Crédit Agricole Egypt (CAE) [CIEB]: Growth by Inertia
A story of systematic growth; 12MPT downgraded, OW/M maintained
Crédit Agricole Egypt (CAE) [CIEB]
Egypt / Banks / Core Coverage Update
12M PT: EGP8.3
(+26%, was EGP9.9) set on 22 Aug 2022
Investment Rating: Overweight | Risk Rating: Medium
Since the pandemic breakout in 2020 and subsequent global disruptions, some Egyptian banks focused more on protecting their business against any possible negative externalities than on aggressive growth strategies. Similarly, we believe Credit Agricole Egypt [CIEB] chose to protect its market share until more favorable conditions return, while slightly improving its financial position with a combination of cost control and revenue growth approaches. As safe as it was, this strategy led to volatility in CIEB’s profits. Here, we anatomize CIEB’s past positions then draw a trajectory for the next five years.
Err on the side of caution:
CIEB has always adopted and maintained a conservative strategy, drifting away from aggressive growth or market share expansion. Indeed, over the 6y period through 2021, CIEB’s growth rates were almost half the market’s. On the deposits side, CIEB’s deposit growth was a 6y CAGR of 10% versus the market’s 22%. Also on the lending side, CIEB’s loan portfolio growth was a 6y CAGR of 13% versus the market’s 25%. This selective, yet slow growth, has allowed CIEB to shield against market fluctuations while producing satisfactory margins. CIEB’s ROAE has been one of the highest among its peers, reaching 24% in H1 2022, while its NIM hit 6.2%. The resilience created by this systematic growth strategy makes CIEB a very promising investment. Looking forward, in a normalized monetary policy environment, CIEB is set to maintain a sustainable and adequate earnings growth with its steady market share and selective portfolio.
Current tactics:
In H1 2022, CIEB still picked the safe side, by choosing not to widely expand its pool of deposits. Unlike other private-sector banks, CIEB did not follow suit with issuing high-yield 3y CDs to lock in funds. Hence, CIEB’s deposits grew only 1.8% ytd and remained flat q/q by end of Q2 2022. Having followed the same strategy back in 2016, CIEB seems to be betting on its positive short-term asset-repricing gap of 13% to push its profitability higher with any upcoming interest rate hike in this tightening cycle. Meanwhile, CIEB’s net long foreign currency position should boost its growth with any EGP weakness since foreign currency represented 11% of loan book and 27% of deposits by end of H1 2022. CIEB also has an evident tendency to keep the weight of Treasuries light. By the end of 2021, CIEB had one the lowest Treasuries-to-total assets ratios among its peers: 13.5%. This helped the bank lower its effective tax rate to 26% and maintain its loan market share at 1%. However, this means that CIEB also forwent very high-yielding, yet relatively safe investment opportunities.
A rosy outlook:
We expect CIEB’s net income to grow at a 5y CAGR (2021-26) of 16% against the backdrop of net interest income’s (NII) 13%. Moreover, we see CIEB’s loan market share stabilizing at 1% through 2026, with its loan book growing at a 5y CAGR (2021-26) of 15%. Meanwhile, we anticipate gross loans-to-deposits ratio to average 70% over our forecast horizon. Given our assessment of the bank’s clientele profiles, we expect the cost of risk (CoR) to average -60bps, with non-performing loans (NPL) ratio rising from 3.3% in 2021 to 4.4% by 2026. hence, we expect NPL coverage to drop from 149% in 2021 to 103% in 2026. For 2022, we expect net income to grow to EGP2.1bn (+32% y/y) in light of (1) higher NII of EGP3.5bn (+21% y/y), (2) lower booked provisions of EGP167mn (-48% y/y), and (3) higher other operating income of EGP91mn (+10% y/y).
OW/M, 12MPT EGP8.3/share:
Our residual income-based FV is EGP11.0/share. We set our 12MPT at EGP8.3/share or 1.21x BV based, assuming LT ROE of 20% and a terminal COE of 18%. Our 12MPT implies 2022e P/E of 4.9x and P/BV of 1.1x. Key catalysts: Persisting inflationary pressures furtherly growing total market lending, thus amplifying CIEB’s loan book size. A higher-than-anticipated growth pace. Key risks: Current M&A trend could lead to intensified competition. Any deterioration in asset quality would result in higher-than-expected CoR.
Amany Shaaban
Equity Analyst
T +202 3300 5720
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