggered food inflation, including seasonal demand during the month of Ramadan, c18% EGP devaluation since 21 March, and increasing global prices following the Russia-Ukraine war. Even though food prices could relatively cool off in the coming month as demand neutralizes after the month of Ramadan, we expect food prices to be the main trigger for an average inflation estimate of 14.0% over the remaining of 2022e due to hampered purchasing power resulting from lower employment levels (as revealed by Egypt’s April PMI at 46.9) and directing most demand to food staples. On a different front, we believe carry trade is essential at this point to support Egypt’s net international reserves (NIR); however, it would be challenging for Egypt to attract it, given the massive sell-offs in emerging markets by foreign investors. We believe that carry trade remains subdued with coverage of government T-bill auctions of only c3%-4% for six and 12 months durations and coverage of c66%-78% for the shorter durations (in auctions held from 19 April until now). We note that yields on the 3M T-bills increased by 170 bps since the March interest rate hike, while 12M T-bills increased by only 49 bps. Given our May-December 2022e inflation estimate of 14.0% and a 15% tax rate on T-bills income for the US and EU investors, we believe that Egyptian 12M T-bills offer a negative real return of 239 bps. In May, the Fed increased its main policy rate by 50 bps taking its 1-year T-bill constant yield to 1.99%, from 1.34% in March. Accordingly, we perceive pressure on 12M T-bills to increase to 16.5%-17.0%, close to their 1H19 average of 17.4% when inflation averaged 12.9% and corresponding to average 1-year US Treasury yields of 2.39%. In 1H19, real yields of 180 bps in Egypt corresponded to a real yield of 58.9 bps in the USA. At 17%, real yields on Egypt’s 12M T-bills will come in at 0.45 bps while 1-year US treasuries offer a year yield of -490 bps (given Bloomberg consensus 2022 inflation estimate of 6.9% for the USA) while Turkey offers a negative real return of -37.69% (given the last 1-year T-bill rate of 22.3% and Bloomberg consensus 2022 inflation estimate of 60%). That said, we expect the MPC to increase rates by 200 bps in its upcoming meeting, bringing back Egypt’s real interest rates to positive territory. On the currency front, we believe that risks are to the downside as we believe that the currency rate is more flow-driven, and as we expect higher outflows from more industrial imports (they are now exempt from the LC requirement) and given our estimated FY21/22e current account deficit of 4.0% of GDP. We note that the net foreign liability position of the Egyptian banking sector (including the CBE) widened to USD12.1bn in March from USD3.39bn in February. Excluding the CBE, the NFL of Egyptian banks narrowed to USD7.04bn in March from 11.8bn in February.

It is worth mentioning that, in a special meeting on 21 March, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to increase key policy rates by 100 bps after keeping it unchanged for ten consecutive meetings and following the Federal Reserve Bank (Fed) decision in March to increase the interest rate by 25 bps. Egypt’s annual headline inflation accelerated to13.1% from 10.5% in the previous month, with monthly inflation increasing 3.3% m-o-m, compared to an increase of 2.2% m-o-m in March, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).