KEY THEMES
Yesterday, we initiated coverage on five Egypt bank stocks listed on the EGX. We rated four Overweight and one Neutral. Overall, we are positive on the Egyptian banking sector which we think will be a beneficiary of whatever direction the global and local trends may go. Here is a summary of our rationale, but you may check out the full report for more details.
Unprecedented challenges overcome: Faced with unprecedented challenges to address long-term macroeconomic imbalances, the CBE’s 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 outflows 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: Despite the above conquest, 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: We think one way to avert the current and potential headwinds facing the Egyptian economy is by going long Egypt banks. The five new banks stocks that we initiated coverage on are (sorted alphabetically):
1. Abu Dhabi Islamic Bank – Egypt [ADIB] (OW / MR / 12M PT EGP21.7/share)
2. Al Baraka Bank – Egypt [SAUD] (OW / MR / 12M PT EGP25.6/share)
3. Export Development Bank of Egypt [EXPA] (OW / MR / 12M PT EGP11.1/share)
4. Housing & Development Bank [HDBK] (N / MR / 12M PT EGP49.0/share)
5. QNB Alahli [QNBA] (OW / MR / 12M PT EGP19.5/share).