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Securities & Investment

Month: July 2024

HC expects the CBE to maintain the interest rates, Egypt’s credit outlook improvement is one of the reasons

Posted on by Marwa Nakhla

  • In light of Egypt’s macro economy developments and the global conditions, HC Securities & Investment expects the CBE to maintain the interest rates in its upcoming meeting scheduled July 18th, 2024, Egypt’s credit outlook improvement is one of the reasons

Financials analyst and economist at HC, Heba Monir commented: “We expect the MPC to maintain the overnight deposit and lending rates at its upcoming meeting despite (1) the y-o-y deceleration in headline inflation for four consecutive months, despite m-o-m increases, on favorable base effect, (2) improved FX liquidity post the Ras El Hekma investment deal, which helped increasing net international reserves (NIR) by c33% y-o-y and c0.6% m-o-m to USD46.4bn in June and reversing the net foreign liabilities (NFL) position of the banking sector of USD29.0bn in January into a net foreign assets position (NFA) of USD14.3bn in May, (3) the improvement in Egypt’s one-year CDS to 303 bps currently from 857 bps on 1 January, and (4) the recent improvement in Egypt’s credit outlook by Moody’s to Positive from Negative and to Positive from Stable by Fitch and S&P. However, our interest rate model estimated the required interest rate by investors on the 12-month T-bills at 36.1%, corresponding with the maximum yields requested by banks and reflected in the high bid-to-cover ratios currently witnessed, which implies a real positive interest rate of 7.9% versus a current minor negative real interest rate of 0.6% (after deducting a 15% tax rate for European and US investors and based on our 12M average inflation rate forecast of 22.8%) over the latest 12M T-bill rate. Since the 6 March EGP floatation, the 12M T-bill rate rebounded to 26.1% currently from its lowest level of 25.7% in early April, yet it remains lower than its peak at 32.3% in early March. Therefore, given the current negative real interest rate on treasuries and the possibility of higher inflation following the imminent revision of household electricity and fuel prices in 3Q24, we anticipate the MPC will keep interest rates unchanged.”  

It is worth mentioning that, in its 23 May meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending rates unchanged at 27.25% and 28.25%, respectively, after it hiked them by 600 bps in March, bringing total rate hikes to 1,900 bps since it started its tightening policy, including 300 bps in 2022, 800 bps in 2023 and 800 bps in 2024. Egypt’s annual headline inflation decelerated to 27.5% in June from 28.1% y-o-y in May, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.6% m-o-m, compared to a decrease of 0.7% m-o-m in the previous month. On the global front, the US Federal Reserve maintained the target range for the federal funds rate at 5.25-5.50% after it hiked rates by 100 bps in 2023 and 425 bps in 2022, with a total of 525 bps since it started its tightening policy, while the European Central Bank (ECB) ECB lowered the key ECB interest rates by 25 bps after nine months of holding rates steady on an improved inflation outlook. Based on Egypt’s current economic situation, we present below our expectations for the possible outcome of the 18 July MPC meeting.

About HC Securities & Investment

HC Securities & Investment is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has utilized its relationship-driven insights, local and regional market knowledge, and industry-specific expertise and strong execution capabilities to provide its clients with a wide range of services in investment banking, asset management, securities brokerage, research, custody and online trading through its offices in Egypt and the UAE (DIFC). HC Investment Banking has an outstanding track record of advising leading corporates in Egypt and the MENA region on M&A, capital market, and financing transactions in excess of USD6.6bn. HC Asset Management now manages 7 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP7bn. HC Brokerage is ranked among the top brokers in Egypt and provides a wide array of services, including research and online trading to institutional and retail clients.

