Beltone Financial has maintained a positive outlook for banks in Egypt due to the improvement in the performance of economic activities, which is seen in a strong growth in the financial position of the banking sector and supports the outlook for profitability and asset quality.
In a research note issued last week, Beltone said that it highly evaluated the shares of Commercial International Bank (CIB) and Credit Agricole due to ample capital levels, as the capital adequacy ratio is estimated at 32% and 22%, respectively. CIB and Credit Agricole also boast strong profitability models and an expected future rate of return on equity at 22% and 24%, respectively, benefiting from the expected growth of lending activities (CAGR between 2020-2025 at 14%) with a strong expansion of the financial position expected (CAGR of 13% between 2020-2025).
Beltone raised the fair value of the CIB share by 13% to EGP 63 per share, with the recommendation to buy. The same is true for buying Credit Agricole’s shares. The two shares are traded with earnings multiples for 2021 at 1.5x and 1.1x, respectively, below the averages at 3x and 2.3x and compared to regional peers of the stocks covered at 1.6x.
It indicated that it prefers the Housing and Development Bank (HDB) and Al-Baraka Bank among the small banks due to their relatively stable profitability and the limited pressures on the capital structure, which provides a potential rise of about 42% and 67%, respectively. It pointed out that it is still cautious towards Abu Dhabi Islamic Bank and the Export Development Bank of Egypt (EBE) due to the limited capital base relative to their high risk-weighted assets, which affects the growth outlook for them, although the assessment of Abu Dhabi Islamic is still attractive.
At the same time, Beltone maintained its buy recommendation for QNB Alahli thanks to its continued strong performance.
According to Beltone, the strong rise in the M2 money supply by 12% since the beginning of the year, resulting from a strong improvement in economic activities, pushed the financial position of the banking sector to grow by 18%, and the business activities of companies and individuals boosted total deposits by about 15% in the first 8 months of 2021.
“We maintain our positive outlook of the expected expansion of the financial position of the shares of the banks we cover (with an average compound annual growth rate of 13% for the banks we cover between 2020-2025), especially that banks that have large corporate business volumes (QNB Alahli, CIB, Credit Agricole, Banque du Caire, and HDB) will be eligible to benefit from the expected strong change in corporate business, in addition to gradually regaining its lost market share from individual deposits,” the report said.
Beltone noted that in terms of loans, lending activities are expected to regain their attractiveness, which leads to expecting a compound annual growth of about 14.5% between 2020-2025 with the recovery of corporate activities, as well as the improvement in private consumption patterns.
Beltone believes that banks with a limited capital base, such as Abu Dhabi Islamic Bank and EBE, will be able to maintain retail lending growth as a result of their relatively little impact due to the high risk-weighted assets (RWAs represent 65% and 71% on average), compared to the average of its peers which is estimated at 55%.
Despite the pressure on tax margins, total investments in treasury bonds increased by 25% in the first nine months of 2021, which increases the tax burdens for the banks.
Beltone expects a gradual decline, but at a quiet pace, in the ratio of the contribution of income from investments in bonds denominated in the Egyptian pound to the total income from banking business, as a result of the pressures faced by market variables. This pushes banks to increase lending.
It also expected that the income growth from the basic banking business will be supported mainly by the growth in net income from the return, with a compound annual growth rate of 13% for the shares of the banks covered between 2020 and 2025. In addition, there will be an improvement in income from commissions, with a compound annual growth rate of 14% for the shares of the banks covered between 2020 and 2025.
At the same time, Beltone expects the return on average equity to decline by an average of 1.1% in 2021 due to the increase in the tax margin and the activation of financial leverage.
The company maintained its positive outlook for CIB and Credit Agricole, with healthy levels of return on average equity above 20%, supported by the remarkable improvement in the core banking income index, which is 19 basis points and 8 basis points, respectively, to settle at 6.1% and 6.3%, respectively, in addition to a decline in the cost of risks, supported by the expected recovery of macroeconomic activities.
It also expects Abu Dhabi Islamic Bank, QNB Alahli, and HDB to show gradual improvement following the expected improvement in income from core banking business with containment of tax burdens.
“At the same time, we remain cautious about the profitability before interest, taxes, depreciation and amortization of the EBE and EG Bank due to the decrease in the level of income from basic banking business along with tax burdens, especially with the increase in investments in sovereign debt instruments (tax margin increased by about 14 and 16%, respectively).
Beltone added that with the maturity of long-term bonds, it expects the tax margin effect to be high. This, however, is expected to be partially compensated by the low contribution of income to sovereign debts in Egyptian pounds.
Beltone expects the credit provisions created in 2020 to continue to mitigate the impact of the cost of risk on profitability through 2022, and sees the expected healthy recovery of economic activities along with the low interest burden as key drivers.
It also expects that there will be no shortcomings or delays, whether in certain sectors or in the customer sectors following the communication with banks’ departments, which is a major catalyst for the expected improvement in the quality of assets in the sector.
“Our outlook remains positive on the containment of non-performing loan levels of CIB and Credit Agricole (stabilizing at 5.4% and 3.4%, respectively) with ample provision coverage at 205% and 139%, respectively, but at the same time, we are following the high level of non-performing loans for HDB by 10% (the highest level among the stocks we cover) with a lower than average coverage rate of 85%,” Beltone added.
It indicated that it is also following the levels of the capital structure of Abu Dhabi Islamic Bank and EBE, which stabilized at 13.4% and 13.7% only until the first half of 2021, compared to the minimum required capital at 12.5%. The pressures of the growth of the financial position of the banks are expected to be reflected in the growth of the market too.
