• Higher interest rates generally positive for NIMs; CIB and Credit Agricole Egypt are key beneficiaries The 150bps rake hike by the CBE last Thursday will have, in our view, a positive impact on banks’ net interest margins as EGP-denominated interbank assets, T-Bills, and corporate loans re-price upwards. Yields on T-Bills already rose by c100bps on Thursday in anticipation of the rate hike. Furthermore, the bulk of corporate loans in Egypt are floating and benchmarked to corridor rates, thus meaning a fast re-pricing of the corporate book following an increase in rates. Egypt banks tend to increase rates on deposits with a lag relative to assets, and for most banks, we do not expect the full 150bps to be passed on to deposit rates. Banks with a larger share of corporate loans to total loans and of CASA deposits to total deposits are likely to see stronger NIM expansion: we highlight both CIB and Credit Agricole Egypt as key beneficiaries of higher rates.
• Loan growth largely geared to improvement in FX liquidity The slowdown in corporate loan growth in 2H2015 has come as a result of Egypt corporates’ difficult access to USD. Recent measures by the CBE, including the lifting of FX deposit/withdrawal limits for individuals and importers of essential goods and the 15% rate offered by public sector banks on 3-year CDs for customers selling FX might boost liquidity. Furthermore, the recent devaluation of the EGP could be a trigger for stronger investment, led by multinationals. We believe, however, there is still downside risks to loan growth, including a slowdown in GDP growth due to higher inflation.
• Few risks to credit quality as gearing for Egypt corporates is low Higher rates are a risk to credit quality, but leverage for Egypt corporates is generally fairly low (the Egyptian economy has seen strong deleveraging over the past decade, with loans to GDP at 35% in 2015, down from 60% in 2005), and, in our view, higher borrowing costs should be well absorbed, especially for large corporates. Retail loan growth could however see a slowdown as a result of higher rates for new loans (existing loans will not see an upward repricing as rates are usually fixed), bearing in mind the 35% ceiling on debt burden ratios introduced by the CBE in January 2016.
• CIB has room to absorb potential unrealised losses in its AFS book CIB has the larger book of T-Bonds to total assets amongst the banks we cover at 26% in 2015. These are booked in available for sale investments. CIB uses a mark-to-model rather than a mark-to-market methodology to value these bonds, as the secondary market for T-Bonds is illiquid. There could be some unrealised losses through shareholders’ equity on the AFS book as a result of the higher rates, but we believe these should be well absorbed as CIB has a strong capital adequacy ratio of 16.4%.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel