the hopes and fears of the egyptian banking sector...the hopes and fears of the egyptian banking...

The Hopes and Fears of the Egyptian Banking Sector

January 15, 2017

Radwa El SwaifyHead of [email protected]

ANALYST CERTIFICATIONS AND REQUIRED DISCLOSURES ON LAST PAGE OF THIS REPORT

Overweight Banks| Despite challenges, the best proxy for Egypt’s macro transformation story

The Hopes| Improved USD liquidity, lending growth pick-up and higher non-interest incomeDespite some denials, floatation did improve the USD liquidity within the banking system, partially due to the narrower gap between the parallel and official rates and because of higher confidence in the banking system. With improved USD liquidity within the banking system, working capital financing (rather than capex financing) should show signs of revival in 2017, raising banks’ asset allocation for lending, which should “gradually” and “partially” substitute treasury instruments’ asset allocation. We realize that several factors will determine the fate of retail lending: lower disposable income; debt service ratio cap at 35% and affordability. We vote that affordability will outweigh others and that retail lending will continue to deliver healthy growth even before corporate lending picks up. The golden age for bank margins has been witnessed between 2011-2016, but we foresee a gradual drop in policy rates over 2H2017-2018, which would cause NIM to gradually level off, starting 2018, from the peak witnessed in 2016. Non-interest income will revive after years of silence, mostly through fees and commissions.

The Fears| Asset quality shock, tight capital adequacy and cash dividend cutsSome banks including public sector banks have reported net foreign liability positions pre-floatation and will incur losses on the short USD-positions. In addition, corporate banking clients with short USD-positions will incur losses that might affect credit quality. Thus, we estimate that the current levels of COR will continue to be booked, in order to maintain conservative provisions coverage. Because banks have foreign currency denominated assets, while most capital bases are in local currency, 4Q16 will witness a significant drop in Capital Adequacy Ratios (CAR). The Central Bank of Egypt had raised the capital charge for client concentration, putting further pressure on CARs. However, banks will revert to capital increases, or tier II funding along with profit retention in 2016 to gradually recover CARs. Due to tight capital positions, we expect a cut in cash dividends, but an attractive alternative will be offering stock dividends, provided that retained earnings or reserves support such a move.

Upgrade valuations; Maintain OverweightCommercial International Bank (FV: EGP86.83) is best positioned in the market to embrace the benefits of the macro story. We believe that the bank can sustain a 25% bottom line growth over the forecast horizon, driven by NIM resilience, and non-interest income surge, despite high provisioning. Management is targeting a minimum of 30% lending growth in 2017, along with low cost deposit accumulation in order to build the appropriate funding base for growth. We realize that COMI is currently trading at rich multiples, with P/E 2017e of 13.6x and P/B 2017e of 3.4x. However, with 25% growth in bottom line and ROAE north of 27%, versus regional peers with EPS growth below 10% and ROAE between 10-15%, the premium is justified in our view.

Credit Agricole Egypt (FV: EGP44.73) has witnessed a significant turnaround in positioning starting 2014. The bank’s growth and profitability have picked up to catch up with larger private sector banks. The bank provides solid exposure to the under-penetrated retail sector in Egypt, as well as the medium-sized corporations in Egypt. We realize that CIEB is trading at attractive multiples, with P/E 2017e of 8.5x and P/B 2017e of 2.6x. The attractiveness of these multiples is even higher when looking at the bottom line growth (18%) and ROAE (32%).

Housing and Development Bank (FV: EGP33.20) has demonstrated healthy momentum in balance sheet growth and solid margins. In addition, its real estate operations have proven to provide some support for non-interest income. HDBK is a high yield stock with estimated dividend yield for 2016 of 8%, on current price. The bank does not have any capital constraints due to the absence of foreign assets on its books and thus has high probability for maintaining high cash dividend distribution. HDBK is trading at attractive multiples, with P/E 2017e of 3.7x and P/B 2017e of 0.7x. The attractiveness of these multiples is even higher when looking at the bottom line growth (14%) and ROAE (21%). Definitely, the stock is over penalized by low liquidity.

.


