Commercial International Bank – Egypt (CIB) [COMI]: A Good Bet for the “Risk On” Mode
Potential lending recovery with healthy NPL coverage
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Commercial International Bank -Egypt (CIB) [COMI]
Egypt / Banking / Reason for note: Valuation
12MPT: EGP85 (+28%)
as of 6 Oct 2020
Investment Rating: Overweight | Risk Rating: Medium
Key Insights
Profitability to recover starting 2021
We expect Commercial International Bank – Egypt’s (CIB) [COMI] earnings to be weaker y/y in 2020 due to COVID-19. While a potential spillover to its balance sheet is not entirely off the table, H1 2020 figures proved the impact will likely be subdued with net lending growing 0.6% ytd in H1 2020, up from -3% ytd in Q1 2020. Indeed, we expect earnings to slip c.5% y/y to EGP11.2bn in 2020 before growing at a 6-year CAGR of 14.5% to EGP26.5bn by 2025. Weaker profitability in H1 2020 was driven by: (1) lower corridor rates by 300bps, (2) lost deposit growth pulled by state-owned banks’ high-yield CDs in H1, and (3) somewhat lower productivity due to shorter working hours and tentative closure of some branches due to COVID-19. We expect this to be partially offset by the credit recovery which started in Q2 2020 and should continue in H2 2020, supported partially by lower corridor rates by another 50bps.
NIM resilience in 2020 is not expected to persist in 2021 and beyond
We expect net interest margin (NIM) compression to accelerate due to an expansion in credit volumes, dropping from 6.6% in 2019 to 5.1% by 2025. This comes as growth normalizes with interest rates falling below 10%.
Recovery in H2 2020 to be driven by lending growth and provisions reversals
Q2 2020 has exhibited early signs of lending growth with gradual normalization. Retail credit growth, in particular, has recovered with COMI reassessing the credit risk when building new provisions in H2 2020. This may lead to booking less provisions down the road
Valuation, Investment Thesis, & Risks
Overweight, 12M PT EGP85/share (+28%)
We valued COMI using a residual income model, reaching a fair value of EGP94/share. But we set our 12-month price target at EGP85/share (2.15x 2020e book equity, in line with its historical average), hence our Overweight rating. Over the last five years, COMI’s stock has returned in excess of 18% a year (including dividends). In 2020 so far, COMI has underperformed, falling c.20% ytd, leaving room for recovery, save for any short-term systematic risks. We expect COMI’s balance sheet and net income to more than double by 2025.
Trading at a deep discount; lucrative valuation
We view the recent dip instigated by a foreign investors sell-off as a buying opportunity. At the current price, COMI is trading at a 2020e P/E of 8.9x and P/B of 1.7x which is c.20% below its 14-year average of 2.1x.
Investment thesis
Capex lending recovery in tandem with shrewd ALM management, ensuring low cost of funds (CoF) and high profitability metrics.
Risks
Despite its solid fundamentals, COMI is still exposed to systematic and geopolitical risks, including fierce competition from foreign banks’ entering the market in view of recent and potential M&As, slower-than-expected credit growth recovery, and another wave of pandemic that entails severe preventative measures.
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Shihab M. Helmy
Equity Analyst
SMohammed@egy.primegroup.org