EGYPT | BANKING

21 March 2012
st

Banks to benefit from recent CBE cut to RRR

In its Board meeting held on March 20, 2012, the Central Bank of Egypt (CBE) decided to reduce the required reserve ratio (RRR) on domestic currency deposits by 200bps from 14% to 12%, effective the maintenance period starting March 20. The CBE said it took this move in light of the current liquidity situation. This measure will provide permanent liquidity into the banking system and help ease credit conditions in the market. We believe the banks that would benefit most are those with larger percentages of eligible local deposits to pay required reserve to CBE. A simple exercise suggested Credit Agricole Egypt (CAE) [CIEB] and Housing and Development Bank (HDB) [HDBK] would be one of the higher improvers (in terms of percentage not value - as Commercial International Bank (CIB) [COMI] and National Societe Generale Bank (NSGB) [NSGB] lead in terms of improvement in value terms) given their larger eligible deposits percentage and also the lower base effect. Additionally, HDB deposit base is chiefly dominated by local currency. Positive impact expected on banks: For banks, the EGP reserve is non-interest bearing and also it parks more liquidity within the CBE, so lowering it will mean more liquidity and more income for banks. While it is true that the system is liquid in terms of loans/deposits ratio that is relatively low (c.49%), a lot of liquidity is allocated in T-Bills (27% of assets as of December 2011 up from 22% in Dec 2010), so an effective way to improve loan and credit conditions is to relieve banks of some of their reserve constraints. Comparatively, system loans/assets had only increased from around 36% in December 2010 to 37% in 2011, indicating much swifter growth on the TBs side. Banks holding higher portion of deposits denominated in local currency with shorter-tenors will benefit most: We did a quick exercise based on the estimated local currency component of deposits with maturities eligible for paying required CBE reserve for each of the covered banks. Estimating the effect of the additional freed deposits for each bank versus our outstanding forecasts, we assumed 60% utilization rate for the freed amount of deposits. We then calculated the additional interest income versus outstanding forecasts, and adjusted for both taxation and relevant time period in 2012 (excluding 1Q). In conclusion, banks with larger eligible deposits percentages will benefit the most in terms of incremental earnings. CAE and HDB generated higher percentage changes in NPAT when compared to the outstanding projected NPAT for 2012. Using the projected PER multiples in 2012 (based on closing prices of March 19, 2012 and current outstanding earnings estimates of CI Capital Research) with the new adjusted EPS for 2012 for each bank, we reached new adjusted prices for each bank. We then compared the new prices with the market close of today to see the remaining upside /downside potential for each. NSGB and CAE showed the higher upside reaching 1%.

POTENTIALS

A highly profitable sector Huge growth potential due to highly underpenetrated market, especially in retail, mortgage and SME lending High liquidity. A balanced total loans/deposits ratio at c.49% implies a funding surplus and readily available liquidity. A real/non-inflated balance sheet, primarily funded by core deposits. Improved asset quality through reforms and consolidations. No significant exposure to sub-prime mortgage securities places the sector at an advantage vs. Banking sectors in other countries. Political reforms and cleaning up corruption can create a better business environment supporting sector growth.
RISKS

Political risks including protracted political tensions that affect the economic and business environment, and the banking sector. A larger - or longer-than-expected GDP slowdown that can pressure deposits and loan growth or weaken asset quality. A large global recession and the risk of other exogenous factors that might impact the sector. Slower-than-expected rise in banking penetration, especially for retail, SMEs and mortgage lending. Liquidity risks for both local and foreign currency. Interest rate risks including increased pricing pressures of funds or mismatches. FX risks. Operational risks. Regularity risks including more stringent requirements.
SYSTEM LOANS & DEPOSITS (EGP bn)
Loans 1,200 Deposits Loans Growth Deposits Growth 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2005 2006 2007 2008 2009 2010 2011

NEWSFLASH

Estimated Eligibale LCY Deposits Percentage Incremental NPAT in 2012 Close Prices of March 19, 2012 (Before Rally) Close Prices of March 21, 2012 (After Rally) Price Movement between March 19 and March 21 Adjusted market price (using adjusted EPS 2012 and projected PER ) * Upside / Downside Potential

CIB 56% 1% 25.06 25.81 3% 25.38 -2%

NSGB 51% 1% 28.95 29.05 0% 29.28 1%

CAE 57% 2% 9.07 9.21 2% 9.28 1%

HDB 82% 2% 14.48 14.83 2% 14.79 0%

1,000 800 600 400 200 0

Source: Bank Financials & CI Capital Estimates * Projected PER reached by using March 19 close / projected EPS in outstanding fundamental forecast

Source: Central Bank of Egypt (CBE)

ALIA ABDOUN ALIA.ABDOUN@CICAPITAL.COM.EG 1

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RESEARCH
Amr Hussein Elalfy, CFA | Co-Head of Research Amr.Elalfy@cicapital.com.eg Mona Mansour | Co-Head of Research Mona.Mansour@cicapital.com.eg CI Capital Holding 8 Nadi El-Seid Street, 3rd Floor Dokki, Giza, Egypt Tel: +2(02) 3338 6259 Research@cicapital.com.eg www.cicapital.com.eg Investment Rating* Strong Buy >30% Buy >20% <30% Hold >10% <20% Underweight >0% <10% Sell <0%

SALES
CI Capital Securities Brokerage Khaled Abdelrahman | Managing Director & Global Head of Securities Brokerage Khaled.Abdelrahman@cicapital.com.eg Dynamic Securities Hesham Khalil | Managing Director Hesham.Khalil@cicapital.com.eg CI Capital US Karim Baghdady | Director International Sales kbaghdady@ci-capital.com

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In February 2008, CI Capital Research (CICR) launched a new rating system to give analysts more freedom to be market responsive. This was to make one element of our research more dynamic, namely the advertising of target prices and recommendations. What we did not change is our assessment of the Long Term Fair Value (LTFV), nor did we stop our detailed industry and company research. What we did is change the target price to trade in the balance of where a share should trade and where we think it will trade. LTFV: As before we continue to estimate a fundamental valuation, largely DCF and/or NAV based. Target Price: The price, which is not necessarily the LTFV, is where the analyst, given all (qualitative as well as financial) information available, thinks the share price can get to within the next 3-12 months. This can be changed at any time on changing facts and perceptions. Recommendations: Our new rating system falls out from the total return relating to the share price performance to the target price, and including any distributions may not be included in the target price calculation. This is shown in the table below, and to be BUY must return over 19%, an arbitrary hurdle rate we think reasonable given prevailing interest rates and risks (Please see investment rating bar above).

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