EGYPTBanks: Takeoff Time
A beneficiary regardless the direction; Overweight Egypt Banks
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Unprecedented challenges overcome …: Faced with unprecedented challenges to address long-term macroeconomic imbalances, the Central Bank of Egypt’s (CBE) policies under the economic reform of 2016 were crucial to control inflation and stabilize the FX market. The CBE successfully managed to build its credibility during those past five years despite challenges triggered by the EGP floatation and capital outflow bouts in 2018 and later in 2020. By 2021, the inflation environment stabilized, and inflation was contained within the CBE’s target of 7% ± 2% by Q4 2022. Hence, the CBE’s policy rates have been left unchanged since the latest two 50bps cuts in September and November 2020, just before the COVID-19 crisis interrupted the easing cycle that started early 2018.
… but global woes hit home: However, the agitated global inflation environment in 2021 has started to fuel the domestic inflation outlook and – in our opinion – has put an end to this easing cycle, which is expected to be reversed in 2022. The CBE’s monetary policy outlook will focus on keeping high real interest rates to help support the economic recovery and alleviate the pressures on the current account deficit (CAD). This fits well within the context of the CBE’s inflation-targeting policy that should keep inflation expectations well anchored around its target.
Averting headwinds by going long Egypt banks: In view of the above, we think one way to avert the current and potential headwinds facing the Egyptian economy is by going long Egypt banks. For this, we initiate our core coverage on five more bank stocks listed on the EGX. In addition to CIB [COMI] and Credit Agricole Egypt [CIEB], this brings our Egypt banks coverage to seven stocks. The five new banks stocks that we cover in this note are as follows, sorted alphabetically:
1. Abu Dhabi Islamic Bank – Egypt [ADIB]
Overweight / Medium Risk / 12M PT EGP21.7/share (+45%)
A Formula for Growth
- Earnings growth driven by lending growth, lower CoR, and better cost optimization; solid asset quality ensures steadying lending growth; long-awaited rights issue likely next year.
2. Al Baraka Bank – Egypt [SAUD]
Overweight / Medium Risk / 12M PT EGP25.6/share (+80%)
Comfortably Rewarding
- Earnings to flourish on lower CoF and heavy Treasury investments; favorable deposit terms to aid NIM; profound asset quality with a wide capital base.
3. Export Development Bank of Egypt [EXPA]
Overweight / Medium Risk / 12M PT EGP11.1/share (+21%)
Aglow Despite Dim Clouds
- Ebbing profitability is transitory; a coherent NIM despite marginal earnings growth, which should reverse course gradually; high asset quality with a barely sufficient capital base.
4. Housing & Development Bank [HDBK]
Neutral / Medium Risk / 12M PT EGP49.0/share (+13%)
A One-Stop Lender
- High retail lending aids profitability; asset quality is seen to stay poor before improving; real estate is fifth total fair value.
5. QNB Alahli [QNBA]
Overweight / Medium Risk / 12M PT EGP19.5/share (+24%)
Captive Growth
- High lending utilization and a wide capital base to help boost growth; cheapest deposits fend off NIM pressure; solid asset quality despite headwinds.
Shihab M. Helmy
Senior Equity Analyst
T +202 3300 5723