July 15, 2020

Egypt’s Banking Sector, Well shielded

Norway

HC Brokerage just issued their report about Egypt’s banking sector asserting that it is facing the Covid-19 outbreak steadily and shared their evaluations of the three banks under their coverage, CIB, ADIB-Egypt and CA-Egypt.

  • Despite our downward GDP revision, Egypt provides attractive risk-adjusted return for carry-trade, while Egypt’s banking sector is strong enough to weather a business slowdown in 2020, in our view

  • CAPEX lending now delayed to 2021, however CIB, ADIB-Egypt and CAE are expected to maintain decent profitability, despite 2020e EPS downward revision, in our view,

  • We remain Overweight on CIB and ADIB-Egypt, and upgrade our rating for CAE to Overweight from Neutral, despite lower valuations for the 3 banks. CIB is our sector pick

Monette Doss, Chief Economist and Head of macro and financials at HC Brokerage declared that: “We lower our TP for CIB by c17% to EGP95.5/share, ADIB-Egypt by c14% to EGP21.8/share, and CAE by c21% to EGP41.0/share; and maintain an OW rating for CIB and ADIB-Egypt, while upgrade our rating for CAE to OW from N. CIB is our top pick: CIB is our top pick due to the bank’s s healthy balance sheet growth, high profitability, good asset quality and high capitalization. Even though we like ADIB-Egypt, we believe the delayed capital increase will continue to be an overhang on the share price. At current levels, we believe CAE is oversold.”

Monette explained: “Despite our downward GDP revision, Egypt provides attractive risk-adjusted return for carry-trade, while Egyptian banks are strong enough to weather a business slowdown in 2020, in our view: We believe tourism, private investment and consumer spending are the main GDP components hit by the COVID-19 outbreak in Egypt. Accordingly, we revised our FY19/20e GDP growth estimates downwards twice from 5.9% to 4.7% and now to 4.0% as we expect the economy to remain flat y-o-y in 4Q19/20e and account for 9M19/20 actual GDP growth of 5.4%. We also revised our FY20/21e GDP growth downward to 3.7% from 6.1% previously. In order to combat the negative effect of the COVID-19, the Egyptian government and the Central Bank of Egypt (CBE) launched several initiatives to support the private sector including a 300 bps rate cut by the CBE in March to stimulate economic activity. Using the Sharpe ratio for different emerging markets, we believe Egypt’s current treasury yields continue to offer relatively attractive risk-adjusted return coupled with low currency volatility. This in our view should lead to regained foreign inflows into the Egyptian treasuries market and therefore result in cooling off T-bills yields as well as banks’ cost of funding, while we expect corridor rates to remain unchanged for the rest of 2020. We believe that Egypt’s strong economic fundamentals will support banking sector profitability, despite our 2020e EPS downward revision.

“CAPEX lending now delayed to 2021. CIB, ADIB-Egypt and CAE to show decent profitability, in our view, despite our 2020e EPS downward revision on lower balance sheet and non-interest income estimates and higher provisioning: The outbreak of COVID-19 since mid-March, has led to a slowdown in business activity in Egypt as the government has implemented some precautionary measures including the imposition of a partial curfew and halting some transportation means. As a result, companies operating in Egypt have decided to delay their CAPEX plans to 2021 and only maintained working capital borrowing. The CBE launched several initiatives to ease the burden on individuals and businesses, including delaying loan repayment for personal and corporate loans for a 6-month period and waiving online fees and commissions. We believe that these initiatives will lower Egyptian banks’ 2020 profitability and pressure its cash flows, however other CBE initiatives of offering subsidized loans to the tourism, industrial, contracting and agriculture sectors provided a breather as the CBE compensates banks for the difference between mid-corridor rate + 2% and the subsidized 8% interest rate paid by these corporates. We revised downward our 2020e deposit estimates for Commercial International Bank, Abu Dhabi Islamic Bank-Egypt, and Crédit Agricole Egypt by an average of c11% in order to account for rising unemployment as well as significant decline in business activity. Similarly, we revise downwards our banks’ 2020e loan estimates by an average of c12% as we now expect investments to shrink by c12% in 1H20e, while maintained fund utilization at c106% for CIB and ADIB-Egypt and at c95% for CAE, as banks allocate their excess liquidity to government treasuries. Looking at asset/liability duration gaps we believe CIB is well positioned to achieve healthy NIMs over 2020e, while high L/D ratio and high local currency portion of loans support CAE’s NIMs. ADIB-Egypt’s significantly long liability duration should result in the lowest 2020e NIMs compared to the 2 other banks, in our view. We revise downwards our 2020e net profit estimates by an average c29% for the 3 banks on lower non-interest income and higher provisioning.” Monette Doss added.