Overweight Banks| Despite challenges, the best proxy for Egypt’s macro transformation story

Improved USD liquidity within the banking system post-floatation

Despite some denials, floatation did massively improve the USD liquidity within the banking system, since banks are fully responsible for the sourcing and allocation of the USD needed by their clients, after being given the proper tool, which is exchange rate adjustment to reach some balance between supply and demand. Bank management have noted that the supply within the banking system has significantly improved, partially due to the narrower gap between the parallel and official rates and because of higher confidence in the banking system.

Corporate lending to slowly and gradually substitute treasury investments in asset allocation; pushing utilization ratios higherWith improved USD liquidity within the banking system, working capital financing (rather than capex financing) should show signs of revival in 2017, raising the asset allocation for lending, which should “gradually” substitute treasury instruments’ asset allocation. While we realize that treasury investments to total assets will continue to be high, the estimated pickup in lending should edge the ratio down over the next five years. As a result, lending to deposit ratio within the system should gradually pick up from the current low levels, which depict significantly high liquidity within the banking system, with the majority of the funding parked in treasury and other short term investments or interbank deposits.

Retail lending to show momentum, despite lower disposable incomeWe realize that two opposing factors will determine the fate of retail lending: 1) lower disposable income due to high inflation along with the debt service ratio cap at 35% and 2) the fact that affordability has become an issue for a wide range of products and services after the re-rating of prices, to the extent that purchases on credit has become the definite way to go. We vote that the second factor will outweigh the first, especially for the upper-middle income groups. We believe that factor one will definitely be more valid for lower-middle and lower income groups. Consequently, we project that the growth in retail lending will continue to deliver healthy growth even before corporate lending picks up.

Gradual margin compression is foreseen but its signs to reflect on 2018 numbers The golden age for bank margins has been witnessed between 2011-2016, thanks to the deficit monetization that has been crowding out private sector lending and raising treasury investment allocation. In addition, margins were massively boosted by the 550bps rate hike over 2016, in an attempt to attract foreign portfolio investments in Egypt, increase the attractiveness of the EGP as a savings’ vehicle, and control spiking inflation. According to our estimates, we foresee a gradual drop in policy rates over 2H2017-2018, which would cause NIM to gradually level off, starting 2018, from the peak witnessed in 2016. Despite the gradual leveling off in spreads, the growth in lending should create resilience in net interest income.

Non-interest income to revive after years of silence Non-interest income, mostly through fees and commissions, is poised to witness strong pick-up with foreign currency intermediation and the gradual pick up in lending growth. We project non-interest income to gradually reach c.35% of operating income from a current c.20-25%.



NPLs should edge upwards; High COR is there to stay

Some banks including public sector banks have reported net foreign liability positions pre-floatation and will incur losses on the short USD-positions. In addition, corporate banking clients with short USD-positions, whether in terms of payables for suppliers of raw materials or open importation letters of credit/guarantee pre-floatation will incur losses that might affect their credit rating and consequently the corresponding outstanding debts with the banking system will be booked as non-performing loans. We project that NPLs will edge higher in 2017, being one of the ills of floatation the banking sector has to deal with. We estimate that the current levels of COR, at 2-3% will continue to be booked, in order to maintain adequate and conservative provisions coverage ratios.

CARs to take a hit in 2016; Expect tier II fund raising and capital increases by 1Q17

Because banks have foreign currency denominated assets, which will expand with floatation and consequently raise risk weighted assets, while most capital bases are in local currency, 4Q16 will witness a significant drop in Capital Adequacy Ratios (CAR).

In addition, the Central Bank of Egypt has raised the capital charge for client concentration (judging through the top 50 clients per bank) in March 2016, a requirement to be met by March 2017. With floatation, and the nominal increase in lending exposure to some clients whose debt is USD denominated, the capital charge will be higher, putting further pressure on CARs.

However, bank management have noted that capital increases, or tier II funding is being planned to get the CAR up to at least 11.5% by 2017 end (the minimum required by the central bank for 2017 end). In addition, with healthy profitability in 2017 and sustainable ROAEs above 20% for some of the key banks under coverage, CARs should gradually recover through internal resources fueling banks’ capital bases.

Expect a cut in cash dividends; but stock dividends might be an attractive alternative

Due to tight capital positions, we expect a cut in cash dividends, but an attractive alternative for banks’ boards will be offering stock dividends, provided that retained earnings or reserves support such a move.

