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HC expects outstanding bank’s profitability in 2024 for CIB

Commercial International Bank (CIB)

  • Egypt’s favorable economic structural reforms entail monetary and fiscal tightening, enabling private sector growth and currency liberalization, making the Egyptian banking sector a key beneficiary of these reforms
  • We expect outstanding profitability for COMI in 2024 as a result of the expected NIM expansion, while CAPEX loan growth would be delayed to 2025, in our view
  • HC Brokerage resumes coverage on Commercial International Bank expecting outstanding bank’s profitability in 2024 as a result of the expected NIM expansion.

Economist and financial analyst at HC, Heba Monir commented: “The Ras El Hekma investment deal improved Egypt’s external position and outlook: The Egyptian economy restored confidence after concluding the Ras El Hekma USD35bn investment deal with the UAE in February 2024. The disbursement of the first and second cash tranches worth USD24bn, helped narrow the banking sector’s net foreign liabilities (NFLs) significantly by c85% y-o-y to USD3.64bn in April, from USD29bn in January 2024. On 6 March, the Central Bank of Egypt (CBE) hiked policy rates by 600 bps, raising them by 800 bps y-t-d and 1,900 bps since it started tightening rates in March 2022, and allowed market forces to determine the exchange rate, leading to an EGP devaluation of c35% y-t-d to EGP47.7/USD currently. Following this, and given the impact of the Gaza war on tourism and Suez Canal receipts, the International Monetary Fund (IMF) and the Egyptian authorities reached a staff-level agreement on a set of comprehensive policies and reforms needed for the Extended Fund Facility (EFF) arrangement, increasing it significantly to USD8.0bn from the previously approved USD3.0bn in December 2022, leading to the disbursement of USD820m in April and another USD820m to be disbursed in June. The European Union (EU) also pledged a EUR7.4bn (USD8.06bn) aid package for Egypt to be disbursed through 2027. All this reflected positively on Egypt’s economic and banking sector credit ratings; S&P Global Ratings and Fitch Ratings upgraded Egypt’s economic outlook to Positive from Stable and Moody’s to Positive from Negative. Despite these positive developments, we do not expect CAPEX lending growth before 2025, given the prohibitive high borrowing cost and our expectation of delayed monetary easing to late 2024 or early 2025. Yet, we expect banks to benefit in 2024 from the higher treasury yields and high deposit auction rates, leading to unusually high net interest margins (NIMs).”

“We expect solid banking sector profitability in 2024 due to high treasury yields and real growth in loans: We forecast the banking sector’s loans to grow by c31% y-o-y to EGP7.25trn in 2024, mainly driven by EGP loans to finance working capital needs and inflated by the EGP devaluation. Given the high-interest rate environment, we do not expect CAPEX lending to materialize before 1H25. In January 2024, the state-owned National Bank of Egypt (NBE) and Banque Misr introduced a one-year certificate of deposits (CDs) at a 27.0% interest rate paid annually. Following the 6 March EGP devaluation, they introduced in March a three-year declining interest rate CDs paying interest annually of 30.0% in the first year, 25.0% in the second year, and 20.0% in the third year. In January 2024, some private banks like Commercial International Bank (COMI) followed suit and issued three-year CDs at a monthly 20–22% interest rate while setting a minimum value per CD of EGP0.1–5.0m. Therefore, we estimate market deposits to increase by c27% y-o-y to EGP13.7trn in 2024. Regarding profitability, we expect local currency NIMs to continue expanding, given the high treasury yields and high interest rates. We see room for higher treasury yields by 100–200 bps if inflation accelerates, which would represent an upside risk to our numbers. Regarding asset quality, we forecast that large to medium-cap banks will report good asset quality, as most of them increased their provisions charges during 4Q23. Meanwhile, we could see higher NPLs for small-cap banks. As for the capital adequacy ratio (CAR), most banks’ CARs are above the CBE’s minimum requirement, and if they happen to be impacted by the EGP devaluation, we expect them to recover, helped by their solid profitability.” Heba Monir added.

