Mohamed Saad, equity analyst at SHUAA Egypt in Cairo, argues that the valuations which are likely to be used in the long-awaited IPO of Banque du Caire and the central bank sale of a non-controlling stake in United Bank will highlight the cheapness of the sector.
- “Embedded valuation multiples of these deals will mean so much for overlooked banks,” he says.
Banque du Caire is expected to launch its IPO in the first half of this year after encouraging feedback from the first leg of the government’s roadshow in London, Dubai and Abu Dhabi. The second leg of the roadshow will target investors in the US in February. In November, the central bank appointed EFG Hermes and Evercore to advise on the sale of a stake in United Bank.
Those deals are likely to take place at a premium to market prices for Egyptian banks.
- According to Pharos in December, the Egyptian banking sector was trading on a 2019 price-to-earnings (PE) ratio of just 4.2.
- Standard Bank of South Africa, for example, is more than twice as expensive, trading on a PE of 9.
- Credit Agricole Egypt and Faisal Islamic Bank of Egypt, with PE ratios of 6.4 and 2.5 in December, were both offering dividend yields of 10%.
Commercial International Bank, the most expensive Egyptian bank with a PE ratio of 11, is “the perfect proxy for the macro transformation story in Egypt”, Pharos says. The bank’s plans to expand into Kenya as well as opening a representative office in Ethiopia could be potential value drivers, according to the research.
Tellimer finds in a note this month that Egyptian banks are among the most attractive among 20 emerging markets surveyed, due to valuation and strong prospects for profitable growth.
- New capital requirements raising the minimum to 5.0b Egyptian pounds (290m euros) from 500mn pounds could trigger M&A activity, the note says.
- According to Tellimer, 300 basis points of interest rate cuts are in prospect this year. “Falling interest rates should underpin solid credit growth prospects.”
Saad expects 200bps of rate cuts to be enough to trigger credit growth. He also sees the decision by the central bank to raise the limit on consumer loan instalments to 50% of their total monthly income versus 35% as opening the way to “flourishing retail lending activities in 2020”.
- A further filip could also come from possible government moves to cut energy prices for some factories and producers, Saad says. High energy prices have been a constraint on capex lending, he says.
Paul Hollingworth, managing director at Creative Portfolios in London, sounds a note of caution.
- “Banks are often a macro bet like sovereign bonds” as they invariably hold a country’s debt on their books.
- “Egypt may look a bit better than most, but it’s in a rough neighbourhood,” he says.
Tellimer points to the fact that Egypt is surrounded by unstable regimes and proxy conflicts in Syria, Palestine, Yemen, Libya and Lebanon. The country also depends on capital inflows.
- “A deterioration in global risk appetite could raise the economy’s funding costs,” Tellimer says.
Bottom Line: Undemanding valuations and a consensus on further rate cuts mean that the odds are loaded in favour of investors in Egyptian banks.
Understand Africa's tomorrow... today
We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.View subscription options