Equity Analysis /
Egypt

Egypt Banking Sector 2020: Lending recovers; new tax law hits some; capital hike

    Al Ahly Pharos Securities Brokerage
    13 December 2019

    Please find our in-depth banking sector outlook for 2020, in which we present the hopes, fears and top picks for the sector, as well as fundamental reviews of:

    1. Commercial International Bank (COMI)
    2. Qatar National Bank (QNBA)
    3. Credit Agricole Egypt (CIEB)
    4. Faisal Islamic Bank (FAIT)
    5. Housing and Development Bank (HDBK)
    6. Egyptian Gulf Bank (EGBE)
    7. Al Baraka Bank Egypt (SAUD)
    8. Export Development Bank (EXPA)
    9. Abu Dhabi Islamic Bank (ADIB)
    10. Suez Canal Bank (CANA)

    Top Picks:

    • COMI (FV: EGP95.00) continues to be the perfect proxy for the macro transformation story in Egypt and a solid banking sector. The bank is well capitalized and delivers ROAE in 2020 of 22% on strong sustainable NIM of 6.5% in 2020. The bank’s plans to expand outside the borders of Egypt through acquiring a bank in Kenya along with opening a rep office in Ethiopia could be a potential value driver for the stock. We include it in our top picks, following the recent severe share price drop. 
    • CIEB’s (FV: EGP57.50) favorable funding structure makes it amongst the most aggressive players for profitability. CIEB is among our top dividend plays with an expected dividend yield of 9.2% and a ROAE of 29% in 2020. CIEB is trading at 6.3x P/E 2020 and 1.7x P/B 2020.
    • ADIB (FV: EGP12.75*) post the conclusion of the awaited rights issue has huge potential for profitability with ROE of 32% in 2019. However, the potential rights issue that is to settle the amounts paid under capital increase from ADIB UAE has been acting as a key overhang on share price performance. We expect the stock to rally post finalizing the capital increase that is planned to take place in 2020.

    Stocks Awaiting Catalysts:

    • EXPA’s (FV: EGP12.50) focus on exporters as a key client base makes it a beneficiary of improvements in Egypt’s trade balance and revival in exports. In addition to its expansion in retail lending, the undergoing revamp/turnaround of its Export Credit Guarantee Company (70% owned) should provide some support for profitability going forward.
    • HDBK’s (FV: EGP60.40) real estate segment keeps delivering high earnings growth that sometimes compensates for any relative weakness in commercial banking operations. The potential demerger of the stock into banking and real estate could unlock its upside potential. Also, the bank awaits two rounds of bonus shares (1:10 and 1:5), which could also support share price performance. It enjoys favorable funding structure which supported strong NIM (7.8% in 2019e) and ROE of 22% in 2020, with healthy dividend yield of 6.1% in 2020.
    • QNBA’s (FV: EGP60.00) free float increase can unlock upside potential. The bank’s latest free float recorded 5%. The bank’s financial soundness and size of operations makes it a direct competitor to COMI. Unlike COMI, QNBA trades at very cheap multiples penalized by very low free float and daily traded volumes.

    Egypt Banking Sector Valuation and Multiples

    TickerTrading currencyClosing pricePharos fair valuePharos upside (%)Pharos ratingMarket cap (US$mn)PE ratio 2020PB ratio 2020Dividend yield 2020 (%)ROE 2020 (%)EPS growth 2020 (%)

    COMI

    EGP

    77.93

    95.00

    21.9

    Equalweight

    7,093.60

    9.8

    1.9

    1.5

    21.6

    15.4

    QNBA 

    EGP

    45.00

    60.00

    33.3

    Overweight

    2,731.00

    4.9

    1

    2.7

    22.7

    13.1

    CIEB 

    EGP

    42.1

    57.5

    36.6

    Overweight

    811

    6.1

    1.7

    9.4

    29

    3.7

    FAIT 

    EGP

    12.18

    13.50

    10.8

    Equalweight

    401.9

    2.5

    0.3

    8.1

    14

    -2.1

    HDBK 

    EGP

    40.98

    60.40

    47.4

    Overweight

    321.2

    2.7

    0.5

    6.1

    21.8

    0.6

    EGBE 

    USD

    0.53

    0.51

    -2.9

    Underweight

    191.8

    5.4

    0.7

    0

    13.2

    9.3

    ADIB 

    EGP

    7.13*

    12.75*

    78.9

    Equalweight

    215.9*

    2.7

    0.6

    0

    25

    13.7

    SAUD 

    EGP

    9.80

    14.00

    42.9

    Overweight

    134.1

    2.4

    0.4

    8.1

    19.7

    3.7

    EXPA 

    EGP

    7.74

    12.50

    61.5

    Overweight

    130.8

    2.1

    0.3

    7.7

    17.2

    5.5

    CANA 

    EGP

    6.93

    6.00

    -13.4

    Equalweight

    85.9

    3.1

    0.4

    0

    14

    4.3