Beltone Financial Investment Bank said in its 2020 yearbook that, despite the weak growth in banks' financial position during 8M19, they remain positive on financial position expansion on the back of their expected growth in M2 money supply, though growth will remain lower than the last five years' CAGR of 23% mainly due to expected lower inflation shocks. Moreover, Beltone analysts are expecting Local Currency (LC) retail deposits to remain the main driver of M2 money supply growth, backed by an expected increase in disposable income with slight contribution from an improvement in financial inclusion. With a deeper look at deposit, composition shows a gradual reshuffle in banks' deposit mix toward more concentration in retail CASA and variable CDs. Beltone analysts expect Commercial International Bank (CIB) and Qatar National Bank Al Ahli (QNBA) to enlarge their retail low cost deposits faster than other banks under their coverage as management philosophy shifts to cost of funding (COF) optimization. Moreover, Foreign Currency (FC) deposits accounts for an average of 27% of total deposits among their covered banks. They believe that prevailing FC liquidity is a cornerstone in sustaining the FC portion of total deposits during the upcoming five years, reducing the covered banks' dependency on supranational FC funding, which positively affect their cost of funding. As for the fiscal deficit remains contained, sovereign exposure will partially decrease, providing room for lending to occupy a larger portion of total assets. Accordingly, Beltone analysts expect a gradual increase in Lending to Deposit Ration (LDR), reaching 50% by 2020. Nevertheless, they expect capex lending to start picking up during 2H20, given the further expected policy rate cuts and demand recovery. As for retail lending, they expect a surge in retail lending in 2020, backed by a revival in consumption, lower inflation, and a decrease in interest levels. In context, there is a strong improvement in the sector since 2014 on different dimensions, including regulations, governance, data quality, and accessibility with increasing awareness among the public. Such crucial milestones pave a fertile way to capitalise on the sector's stronger fundamentals and clearer prospects, particularly with the prevailing significantly low presentations rates. Beltone analysts are highly positive on the sector's growth in 2020 through expanding its role in facilitating access to credit in Egypt's thirsty financial sector, meeting untapped credit demand for which banks have been historically reluctant to offer private credit. This is all in addition to a lower interest rate environment and easing inflationary pressure. They believe there is a room for further expansion is in sight this year, given their expected gradual higher contribution to economic activities from the private sector. Beltone's house economic outlook reveals a multidimensional pickup in economic activities, while the promising signs of loan restructuring agreements on the back of rebounding profitability in different sectors. Although aggregate Nonperforming Loan (NPL) levels inched up in 2Q19, they remain positive on covered banks' asset quality levels as they highly capitalise on their expected positive economic outlook. There was a strong improvement in capital adequacy ratios during the last two years. However, elevated sovereign exposure on the back lucrative yields plays a pivotal role in weighing down banks' Risk weighted Asset (RWA). Accordingly, Beltone analysts believe 2020 should reveal a higher negative impact on bottom line on the back of new tax amendments on government securities, mainly for those with higher contribution from government securities income to total bank income, higher total costs to income ratio, or both combined. Meanwhile, banks' with strong lending capabilities and adequate capital base are projected to successfully reduce the negative impact on profitability. Moreover, as they expected a reshuffle in asset composition toward larger concentration in risky assets and namely lending, they believed covered banks would not tolerate such a higher leverage ratio. They believe ADIB followed by HDBK will be the most negatively impacted given their projected surge in RWA exposure. Although Beltone analysts are bullish on the leasing portfolio growth, they expect lower Net Interest Margin (NIMs) on higher competition in a fragmented market.