 

HC expects outstanding bank’s profitability in 2024 for CIB

Posted on by Marwa Nakhla

Commercial International Bank (CIB)

  • Egypt’s favorable economic structural reforms entail monetary and fiscal tightening, enabling private sector growth and currency liberalization, making the Egyptian banking sector a key beneficiary of these reforms
  • We expect outstanding profitability for COMI in 2024 as a result of the expected NIM expansion, while CAPEX loan growth would be delayed to 2025, in our view

  • HC Brokerage resumes coverage on Commercial International Bank expecting outstanding bank’s profitability in 2024 as a result of the expected NIM expansion.

Economist and financial analyst at HC, Heba Monir commented: “The Ras El Hekma investment deal improved Egypt’s external position and outlook: The Egyptian economy restored confidence after concluding the Ras El Hekma USD35bn investment deal with the UAE in February 2024. The disbursement of the first and second cash tranches worth USD24bn, helped narrow the banking sector’s net foreign liabilities (NFLs) significantly by c85% y-o-y to USD3.64bn in April, from USD29bn in January 2024. On 6 March, the Central Bank of Egypt (CBE) hiked policy rates by 600 bps, raising them by 800 bps y-t-d and 1,900 bps since it started tightening rates in March 2022, and allowed market forces to determine the exchange rate, leading to an EGP devaluation of c35% y-t-d to EGP47.7/USD currently. Following this, and given the impact of the Gaza war on tourism and Suez Canal receipts, the International Monetary Fund (IMF) and the Egyptian authorities reached a staff-level agreement on a set of comprehensive policies and reforms needed for the Extended Fund Facility (EFF) arrangement, increasing it significantly to USD8.0bn from the previously approved USD3.0bn in December 2022, leading to the disbursement of USD820m in April and another USD820m to be disbursed in June. The European Union (EU) also pledged a EUR7.4bn (USD8.06bn) aid package for Egypt to be disbursed through 2027. All this reflected positively on Egypt’s economic and banking sector credit ratings; S&P Global Ratings and Fitch Ratings upgraded Egypt’s economic outlook to Positive from Stable and Moody’s to Positive from Negative. Despite these positive developments, we do not expect CAPEX lending growth before 2025, given the prohibitive high borrowing cost and our expectation of delayed monetary easing to late 2024 or early 2025. Yet, we expect banks to benefit in 2024 from the higher treasury yields and high deposit auction rates, leading to unusually high net interest margins (NIMs).”

“We expect solid banking sector profitability in 2024 due to high treasury yields and real growth in loans: We forecast the banking sector’s loans to grow by c31% y-o-y to EGP7.25trn in 2024, mainly driven by EGP loans to finance working capital needs and inflated by the EGP devaluation. Given the high-interest rate environment, we do not expect CAPEX lending to materialize before 1H25. In January 2024, the state-owned National Bank of Egypt (NBE) and Banque Misr introduced a one-year certificate of deposits (CDs) at a 27.0% interest rate paid annually. Following the 6 March EGP devaluation, they introduced in March a three-year declining interest rate CDs paying interest annually of 30.0% in the first year, 25.0% in the second year, and 20.0% in the third year. In January 2024, some private banks like Commercial International Bank (COMI) followed suit and issued three-year CDs at a monthly 20–22% interest rate while setting a minimum value per CD of EGP0.1–5.0m. Therefore, we estimate market deposits to increase by c27% y-o-y to EGP13.7trn in 2024. Regarding profitability, we expect local currency NIMs to continue expanding, given the high treasury yields and high interest rates. We see room for higher treasury yields by 100–200 bps if inflation accelerates, which would represent an upside risk to our numbers. Regarding asset quality, we forecast that large to medium-cap banks will report good asset quality, as most of them increased their provisions charges during 4Q23. Meanwhile, we could see higher NPLs for small-cap banks. As for the capital adequacy ratio (CAR), most banks’ CARs are above the CBE’s minimum requirement, and if they happen to be impacted by the EGP devaluation, we expect them to recover, helped by their solid profitability.” Heba Monir added.