With all the positives and despite the negatives, we believe that the banking sector in Egypt has been one of the best performing sectors over the last decade and despite highlighted challenges, it will be the proxy for the macroeconomic transformation story in Egypt. The sector should continue to deliver return on equity north of 20% over the coming five years.


RECOMMENDATION

Fair Value, EGP/Share

Last Price, EGP/Share

Valuation Gap, %

Shares Outstanding, m

Market Cap, EGP m

52W H-L, EGP/Share

52W ADTV, EGP m

Reuters/Bloomberg

4

On Top of Its Game

Commercial International Bank

January 15, 2017

Equalweight

The proxy for Egypt; The proxy for EGX

We continue to recommend an Equalweight on COMI, since it is best positioned in the market to embrace the benefits of the macro story. We believe that the bank can sustain a 25% bottom line growth over the forecast horizon, driven by NIM resilience, and non-interest income surge, despite high provisioning. Management is targeting a minimum of 30% lending growth in 2017, along with low cost deposit accumulation in order to build the appropriate funding base for growth.

Upgrade FV to EGP86.83; Maintain Equalweight recommendation

We upgrade our FV after accounting for the balance sheet expansion post-floatation. We account for higher lending growth (24% CAGR between 2016-2021), and higher deposit accumulation pace (22% CAGR), along with slower pace of margin compression and faster pickup in non-interest income. We estimate margins will level off from above 5% in 2016 to 4.5% in 2021, which demonstrates resilience despite lower interest rates, for two key reasons: 1) accumulation of low cost deposits and 2) higher retail lending contribution to overall lending. Non-interest income should pick up from 23% to 37% of operating income, mostly driven by fees and commissions than by investment income growth. We estimate that NPLs will edge higher in 2016 and 2017, which will result in sustained high COR at 1.7%-1.9% between 2016-2018. CAR will be hit to 13.5% in 2016, but should pick up gradually over the forecast horizon.

COMI is trading at rich multiples, but justified by financial projections

We realize that COMI is currently trading at rich multiples, with P/E 2017e of 13.6x and P/B 2017e of 3.4x. However, with 25% growth in bottom line and ROAE north of 27%, versus regional peers with EPS growth below 10% and ROAE between 10-15%, the premium is justified in our view.

86.83

77.00

12.5%

1,154

88,737

77.80-28.90

8.8

COMI.CA/COMI EY


Key Indicators 2015 2016 2017 2018 2019 2020

EPS, EGP 3.64 4.49 5.66 7.04 9.00 11.38

P/E, x 21.18 17.14 13.61 10.93 8.56 6.77

BVPS, EGP 14.33 17.82 22.48 28.52 36.52 46.90

P/B, x 5.37 4.32 3.43 2.70 2.11 1.64

DPS, EGP 0.75 1.00 1.00 1.00 1.00 1.00

Dividend Yield, % 1.0% 1.3% 1.3% 1.3% 1.3% 1.3%

Implied P/E, x 23.88 19.33 15.35 12.33 9.65 7.63

Implied P/B, x 6.06 4.87 3.86 3.04 2.38 1.85

Radwa El [email protected]

Dalia [email protected]

5


Figure 3| Interest income to level off; To be compensated for by non-interest income

Source: Pharos Research, Company Financial Statements

Figure 1| Balance sheet growth to pick up gradually starting 2017; 2016 hike is floatation caused


Figure 2| Lending growth to reflect on asset allocation


Figure 4| NPL ratio to rise in 2017-2018; High COR will be sustained


Figure 5 | ROE to be sustained above 25%


Figure 6| CAR to recover gradually from the 2016 shock


40%37% 38% 38% 39% 40% 41%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2015 2016 2017 2018 2019 2020 2021

Utilization Ratio Loan Growth Deposit Growth

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

-

50

100

150

200

250

300

350

400

2015 2016 2017 2018 2019 2020 2021

Gross Loans, EGP bn Treasury Investments, EGP bn

Treasury/Assets Gross Loans/Assets

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2015 2016 2017 2018 2019 2020 2021

Non-Interest Income/Operating Income NII/Operating Income (RHS)

140%

145%

150%

155%

160%

165%

170%

175%

180%

185%

190%

195%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2015 2016 2017 2018 2019 2020 2021

Provisions Coverage (RHS) NPL Ratio COR

21%

22%

23%

24%

25%

26%

27%

28%

29%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2015 2016 2017 2018 2019 2020 2021Interest Income Non-Interest Income Bottom Line Growth post appropriations (RHS) ROE (RHS)

0%

5%

10%

15%

20%

25%

-

50

100

150

200

250

300

2015 2016 2017 2018 2019 2020 2021

RWA, EGP bn CAR (RHS)

6


Income Statement (EGP Mil) 2015 2016 2017 2018 2019 2020

Net Interest Income 8,115 9,185 10,867 12,423 14,889 17,842

Non-Interest Income 2,677 2,704 3,957 5,876 7,867 10,149

Operating Income 10,792 11,889 14,824 18,300 22,756 27,991

Loan-Loss Provisions (1,682) (1,250) (1,686) (2,186) (2,572) (2,869)

Operating Expenses (2,627) (3,033) (3,549) (4,165) (4,899) (5,775)

Net Operating Profit 6,482 7,606 9,588 11,949 15,285 19,348

Net Profit after Taxes 4,730 5,824 7,335 9,134 11,671 14,760

Balance Sheet (EGP Mil) 2015 2016 2017 2018 2019 2020

Cash & Due from Central Bank 9,849 47,276 56,484 68,830 89,170 121,124

Dur from banks 21,002 44,105 43,664 45,847 52,724 71,177

Treasury Bills and Gov't Notes 22,130 18,380 29,287 38,991 50,547 61,544

Loans & Discounts, gross 62,524 84,574 102,807 127,312 158,495 200,085

Loans & Discounts, net 56,798 77,684 94,194 116,531 145,133 183,859

Total Assets 179,500 259,752 309,503 374,386 456,835 569,207

Due to Banks 1,601 2,017 2,219 2,441 2,685 2,953

Customer Deposits 155,234 229,217 273,222 330,732 403,521 503,453

Total Liabilities 162,918 239,140 283,516 341,425 414,640 515,030

Total Net Worth 16,583 20,612 25,986 32,962 42,195 54,177

Key Indicators 2015 2016 2017 2018 2019 2020

NIM 5.6% 5.1% 4.9% 4.7% 4.6% 4.5%

Non-interest income to operating income 24.8% 22.7% 26.7% 32.1% 34.6% 36.3%

OPEX-to-assets 1.6% 1.4% 1.2% 1.2% 1.2% 1.1%

Cost-to-Income 24.3% 25.5% 23.9% 22.8% 21.5% 20.6%

Cost of Risk 2.9% 1.7% 1.8% 1.9% 1.8% 1.6%

ROAE 26.7% 27.9% 28.0% 27.6% 27.6% 27.3%

ROAA 2.6% 2.4% 2.3% 2.4% 2.5% 2.6%

CAR 16.1% 13.5% 15.7% 17.7% 18.1% 19.1%

Treasury + Investments/Total Assets 46.5% 31.2% 33.9% 35.4% 34.7% 31.9%

Utilization (LDR) 40.3% 36.9% 37.6% 38.5% 39.3% 39.7%

NPL Ratio 4.0% 4.9% 5.2% 5.0% 4.8% 4.7%

Provisions Coverage 188.0% 165.4% 156.9% 170.9% 180.8% 181.2%

EPS, EGP 3.64 4.49 5.66 7.04 9.00 11.38

P/E, x 21.18 17.14 13.61 10.93 8.56 6.77

BVPS, EGP 14.33 17.82 22.48 28.52 36.52 46.90

P/B, x 5.37 4.32 3.43 2.70 2.11 1.64

DPS, EGP 0.75 0.75 1.00 1.00 1.00 1.00

Dividend Yield, % 1.0% 1.3% 1.3% 1.3% 1.3% 1.3%

Implied P/E, x 23.88 19.33 15.35 12.33 9.65 7.63

Implied P/B, x 6.06 4.87 3.86 3.04 2.38 1.85

RECOMMENDATION



Valuation Gap, %


Market Cap, EGP m

52W H-L, EGP/Share

52W ADTV, EGP m

Reuters/Bloomberg

7

Crème De La Crème

Credit Agricole Egypt

January 15, 2017

Overweight

Highly profitable; Diversifies exposure

We recommend Credit Agricole Egypt due to the significant turnaround in positioning starting 2014. The bank’s growth and profitability have picked up to catch up with larger private sector banks. The bank provides solid exposure to the under-penetrated retail sector in Egypt, as well as the medium-sized corporations in Egypt.

