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Egyptian banks unanimously trade at Trailing Twelve Months (TTM) earnings multiples below 5x despite boasting solid return on average equity above 35% over the cycle and above 45% in 2024.
At present, three out of eleven listed banks are members of the benchmark EGX30 index and their combined free float-adjusted MCAP weights in the EGX30 index is almost 30.0%. In descending order in terms of index weights, the three banks are 1) Commercial International Bank (CIB) at 26.4%, 2) Abu Dhabi Islamic Bank–Egypt (ADIB) at 1.8%, and 3) Credit Agricole–Egypt (CA-Egypt) at 1.5%.
Why do low earnings multiples of Egyptian banks seem like a conundrum?
First, it is not due to an indiscriminate macro risk – if that were the case, all sectors would have been trading at distressed valuation multiples. Yet, when we depict the TTM earnings multiples of the 50 most-actively traded companies, it is obvious that all commercial banks trade at the lower end of the spectrum in what seems as a “sector-discount”.
Second, if banks generate ROAE in excess of 35-45% and the long-term cost of equity (COE) is close to 20.0%, then banks should be trading at forward earnings multiples above 5x by virtue of the intrinsic earnings multiples model. Yet, Egyptian banks trade at trailing and forward earnings multiples way below the 5x, which is the multiple of a no-growth company in Egypt.
So why are are the valuations of Egyptian banks penalised?
