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Banque du Caire IPO investors could consider Commercial International Bank instead

By David Whitehouse
Posted on Friday, 14 February 2020 11:25

Construction of a new Commercial International Bank branch in Cairo, Egypt July 26, 2016. REUTERS/Amr Abdallah Dalsh

Egypt’s courting of foreign investors to take a stake in Banque du Caire is likely to lead to the success of the state-owned bank’s IPO planned in the first half of this year.

Interest from Arabian funds and public banks, which have a strong relationship with the Egyptian government, will underpin the offer, according to Mohamed El-Naggar, fixed income and money market trader at Alpha Capital Holding in Maadi. “It wouldn’t be hard to get it sold.”

According to The Economist Intelligence Unit (EIU) in London, complex legal procedures to prepare firms for IPO, combined with poor market conditions, have delayed plans for public offers of Egyptian state-owned enterprises. Banque du Caire has repeatedly postponed IPO plans over the past three years.

“The environment today has improved since and is relatively more conducive given stronger macro fundamentals amidst an equally strong industry outlook,” says Richard Lee, senior portfolio manager at Emirates NDB Asset Management in Dubai.

But a successful IPO will not be enough to end to the dependence of the country’s benchmark stock index on Commercial International Bank, Egypt’s largest private-sector bank.

  • Much of the gains in the benchmark index can be attributed to Commercial International, Lee says.
  • The stock accounts for over 30% of the index.
  • The performance of the rest of the benchmark index “remains lacklustre and the planned IPO is unlikely to have any meaningful impact on the valuation of the Egyptian banking sector,” Lee says.

‘Gold standard’

According to research from Pharos in December, factors that could hold back the performance of listed Egyptian banks in 2020 include slower-than-anticipated recoveries in purchasing power or capex lending, and higher than expected taxes from the new tax law application. “Re-rating Egyptian banks requires much deeper improvement in the market and in the banking sector,” says El-Naggar at Alpha Capital.

Lee is also sceptical as to whether the IPO will make it easier for other state-controlled businesses such as the already listed Alexandria Container and Cargo Handling, and Abu Qir Fertilizers, to sell equity.

  • “Unless the offering parties are willing to accept lower valuations in order to entice new investors to IPOs, these companies might find it hard to come to the market this year,” he says.
  • Still, falling interest rates augur well for Egypt’s stock market over the medium to long term, Lee says. He expects between 150 and 250 basis points of central bank rate cuts this year.

Pharos argues that Commercial International is Egypt’s “best managed private bank” and the “perfect proxy” for the country’s macro transformation story.

  • At the start of February, the bank  reported a 27% increase in fourth-quarter net income.
  • Pharos predicts compound annual growth rates for lending and deposits of 25% and 17% to 2024.
  • Commercial International “remains the gold standard on the Egyptian exchange, and that is not going to change,” Lee says.
  • As of December, Commercial’s price-to-book value of 1.9 times was well below its historical average of 2.8 times between 2004 and 2019, Pharos says.
  • The bank’s plans to expand in Kenya and Ethiopia may be the catalyst for a revaluation, according to the research.

The bottom line: Investors will need positive reasons to prefer Banque du Caire to Commercial International as their favoured play on Egyptian banking.

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