Upgrade FV to EGP44.73; Maintain Overweight recommendation

We upgrade our FV after accounting for the balance sheet expansion post-floatation. We account for higher lending growth (16% CAGR between 2018-2021), and higher deposit accumulation pace (16% CAGR), along with slower pace of margin compression and faster pickup in non-interest income. We estimate margins will level off from above 6.5% in 2016 to 6.0% in 2021, which demonstrates resilience despite lower interest rates, for two key reasons: 1) accumulation of low cost deposits and 2) higher retail lending contribution to overall lending. Non-interest income should pick up from 28% to 39% of operating income, mostly driven by fees and commissions than by investment income growth. We estimate that NPLs will edge higher in 2016 and 2017, which will result in sustained high COR between 2016-2018. CAR will be hit to 13% in 2016, but should pick up gradually over the forecast horizon.

CIEB is trading at attractive multiples versus COMI, but it never catches up

due to liquidity discount

We realize that CIEB is trading at attractive multiples, with P/E 2017e of 8.5x and P/B 2017e of 2.6x. The attractiveness of these multiples is even higher when looking at the bottom line growth (18%) and ROAE (32%).

CIEB usually trades in parallel to COMI, but maintaining a spread, because share price performance is penalized by its low liquidity.

44.73

39.00

15%

310.9

12,305

39.99-18.11

0.5

CIEB.CA/CIEB EY


Key Indicators 2015 2016 2017 2018 2019 2020

EPS, EGP 3.34 3.92 4.61 5.32 6.31 7.13

P/E, x 11.7 10.0 8.5 7.3 6.2 5.5

BVPS, EGP 11.20 13.67 15.05 16.65 18.54 20.68

P/B, x 3.5 2.9 2.6 2.3 2.1 1.9

DPS, EGP 2.29 1.45 3.23 3.72 4.42 4.99

Dividend Yield, % 5.9% 3.7% 8.3% 9.6% 11.3% 12.8%

Implied P/E, x 13.4 11.4 9.7 8.4 7.1 6.3

Implied P/B, x 6.0 5.0 4.8 4.0 3.3 3.0


Jaida [email protected]

8




Figure 7| Balance sheet growth to pick up gradually starting 2017; 2016 hike is floatation caused






Figure 11| ROE to be sustained above 30%




55%

44% 45% 46% 47% 48% 49%

0%

5%

10%

15%

20%

25%

30%

35%

0%

10%

20%

30%

40%

50%

60%

2015 2016 2017 2018 2019 2020 2021

Utilization Ratio Loan Growth (RHS) Deposit Growth (RHS)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2015 2016 2017 2018 2019 2020


Treasury/Assets (RHS) Loans/Assets (RHS)

55.0%

57.0%

59.0%

61.0%

63.0%

65.0%

67.0%

69.0%

71.0%

73.0%

25.0%

27.0%

29.0%

31.0%

33.0%

35.0%

37.0%

39.0%

41.0%

43.0%

2015 2016 2017 2018 2019 2020 2021

Non-Interest Income/Op Income NII/Op Income (RHS)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

155%

160%

165%

170%

175%

180%

185%

190%

195%

200%

205%

2015 2016 2017 2018 2019 2020 2021

Provisions Coverage NPL Ratio (RHS) Cost of Risk (RHS)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2015 2016 2017 2018 2019 2020 2021


0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

2015 2016 2017 2018 2019 2020 2021

Interest Income Non-Interest Income

Bottom Line Growth (RHS) ROE (RHS)

9



Net Interest Income 1,606 2,016 2,114 2,305 2,647 2,871

Non-Interest Income 670 801 1,074 1,328 1,595 1,864

Operating Income 2,275 2,818 3,188 3,634 4,242 4,736

Loan-Loss Provisions (118) (229) (185) (222) (262) (305)

Operating Expenses (797) (986) (1,116) (1,235) (1,400) (1,515)