HC’s economist concluded: “We forecast COMI’s net income to grow at a 5-year CAGR of c24% while maintaining its leading market share: We forecast COMI’s net income to grow at a 5-year CAGR of c24% from 2023–28e, with a c70% y-o-y growth in 2024e to EGP50.4bn on higher interest rates, the EGP devaluation, and a favorable deposit mix, as its current account savings accounts (CASA) represent c55% of its total deposits. We estimate its NIM to increase to 9.57% in 2024e from 7.75% in 2023e, with an ROE of 49.8%, up from 37.5% in the previous year. We forecast COMI to maintain its attractive deposit market share, which we estimate at 6.4% in 2024e, growing its deposits by c23% y-o-y to EGP835bn in 2024e, on our numbers, and we estimate its loan market share at 4.9% in 2024e, growing its loan portfolio by c29% y-o-y to EGP303bn in 2024e to finance corporates’ higher working capital needs, inflated by the c35% EGP devaluation. We expect COMI to report an adequate asset quality, with NPLs of 4.65% of gross loans, higher than the 3.59% it reported in 2023, due to more volatile business conditions and the precautionary measures required by the expected credit loss (ECL) model of IFRS 9. We forecast the bank to record a lower coverage ratio of 276% in 2024e from 305% in 2023 due to its good provisioning and the sound credit profile of its corporate clients. We estimate its net loan-to-deposit (L/D) ratio to increase to 36.3% in 2024e from 34.8% a year earlier. We estimate the bank’s financial investments holdings to surge by c39% y-o-y to EGP378bn, representing c45% of customer deposits in 2024e from c40% in 2023 due to the attractive treasury yields. We expect COMI’s CAR to increase to 30.3% in 2024e from 26.2% in 2023.”


About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311



CIRA: Favorable growth dynamics

  • CIRA expansion plan implies increasing registered students and revenue at a 2022–29e CAGR of c13% and c25%, respectively, with some pressure on EBITDA due to rising OPEX

  • Planned annual CAPEX average EGP940m over the next five years  for CIRA with average debt/equity of 1.19x, on our numbers

CIRA’s expansion plan should reflect in the number of registered students growing at a 202229e CAGR of c13%, on our numbers: The company’s Badr University in Assuit (BUA) should start operations next September with six to seven science-focused faculties including physical therapy, nursing, dentistry, and biotechnology. The company plans to add two new faculties annually to reach 16 faculties by 2028e with a total capacity of 24,000 students. The company plans to start the operations of its Cairo Saxony University for Applied Sciences and Technologies (CSU) in 2024e with some four cohorts and add two annually to reach a total of 16 faculties by 2030e, with a total capacity of 32,000 students. CSU will be established under a joint venture between CIRA and Al Ahly Capital, named Al Ahly CIRA for Educational Services, in which CIRA owns 51%. CIRA will own 60% of CSU and Al Ahly Capital 40%. The company also expects to start the operations of its New Damietta university in 2025e with some four faculties and will add two annually to reach 16 faculties by 2031e with a total capacity of 24,000 students. The New Damietta university will be established under a joint venture between CIRA and El Sewedy Capital Holding, named Cairo Egypt for Education (CEE), where CIRA will own 60% of the university and El Sewedy Capital will own 40%. The company plans to increase its higher-education capacity from 25,000 students in Badr University in Cairo (BUC) in 2022 to 105,000 students in all of its universities by 2031e. We, accordingly, incorporate all universities’ expansions and account for the recent change in the university admission system by the Ministry of Higher Education. In the academic year 2020/21, the Egyptian secondary examination system was renovated, leading to a 20 pp decline in average students’ grades. The minimum grades for acceptance into private universities were not adjusted proportionally, leading to a lower number of students’ eligibility for enrollment and hence less utilization of the available seats. As a corrective action, the Supreme Council of Private Universities (SCPU) recently decided to revert to the pre-2020/2021 direct enrollment system, allowing students to apply to universities through their websites. The SCPU has also agreed to adjust the minimum grading for all faculties after the release of secondary-school grades. For K–12. The company currently owns 27 schools, 16 under the Futures brand, serving lower-middle-income families. Two schools under the British Columbia Canadian International School (BCCIS) and one under Saxony International School (SIS) are geared towards the higher-income segment, with the rest of the schools in between. In November 2021, CIRA signed a partnership with The Sovereign Fund of Egypt (TSFE) to provide high-quality, affordable education to all segments and governorates in Egypt. The partnership involves launching two new schools in the Cosmic Village with an investment cost of EGP350m, and plans to start the operations of the first one in 2024e. The company plans to add one new school annually over our 2023–29e forecast period to reach 36 schools with a total capacity of 49,000 students. The Egyptian government’s public-private partnership (PPP) program provides an upside risk to our numbers as the government is offering some 57 schools, of which the company is bidding for 12 schools. The program is under a build, own, operate, and transfer (BOOT) scheme, where the government will offer the land, while the winning company will build and operate the schools for 30 years, after which the ownership will be transferred to the government and the company will be awarded a management contract. The average annual tuition fees for these schools will approximately be EGP18,000/year, fitting well with CIRA’s Future schools brand average annual tuition fees of around EGP14,000–15,000 per student. CIRA’s management believes the program will give them access to highly scarce land in Egypt’s Delta region.

We expect revenue to grow at a 2022-29e CAGR of c25% with an average EBITDA margin of c47%: We largely maintain our K–12 revenue estimates over our forecast period but downward revise our 2022e revenue estimates by c9% as the Futures brand continues to be the main contributor to K–12 tuition revenue (c61%) as opposed to our earlier assumption of a more pronounced shift towards the high-end brands. For higher-education, we downward revise our 2022–25e revenue estimates by c9% due to a one-year delay in opening BUA in addition to lower-than-expected student registration in BUC as a result of the applied registration process, which took place in the 2020/2021 academic year. Over 2028–31e, we raise our higher-education revenue estimates by c8% to capture revenue from the New Damietta university. Based on our numbers, the K–12 and higher-education expansions imply revenue growing at a 2022–29e CAGR of c25%. We expect rising costs to reflect in K–12 OPEX 8-year CAGR of c14%, with an average EBITDA margin of c28%, down from our earlier estimate of c32%. For higher-education, we expect OPEX to increase at 2022–29e CAGR of c33%, reflecting the launch of BUA in 2023e, CSU in 2024e, and New Damietta university in 2025e. We note that universities will break-even in the third year of operations and start making profits in the fourth year. We accordingly expect the higher-education EBITDA margin to decline from c67% in 2021 to an average of c58% over our forecast period, largely unchanged from our previous estimate of c59%.

CIRA secured all the land for its planned expansions and is working on securing diverse funding sources for its CAPEX plan: The company has already secured a 40-acre land plot in Badr City for its CSU for EGP873m, paid 15% as a down payment, and the rest payable over ten years ending 2031. It also purchased a 58-acre land plot for its New Damietta university for EGP1.06bn, paid a 15% down payment, and the rest payable over ten years ending 2031. The company expects no more land additions over our forecast period. According to management guidance, we raise our 2022–26e CAPEX estimates c31% to EGP4.55bn from EGP3.46bn previously to reflect New Damietta university, which was not fully captured in our earlier estimates, rising prices of construction material and the March 2022 EGP depreciation. The company plans to allocate its 2022–26e CAPEX spending of EGP4.55bn as follows: (1) EGP1.07bn for K–12 schools, (2) EGP1.18bn for BUA, (3) EGP990m for CSU, and (4) EGP1.25bn to New Damietta University. We expect the planned CAPEX to reflect in higher debt (including land liabilities)-to-equity ratio from 1.24x in 2021 to an average of 2.11x in 2022–23e and gradually decline to 0.77x in 2026e. Recently, the company obtained an EGP348m loan from Al Ahli United Bank (AUB) at a floating rate of 1%+ corridor rate, better than its previous loan from AUB at 2.5% markup. The new AUB loan has a 2-year grace period with principal payments starting 2024. The company also secured an EGP260m loan from Qatar National Bank Al Ahli (QNBA EY) at a floating rate of 1%+ corridor rate, better than its previous loan from QNB at a 1.5% markup, including a 2-year grace period with principal payments starting in 2024e. To diversify the funding sources, the company’s board called the EGM to convene to look into starting a 3-year EGP2.0bn securitization program against future cash flows, with the first issuance expected to amount to EGP800m. On our calculations, we account for the company’s future funding needs as bank loans with an interest rate of 1% above the corridor rate, similar to recent terms of bank debt secured by the company.