Egypt: Commercial International Bank Egypt – Sustained earnings growth, BUY


renaiWe upgrade Commercial International Bank Egypt (CIB) to BUY (from Hold) with a new TP of EGP95.7 (from EGP83.2) on what we view as a strong EPS growth outlook. In our view, CIB is well positioned to deliver 20-25% earnings growth even as margins trend lower over the medium term, due to its strong provisioning cover, which should decrease to normalised levels and allow it to post among the highest RoAE in our financials coverage universe in 2018E, at c. 31%. CIB enjoys low funding costs and high operational efficiency, suggesting it can focus on growth as the macro recovery picks up.

Well positioned to deliver EPS CAGR of 20%

We expect the company to maintain a 21% net income CAGR over 2016-2021E supported by a lower cost of risk as the economy recovers and CIB releases some of the excess provisions it has been taking since 2014. We expect asset quality to remain challenging this year (FY17E NPL ratio: 7.0%) but improve over the coming years, with the NPL ratio reaching 5.0% by 2020E.

NIMs to trend lower but focus on CASA bodes well

A decline in interest rates coupled with the higher weight of FX loans would lead to a gradual drop in NIMs over the medium term, in our view. The mix should also move towards loans rather than high-yielding government debt, further dampening interest margins. We expect NIM to reduce to 4.5% in FY20E, vs 5.0% in FY17E. While competition for deposits is currently benign, it is important to keep a close eye on pricing, as we witnessed aggressive pricing in a bid to garner deposits at the end of last year and this could negatively affect NIMs. However, we believe CIB’s emphasis on enhancing its current and savings account (CASA) base augurs well for its margin forecasts over the medium term.

Loan growth acceleration a key catalyst

We believe the market is likely to focus on management guidance for: 1) loan growth, with management guiding for c. 16% in FY17, with potential to exceed this if corporate capex picks up – likely in 2H18, in our view (QNB Al Ahli [not covered] reported 2Q17 loan growth of 7% QoQ, vs 2% in 1Q17, supported by corporate lending, which grew by 8% QoQ); and 2) net interest margins – system liquidity currently remains strong, with deposits growing by 9% in 1Q17 vs 4Q16, with limited aggressive pricing behaviour.

Valuation not fully reflecting quality and growth – upgrade to BUY

Current valuations (2018E P/E of 11.2x and P/B of 3.1x, on our estimates) already reflect some of the strength of the CIB story, but the strong EPS growth outlook we expect warrants further upside, in our view. We upgrade CIB to BUY (from Hold) with a new TP of EGP95.7 (previously EGP83.2) on the back of our higher EPS estimates and a terminal growth rate of 14.5% (vs 13.5% earlier). Lower-than-expected loan growth and weaker margins are the key downside risks, in our view.