Net Operating Profit 1,360 1,602 1,887 2,176 2,580 2,916

Net Profit after Taxes 1,037 1,218 1,434 1,654 1,961 2,216



Dur from banks 6,222 6,533 6,859 7,202 7,563 7,941




Total Assets 31,930 41,146 48,273 55,317 63,823 71,781

Due to Banks 121 145 174 209 250 301



Total Net Worth 3,482 4,249 4,680 5,176 5,764 6,429

Key Indicators 2015 2016 2017 2018 2019 2020

NIM , % 5.4% 6.5% 6.1% 6.0% 6.2% 6.0%

Non-interest income to operating income 29% 28% 34% 37% 38% 39%

OPEX-to-assets 2.5% 2.7% 2.5% 2.4% 2.3% 2.2%

Cost-to-Income 35% 35% 35% 34% 33% 32%

Cost of Risk 0.8% 1.5% 1.1% 1.1% 1.1% 1.1%

ROAE 32% 31% 32% 34% 36% 36%

ROAA 3.3% 3.3% 3.2% 3.2% 3.3% 3.3%

CAR 14% 13% 12% 12% 12% 13%

Treasury + Investments/Total Assets 27% 31% 28% 26% 24% 24%

Utilization (LDR) 55% 44% 45% 46% 47% 48%

NPL Ratio 3% 4% 4% 4% 4% 4%

Provisions Coverage 191% 187% 171% 180% 184% 193%

EPS, EGP 3.34 3.92 4.61 5.32 6.31 7.13

P/E, x 11.7 10.0 8.5 7.3 6.2 5.5

BVPS, EGP 11.20 13.67 15.05 16.65 18.54 20.68

P/B, x 3.5 2.9 2.6 2.3 2.1 1.9

DPS, EGP 2.29 1.45 3.23 3.72 4.42 4.99

Dividend Yield, % 5.9% 3.7% 8.3% 9.6% 11.3% 12.8%

Implied P/E, x 13.4 11.4 9.7 8.4 7.1 6.3

Implied P/B, x 4.0 3.3 3.0 2.7 2.4 2.2

RECOMMENDATION



Valuation Gap, %


Market Cap, EGP m

52W H-L, EGP/Share

52W ADTV, EGP m

Reuters/Bloomberg

10

Building for the Future

Housing and Development Bank

January 15, 2017

Overweight

Healthy mix between banking and real estate operations

HDBK has demonstrated healthy momentum in balance sheet growth and solid margins. In addition, its real estate operations have proven to provide some support for non-interest income. HDBK is a high yield stock with estimated dividend yield for 2016 of 8%, on current price. The bank does not have any capital constraints due to the absence of foreign assets on its books and thus has high probability for maintaining high cash dividend distribution.

Upgrade FV to EGP33.20; Maintain Overweight recommendation

We upgrade our FV after accounting for healthy balance sheet growth. We project lending growth (14% CAGR between 2018-2021), and higher deposit accumulation pace (13% CAGR), along with slower pace of margin compression and faster pickup in non-interest income. We estimate margins will level off from above 6.8% in 2016 to 5.4% in 2021, which demonstrates resilience despite lower interest rates, for two key reasons: 1) accumulation of low cost deposits and 2) higher retail lending contribution to overall lending. Non-interest income is assumed to remain stable as a percentage of operating income. We estimate that NPLs will edge higher in 2016 and 2017, which will result in sustained high COR between 2016-2018. CAR will be resilient in 2016, due to the absence of foreign currency assets on the bank’s balance sheet.

Trading below book, despite high growth potential

HDBK is definitely trading at attractive multiples, with P/E 2017e of 3.7x and P/B 2017e of 0.7x. The attractiveness of these multiples is even higher when looking at the bottom line growth (14%) and ROAE (21%). Definitely, the stock is over penalized by low liquidity.

33.20

27.00

23%

126.5

3,370

27.00-15.01

0.09

HDBK.CA/HDBK EY


Key Indicators 2015 2016 2017 2018 2019 2020

EPS, EGP 4.49 6.55 6.71 7.26 8.09 7.76

P/E, x 5.6 3.8 3.7 3.5 3.1 3.2

BVPS, EGP 24.88 29.40 33.82 38.38 43.22 47.63

P/B, x 1.0 0.9 0.7 0.7 0.6 0.5

DPS, EGP 1.50 2.04 2.29 2.70 3.25 3.35

Dividend Yield, % 6% 8% 9% 11% 13% 13%

Implied P/E, x 7.4 5.1 4.9 4.6 4.1 4.3

Implied P/B, x 1.3 1.1 1.0 0.9 0.8 0.7


Dalia [email protected]

