HC expects interest rate to return to earlier levels in 2020, rates 3 banks

CAIRO – 18 July 2018: HC Securities and Investment expected interest rates to take almost two years to return to pre-flotation levels.

Egypt floated its currency in November 2016, losing 50 percent of its value as a part of an economic reform program.

The research company anticipated in a report that the net interest margin (NiMs) for the company’s coverage of the banking sector will reach its peak in 2018 at 6.7 percent and will start to normalize gradually in 2020, returning to 2016 levels to reach an average of 5.4 percent by 2023.

CBE cut the interest rates twice earlier this year in February and March by 200 basis points, and kept the rates unchanged during May and June meetings at 16.75 percent and 17.75 percent for the overnight deposit rate and the overnight lending rate, respectively.

Regarding the deposit growth, the report expected it to continue its progress in spite of decreasing interest rates on organic growth and expected the addition of new payroll accounts.

“Demand deposits in local currency for the private and public sectors grew by an annualized 67 percent (34 percent y-o-y) in March after the rate cuts,” the report stated.

The report commented on the percentage of the demand deposits by saying: "This is a healthy sign that working capital is accumulating as corporate bank accounts reflect higher liquidity over a short period of time; in addition bank efforts will attract payroll accounts, resulting in a healthy, low cost deposit growth, in our view.”

HC noted that total deposits in the Commercial International Bank (CIB) and Crédit Agricole Egypt’s (CAE) came lower than expectations; as CIB’s total deposits increased 8 percent y-o-y in 2017, compared to a previous estimate of 13 percent, expecting deposits to grow 13 percent in the period between 2018–2023, fueled by local currency deposits and working capital growth.

As for CAE, the report noted that its deposits declined 5 percent y-o-y in 2017, compared to the previous estimate of 10 percent growth, anticipating deposits to grow 10 percent during 2018–2023.

The report said that Abu Dhabi Islamic Bank- Egypt (ADIB) achieved healthy deposit growth, exceeding the research department previous estimate for 2017 with a growth of 17 percent, forecasting the deposits to grow 14 percent in the 2018-2023 period.

“We expect the decline in interest rates in the coming rounds to phase out some high-yielding certificates of deposit (CDs), replacing them with lower-yielding variable deposit CDs or short-term fixed instruments,” the report stated.

It also estimated average effective interest on deposits for the coverage universe to drop to 5.4 percent in 2019 from 6 percent in 2017 and 6.4 percent in 2018.

Chief economist at HC, Sara Saada, believed that the volatility in foreign participation in T-bills will affect the public banks’ share of treasury securities.

“We still see banks are more inclined to explore high-yielding loan opportunities after the CBE stopped issuing long-term variable deposit auctions last February and started issuing corridor-linked deposit auctions in their place at an almost zero spread,” she added.

HC also expected loans to play a bigger part in bank efforts to expand their balance sheets in the coming years.

“In addition to working capital growth, we expect CAPEX lending to witness a stronger pickup by the end of 2019 as companies improve their utilization rates on consumption recovery,” the report showed.

“With the push toward greater financial inclusion and new e-finance, mobile banking, and payment solutions, we believe retail lending growth will see a boost in the coming years. That said, higher loan activity, higher loan turnover, and more trade financing on foreign currency volumes expansion will have a significant impact on non-interest income growth, driving it toward becoming a more significant revenue stream for banks, in our view, which we see as a healthy operating environment,” it stated.

Rating of CIB, CAE ad ADIB

HC Securities and investment raised the target price for CIB 27 percent to LE 100 per share and implied a potential return of 17 percent over the July 3 closing price of LE 86 per share, maintaining natural rating.

As for CAE, the target price was raised 6 percent to LE 58.5 per share with a potential return of 36 percent over the July 3 closing price of LE 43.04 per share, maintaining the overweight rating as the valuation remains compelling.

Finally for ADIB, HC raised the target price 17 percent to LE 26.9 per share with a potential return of 50 percent over the July 3 closing price of LE 17.94 per share, reiterating overweight rating.