• EGP float is a positive catalyst for 2017; HDB is our top pick We upgrade our 2017e earnings for Egypt small banks as the return of USD into the banking system is positive for fees and loan growth. We expect: i) stronger fee income on higher trade finance volumes; ii) wider NIMs on the 300bps rate hike in Nov-16 (beyond 2018 there is risk of lower NIMs as the CBE might ease monetary policy); iii) double-digit loan growth driven by corporate sector. Our top pick is HDB; we also have buys on ADIB-E and Baraka. All three trade at a discount to 2016e BV, despite ROEs above CoE of 19%.
• Investment risks mainly skewed to capital adequacy and dividends While we are positive on earnings growth, we see risks of tight CAR for banks with USD loans, which will increase risk-weighted assets by Dec-16 due to the weaker EGP. Tight CAR is a risk to dividends, particularly for EGB and Baraka. Our top pick HDB offers the best dividend visibility, as c100% of loans are denominated in EGP, thus its CAR is immune to a weaker EGP.
• HDB: high ROEs and dividend yield; strong CAR at 17% HDB has the highest and safest dividend yield at 6%, supported by a strong CAR of 17%. HDB still trades at a 20% discount to 2017 BV and P/E of just 2.8x, while we estimate the bank’s ROE at 30%. A key driver of earnings growth next year will remain free-funds linked to NUCA’s land lotteries.
• ADIB-Egypt: turnaround story on track; reiterate Buy ADIB-E’s ROE has risen to high double-digits since 2013 (29% in 2016) on core revenues, loan growth, and cost efficiency. We believe it is Egypt’s strongest franchise in the Islamic segment. ST downside risks are: i) no div. for at least next 2 years due to accumulated losses in shareholders’ equity (NBD legacy); and ii) CAR might be stretched end-16 due to the weaker EGP.
• Al Baraka Egypt: deep value with high ROEs; upgrade to Buy It trades at low multiples of 0.6x P/B and 2.4x P/E in 2017e, despite a high ROE of 23%. Recent ROE gains were driven by strong loan growth, NIM expansion and low cost of risk on improving credit quality. We see two downside risks: i) tight CAR by Dec-16 on weaker EGP; and ii) no or low dividend. EGB: high growth plan is riddled with risks; reiterate Neutral EGB revamped its entire franchise, doubled staff and loans grew 2.5x since 2014 (market share rose 0.7% to 1.8%). We see some underlying risks: i) it lacks scale in the retail market; and ii) strong capital consumption puts cash dividends at risk. It also trades at a premium to small banks.
• Faisal: outlook less promising than peers; downgrade to Neutral Faisal is a decent retail deposit franchise that invests in gov’t securities rather than lending. It trades at rich multiples (1.6x 2016 P/B) and lacks a strong ST catalyst. As a retail-focused bank, with a weak corp. franchise, Faisal is not a key beneficiary of higher FX liquidity in the banking system.

Rajae Aadel
Elena Sanchez-Cabezudo, CFA