11




Figure 13| Balance sheet growth to average 15%






Figure 17| ROE to be sustained above 20%




55.0%

57.0%

59.0%

61.0%

63.0%

65.0%

67.0%

30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

46.0%

48.0%

50.0%

2015 2016 2017 2018 2019 2020 2021

Non-Interest Income/Operating Income NII/Operating Income (RHS)

0%

50%

100%

150%

200%

250%

300%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2015 2016 2017 2018 2019 2020 2021

Provisions Coverage (RHS) NPL Ratio COR

71%

83%82%

80%82%

80%79%

0%

5%

10%

15%

20%

25%

30%

35%

64%

66%

68%

70%

72%

74%

76%

78%

80%

82%

84%

86%

2015 2016 2017 2018 2019 2020 2021

Utilization Ratio Loan Growth (RHS) Deposit Growth (RHS)

0%

5%

10%

15%

20%

25%

30%

35%

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

2015 2016 2017 2018 2019 2020 2021


Treasury/Assets Gross Loans/Assets

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2015 2016 2017 2018 2019 2020 2021

Interest Income Non-Interest Income

Bottom Line Growth post appropriations ROE (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-

5

10

15

20

25

30

35

40

2015 2016 2017 2018 2019 2020 2021


12



Net Interest Income 1,054.3 1,673.6 1,899.3 2,105.1 2,252.8 2,372.2

Non-Interest Income 818.8 907.0 1,086.9 1,242.0 1,423.5 1,386.6

Operating Income 1,873.1 2,580.6 2,986.2 3,347.1 3,676.2 3,758.8

Loan-Loss Provisions (128.3) (472.9) (577.3) (671.3) (709.0) (728.8)

Operating Expenses (708.2) (869.8) (1,001.3) (1,152.7) (1,270.9) (1,401.4)

Net Operating Profit 792.9 1,237.8 1,407.6 1,523.0 1,696.4 1,628.6

Net Profit after Taxes 575.0 829.3 943.1 1,020.4 1,136.6 1,091.2



Dur from banks 6,639 6,904 7,388 7,905 8,458 9,050




Total Assets 27,287 37,004 42,200 48,337 54,719 62,366

Due to Banks 117 503 653 784 941 1,129



Total Net Worth 3,148 3,719 4,278 4,855 5,467 6,026

Key Indicators 2015 2016 2017 2018 2019 2020

NIM , % 5.6% 6.8% 6.2% 6.2% 5.9% 5.6%

Non-interest income to operating income 43.7% 35.1% 36.4% 37.1% 38.7% 36.9%

OPEX-to-assets 2.8% 2.7% 2.5% 2.5% 2.5% 2.4%

Cost-to-Income 37.8% 33.7% 33.5% 34.4% 34.6% 37.3%

Cost of Risk 1.7% 5.0% 5.0% 5.0% 4.5% 4.0%

ROAE 18.9% 24.2% 21.2% 20.1% 19.8% 17.1%

ROAA 2.3% 2.6% 2.1% 2.0% 2.0% 1.7%

CAR 17% 14% 13% 13% 12% 12%

Treasury + Investments/Total Assets 25% 36% 35% 36% 35% 33%

Utilization (LDR) 71% 83% 82% 80% 82% 80%

NPL Ratio 7.5% 7.1% 7.9% 7.7% 7.6% 7.7%

Provisions Coverage 105% 148% 173% 212% 238% 255%

EPS, EGP 4.49 6.55 6.71 7.26 8.09 7.76

P/E, x 5.6 3.8 3.7 3.5 3.1 3.2

BVPS, EGP 24.88 29.40 33.82 38.38 43.22 47.63

P/B, x 1.0 0.9 0.7 0.7 0.6 0.5

DPS, EGP 1.50 2.04 2.29 2.70 3.25 3.35

Dividend Yield, % 6% 8% 9% 11% 13% 13%

Implied P/E, x 7.4 5.1 4.9 4.6 4.1 4.3

Implied P/B, x 1.3 1.1 1.0 0.9 0.8 0.7

Sales and TradingEssam Abdel HafiezManaging Director

+202 [email protected]

Ahmed RaafatLocal Institutional Sales


Seif AttiaHigh Net Worth+202 27393682

[email protected]

Ahmed AbutalebForeign Sales


Sherif SheblForeign Sales


Omar NafieForeign Sales


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