- Despite the start of an easing cycle and continued fiscal consolidation, we expect banks to remain profitable on higher non-interest income and normalized NIMs
- Balance sheet growth remains healthy, with a pickup in business activity and a shift to lower cost of funding
- We raise our 12M TP c27% for CIB to EGP100 and maintain N, for CAE by c6% to EGP58.5 and maintain OW, and for ADIB by c17% to EGP26.9 and also maintain OW; ADIB is our top pick on a higher potential return and attractive growth profile
NIMs to normalize starting 2020e: The Central Bank of Egypt (CBE) cut interest rates by a total of 200 bps during both the February and March Monetary Policy Committee (MPC) meetings and kept rates unchanged at the May and June meetings. This was after a previous hiking cycle (with a total of 700 bps hike since the floatation) that accompanied the government’s economic reform program, adopting tight fiscal and monetary policy after the EGP floatation in November 2016. Although we believe the recent rate cuts mark the start of an easing cycle, we expect it to take almost 2 years to return to pre-floatation interest rate levels our expectations on the monetary and fiscal plans shape our view on deposit, loan, and security growth at banks, as well as NIMs and overall profitability. We expect average NIMs for our sector coverage to peak in 2018e at 6.7% and start to normalize in 2020e back to 2016 levels, reaching an average of 5.4% by 2023e.
Deposit growth remains healthy with lower cost of funding: We expect deposits to continue growing despite decreasing interest rates on organic growth as well as the addition of new payroll accounts. Demand deposits in local currency for the private and public sector grew by an annualized c67% (c34% y-o-y) in March after the rate cuts. This is a healthy sign that working capital is accumulating as corporate bank accounts reflect higher liquidity over a short period of time. This, in addition to bank efforts to attract payroll accounts, should result in healthy, low cost deposit growth, in our view. That said, Commercial International Bank (CIB) and Crédit Agricole Egypt’s (CAE) 2017 total deposits came in lower than our previous estimates. Due to re-basing our estimates for deposits, we lower our expectations for balance sheet expansion. CIB’s total deposits grew c8% y-o-y in 2017, compared to our previous estimate of c13%. We expect deposits to grow at a 2018–23e CAGR of c13%, fueled by local currency deposits and working capital growth. As for CAE, deposits dropped c5% y-o-y in 2017, compared to our previous estimate of c10% growth. We expect deposits to grow at a 2018–23e CAGR of c10%. Abu Dhabi Islamic Bank- Egypt (ADIB) on the other hand showed healthy deposit growth, exceeding our previous estimate for 2017, with deposits growing c17%, some c5 pp higher than our previous estimate on its high effective interest on deposits of 7.51% in 2017. We expect ADIB’s deposits to grow at a 2018–23e CAGR of c14%, with 2018e growing at an exceptional c25%, reflecting the 1Q18 rise in USD deposits. Moreover, we expect the decline in interest rates in the coming rounds to have phased out some high-yielding certificates of deposit (CDs), replacing them instead with lower-yielding variable deposit CDs or short-term fixed instruments. We estimate average effective interest on deposits for our coverage universe to drop to 5.4% in 2019e from 6.0% in 2017 and 6.4% in 2018e.
Pickup in private lending to contribute to higher non-interest income over our forecast horizon: We believe the volatility in foreign participation in T-bills does not significantly affect our coverage universe, but rather that of public banks’ share of treasury securities. We still see banks are more inclined to explore high-yielding loan opportunities after the CBE stopped issuing long-term variable deposit auctions last February and started issuing corridor-linked deposit auctions in their place at an almost zero spread. Lending in 2M18 has grown an annualized c22% (c20% y-o-y), driven by the household and private sector, Loans, in our view, will play a bigger part of bank efforts to expand their balance sheets in the coming years. In addition to working capital growth, we expect CAPEX lending to witness a stronger pickup by the end of 2019e as companies improve their utilization rates on consumption recovery. Corporate lending has been developing gradually though quite significantly since the revolution, but we are yet to see potential for retail lending at this point. With the push toward greater financial inclusion and new e-finance, mobile banking, and payment solutions, we believe retail lending growth will see a boost in the coming years. That said, higher loan activity, higher loan turnover, and more trade financing on foreign currency volumes expansion will have a significant impact on non-interest income growth, driving it toward becoming a more significant revenue stream for banks, in our view, which we see as a healthy operating environment.
Maintain Neutral for CIB and Overweight for both CAE and ADIB: We have revised upward our operating margins on improved 1Q18 numbers, better liability management and utilization of assets, and less elastic loan yields. We value the banks using an excess-return-based model and adopt a moving cost of equity. Accordingly, we raise our 12-month target price c27% for CIB to EGP100/share, and implies a potential return c17% over the 3 July closing price of EGP86.0/share. We therefore maintain our Neutral rating.
As for CAE, we raise our 12-month target price c6% to EGP58.5/share, and implies a potential return of c36% over the 3 July closing price of EGP43.04/share. We maintain our Overweight rating as valuation remains compelling.
Finally for ADIB, we raise our 12-month target price c17% to EGP26.9/share, , and implies a potential return of c50% over the 3 July closing price of EGP17.94/share. We therefore reiterate our Overweight rating. ADIB remains our top pick.
Chief Economist at HC, Sara Saada
About HC SI:
- HC Securities & Investment (HC) is among the most distinguished investment banks in the Middle East and North Africa, with fully operational offices in Egypt and the UAE
- Over more than 22 years, HC has established itself as a leader in the financial services industry, with a well-recognized brand name in the Middle East and North Africa financial and business communities. It offers its clients a wide range of services in Investment Banking, Asset Management, Securities Brokerage, Research, Custody and Online Trading
- HC has cemented numerous relationships with local and regional governmental entities, large regional corporations and conglomerates, and high net worth individuals, and has played a key role in the overall development of the region’s capital markets
- HC Investment Banking (DIFC) Limited (HCIB) is incorporated in the Dubai International Financial Centre (DIFC) and regulated by the Dubai Financial Supervisory Authority (DFSA) to carry out various financial and investment banking services
© Press Release 2018