• CBE hikes rates by 100bps; we expect NIMs to widen in 2Q-3Q16 The CBE increased benchmark rates last Thursday by 100bps, well above EFG Hermes estimate of 25bps. This followed a 150bps rate hike in mid- March. As we highlighted in our 21 March note, Egypt banks’ net interest margins benefit from higher rates because: i) they have large holdings of T-Bills, which are quickly re-priced upwards (9-month T-bills issued yesterday at 15.1% already captured the full 100bps increase in rates); ii) corporate loans, which account for the bulk of loan books for most Egypt banks, are short term and benchmarked to corridor rates, and hence they also reprice quickly after a rate hike; and iii) the pass-on effect on deposits takes longer to materialise as deposits are not benchmarked to a particular rate, and, at least for stronger, private sector franchises the increase in deposit rates tends to be lower than the CBE rate hike.
• NIMs for corporate focused and/or low cost deposit banks to benefit most While we expect all banks’ NIMs to expand, we see CIB (Neutral; FV: EGP46.4) as a key beneficiary of higher rates. This is because it offers a combination of large corporate lending exposure (80% of total loans) and a high share of low-cost deposits (current and savings accounts constitute 45% of total, see figure 1&2). CIB’s NIMs in 1Q16 did not capture the impact of the March 150bps rate hike as it took place around the end of the quarter, but we expect NIMs to increase in 2Q16 and 3Q16. While we are likely to see positive surprises in terms of revenue for CIB, management continues to guide for c20% Y-o-Y earnings growth in 2016 (EGP5.7bn in net income), as additional revenues will be added to cautious provisioning charges. Other banks that have low-cost deposit structures are CAE (Buy; FVEGP26.7), HDB (Buy; FV: EGP28.5), and ADIB Egypt (Buy; FV: EGP5.2).
• Higher borrowing rates will not help ongoing softening in lending demand As borrowing rates have risen by 250bps YTD, we believe it is reasonable to assume a further softening in lending demand. Credit growth has slowed to 16.8% Y-o-Y in April 2016, or 13% Y-o-Y if we exclude the impact of the March 2016 EGP devaluation, which leads to a higher EGP value for USD denominated loans. This is down from credit growth of 18.8% Y-o-Y in December 2015. We note however that debt leverage for Egypt corporates is generally low, and that the key factor driving down credit growth continues to be the shortage of FX liquidity and the continued weakening of Egypt’s macro-economic backdrop.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel