Equity Analysis /
Egypt

Egypt banks: On the ground update

  • We have spoken to local banks to get a sense of how Covid-19 has affected their operations

  • In early 2020, the outlook for Egypt banks looked strong, but capex lending has come to a complete stop

  • All banks will be taking extra provisions in anticipation of lower asset quality

Al Ahly Pharos Securities Brokerage
2 April 2020

We made a round of calls with the banks under coverage to get some color on their operations amid rising concerns of the current lockdown. Here are the main takeaways.

·  At the beginning of the year, banks had a strong growth outlook for the year with many soft approvals for CAPEX lending, up until the escalation of covid-19 in March. CAPEX lending has come to a complete stop, even with the surprise cut in rates by 300bps on March 16th. Working capital financing also weakened due to the interruption of some business cycles which depend on imported raw materials.

·  On the funding side, some banks resorted to raise interest on deposits as a pre-emptive move to prevent deposit flight out of their system and into local banks’ 15% one-year CD. However other banks haven’t resorted to raise rates on deposits since demand for lending is very weak and they do not highly invest in sovereign instruments.

·  Excess funding should now flow into treasury investments, or interbank deposits. The visibility on the current situation remains to be fluid, and if the situation persisted through 2H20, corporates will postpone capital expenditures to next year, where demand for loans will be weak and mainly driven by working capital financing.

·  All banks will be taking extra provisions in anticipation of a lower asset quality resulting from the weak economic conditions and the interruption to business operations which affects both corporate and retail segments. CoR is expected to rise over the next period and non performing loans may rise if the situations persists, despite the CBE’s introduced debt relief programs, like postponing all credit installments for 6 months for all segments across all products, and donations at an average of 1-2% of banks’ 2019 net profits into the Emergency Fund to support affected individuals.

·  Capital adequacy ratios may come under pressure, if the situation persisted for too long, especially for small and midcap banks, on increased risk and low profit generation.

·  Margins are expected to come in mixed affected by two opposing forces. Margins will either remain strong supported by agile balance sheet management of having a large base of CASA deposits, coupled with high investments in long term government bonds (3-5 years maturity), where banks will be able to roll over liabilities at lower rates while locking up high yield from long term investments. On the weaker side, margins will come under pressure if the yields on government T-bills fall since banks will start to load on treasury bills amid weak lending volumes.

·  However, the CBE’s position and regulatory grip is still strong and will continue to support the entire financial sector to mitigate the negative impact of the current situation.

In the full report, we present a bank scoring and interbank comparison to identify banks well equipped to weather the storm. We also present some historical multiples and charts to determine if stocks are cheap or challenged.