A recent report issued by HC Securities & Investment projected Net Interest Margin Securities (NIMs) to normalise starting 2020. Chief economist at HC, Sara Saada, said that despite the recent rate cuts marking the start of an easing cycle, she expects it to take almost two years to return to pre-flotation interest rate levels. She explained that HC's expectations on the monetary and fiscal plans shape their view on deposit, loan, and security growth at banks, as well as NIMs and overall profitability. She added that they expect average NIMs for the sector coverage to peak in 2018 at 6.7% and start to normalise in 2020 back to 2016 levels, reaching an average of 5.4% by 2023. The Central Bank of Egypt (CBE) cut interest rates by a total of 200 basis points (bps), during both the February and March Monetary Policy Committee (MPC) meetings and kept rates unchanged at the May and June meetings, following a previous hiking cycle (with a total of 700 bps hike since the flotation) that accompanied the government's economic reform programme, adopting tight fiscal and monetary policy after the pound's flotation in November 2016. Saada said that deposit growth remains healthy with a lower cost of funding. "We expect deposits to continue growing despite decreasing interest rates on organic growth, as well as the addition of new payroll accounts. Demand deposits in local currency for the private and public sector grew by an annualised 67% (34% year-over-year) in March after the rate cuts." She explained that this is a healthy sign that working capital is accumulating as corporate bank accounts reflect higher liquidity over a short period of time. This, in addition to bank efforts to attract payroll accounts, should result in healthy, low-cost deposit growth, according to HC. "That said, the Commercial International Bank (CIB) and Crédit Agricole Egypt's (CAE) 2017 total deposits came in lower than our previous estimates. Due to re-basing our estimates for deposits, we lower our expectations for balance sheet expansion. The CIB's total deposits grew by about 8% y-o-y in 2017, compared to our previous estimate of 13%," the report stated. Saada added that they expect deposits to grow at a compound annual growth rate (CAGR) of 13% in the period between 2018 and 2023, fuelled by local currency deposits and working capital growth. As for the CAE, deposits dropped by 5% y-o-y in 2017, compared to the HC's previous estimate of 10% growth. "We expect deposits to grow at a 2018–2023 CAGR of about 10%." The report stated that Abu Dhabi Islamic Bank- Egypt (ADIB), on the other hand, showed healthy deposit growth, exceeding HC's previous estimate for 2017, with deposits growing 17%, which is about 5% higher than HC's previous estimate on its high effective interest on deposits of 7.51% in 2017. "We expect the ADIB's deposits to grow at a 2018-2023 CAGR of 14%, with 2018 growing at an exceptional 25%, reflecting the first quarter of 2018 rise in US dollar-denominated deposits. Moreover, we expect the decline in interest rates in the coming rounds to have phased out some high-yielding certificates of deposit (CDs), replacing them instead with lower-yielding variable deposit CDs or short-term fixed instruments. We estimate average effective interest on deposits for our coverage universe to drop to 5.4% in 2019 from 6.0% in 2017 and 6.4% in 2018," Saada said. In addition, the report quoted Saada as saying that pickup in private lending is to contribute to higher non-interest income over the forecast horizon. "We believe the volatility in foreign participation in treasury bills (T-bills) does not significantly affect our coverage universe, but rather that of 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. Lending in 2018 has grown an annualised 22% (20% y-o-y), driven by the household and private sector." She added that loans, in their view, will play a bigger part of bank efforts to expand their balance sheets in the coming years. In addition to working capital growth, HC expects capital expenditures (CAPEX) lending to witness a stronger pickup by the end of 2019, as companies improve their utilisation rates on consumption recovery. It noted that corporate lending has been developing gradually, though quite significantly, since the revolution. "But we are yet to see the potential for retail lending at this point. 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." Moreover, the report noted that 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, which HC sees as a "healthy operating environment." Finally, the HC report maintained a neutral outlook for the CIB and overweight for both the CAE and ADIB. "We have revised upward our operating margins on improved 1Q 2018 numbers, better liability management and utilisation of assets, and less elastic loan yields. We value the banks using an excess-return-based model and adopt a moving cost of equity. Accordingly, we raise our 12-month target price of 27% for the CIB to EGP 100 per share and implies a potential return of 17% over the 3 July closing price of EGP 86 per share. We, therefore, maintain our neutral rating," the report stated. As for the CAE, HC raised the 12-month target price by 6% to EGP 58.5 per share and implies a potential return of about 36% over the 3 July closing price of EGP 43.04 per share. "We maintain our overweight rating as valuation remains compelling," it concluded. "Finally, for the ADIB, we raise our 12-month target price by 17% to EGP 26.9 per share and implies a potential return of some 50% over the 3 July closing price of EGP 17.94 per share. We, therefore, reiterate our overweight rating," the HC pointed out that the ADIB remains their top pick.