HC’s economist concluded: “We forecast COMI’s net income to grow at a 5-year CAGR of c24% while maintaining its leading market share: We forecast COMI’s net income to grow at a 5-year CAGR of c24% from 2023–28e, with a c70% y-o-y growth in 2024e to EGP50.4bn on higher interest rates, the EGP devaluation, and a favorable deposit mix, as its current account savings accounts (CASA) represent c55% of its total deposits. We estimate its NIM to increase to 9.57% in 2024e from 7.75% in 2023e, with an ROE of 49.8%, up from 37.5% in the previous year. We forecast COMI to maintain its attractive deposit market share, which we estimate at 6.4% in 2024e, growing its deposits by c23% y-o-y to EGP835bn in 2024e, on our numbers, and we estimate its loan market share at 4.9% in 2024e, growing its loan portfolio by c29% y-o-y to EGP303bn in 2024e to finance corporates’ higher working capital needs, inflated by the c35% EGP devaluation. We expect COMI to report an adequate asset quality, with NPLs of 4.65% of gross loans, higher than the 3.59% it reported in 2023, due to more volatile business conditions and the precautionary measures required by the expected credit loss (ECL) model of IFRS 9. We forecast the bank to record a lower coverage ratio of 276% in 2024e from 305% in 2023 due to its good provisioning and the sound credit profile of its corporate clients. We estimate its net loan-to-deposit (L/D) ratio to increase to 36.3% in 2024e from 34.8% a year earlier. We estimate the bank’s financial investments holdings to surge by c39% y-o-y to EGP378bn, representing c45% of customer deposits in 2024e from c40% in 2023 due to the attractive treasury yields. We expect COMI’s CAR to increase to 30.3% in 2024e from 26.2% in 2023.”

 

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

 

 

HC Brokerage awarded best Forecaster of Egypt’s Fiscal Balance – 2024 by Focus Economics

Posted on by Marwa Nakhla

For the second year, HC Brokerage awarded an Egypt Best Forecaster in one of Focus Economics’ macro forecasts categories

  • HC Brokerage’s Research Team has been awarded for its exceptional performance for the second consecutive year from the prestigious Focus Economics, winning the Best Forecaster of Egypt’s Fiscal Balance in the 2024 FocusEconomics Analyst Forecast Awards.

This remarkable achievement is a testament to the team’s proactive efforts in building robust relationships with a diverse range of experts and sources, enabling them to gain valuable insights into economic trends and events, improving the accuracy of their forecasts, and earning them well-deserved recognition in the industry.

FocusEconomics is a leading provider of economic analysis and forecasts for 198 countries in Africa, Asia, Europe, the Middle East, and the Americas, as well as for 30+ key commodities. Each month, FocusEconomics surveys over 1,500 economic experts from national and international banks, top financial institutions, and economic research companies to obtain their projections for the main economic indicators and elaborate the Consensus Forecast, which is the average of all individual forecasts. FocusEconomics has established a solid reputation among the most renowned financial institutions, multinational companies, consulting firms and government agencies as a reliable source for timely and accurate business intelligence.

Hassan Choucri, Managing Director of HC Brokerage, expressed his pride in this achievement for the second year in a row, he added: “HC continues to grow its capacities in providing accurate forecasts and analysis related to the Egyptian economy indicators in general, especially in light of the economic and geopolitical developments the world is witnessing today. We are always keen to maintain our position as a leading provider of financial research services in the Egyptian market through a wide range of solutions.”

In 2023, HC Brokerage research team won the prestigious “The Best Overall Forecaster for Egypt in the 2023 Focus Economics Analyst Forecasts Awards”. The Research team also secured the top spot in inflation forecasts and ranked third in exchange rate and fiscal balance forecasts.

It is worth noting that HC Brokerage is an affiliate of HC Securities & Investment– the full-fledged investment bank has consistently maintained its position as a dynamic participant in the region. The company’s primary objective is to support its partners, clients, and staff in achieving their goals by providing exceptional financial services in various markets across the region.