• Cut FV to USD1.33; reiterate Neutral rating We cut our FV for EGB from USD1.60 to USD1.33 to reflect a higher CoE of 18.5% (from previous 16.5%) following the increase in government bond yields post the CBE’s rate hike. EGB’s ROE rose in 2015 to 15.4%, up from 13.1% in 2014, driven by higher balance sheet leverage after strong loan growth; however, ROA declined to 1.4% in 2015, down from 1.8% in 2014, owing to higher provisioning and operating costs burden, as well as lower NIMs. EGB trades at a P/B of 1.4x in 2016e; while these multiples are justified by our view of slightly improving returns in the medium term over the CoE, it trades at a large premium to other Egypt small-cap banks (peer group for EGB), with HDB, ADIB Egypt and Faisal trading at a c20-30% discount to BV. We reiterate our Neutral rating on EGB, with our FV implying 8% upside.
• EGB’s new management team has ambitious growth targets Nidal Assar, ex CBE deputy governor, joined as CEO in March 2015 and has set an aggressive expansion strategy, with a focus to become a leading bank in Egypt. Loan growth was very strong in 2015, up 94% as EGB took part in syndications. EGB has invested in infrastructure and human capital in 2015, and costs growth was strong, at 73% Y-o-Y, vs. revenue growth of 54%, with costs-to-income up to 42% vs. 34% in 2014. We believe costs growth will continue to be strong, as we understand from management there will be further investments towards developing EGB’s franchise. EGB is a small bank, with only 19 branches. We believe the strategy is likely to revolve around retail, where a bigger branch presence is warranted, in our view.
• Rights issue to boost capital post strong capital consumption in 2015 EGB’s CAR dropped to 11.4% in 2015, down from 20.2% in 2014, and just above the 10% minimum required in 2015. EGB announced in Jan-2016 an USD129mn rights issue (at par value of USD1/share), expected to be implemented in tranches in the upcoming three years. The first tranche of USD32mn has been approved and should take place in 2Q16. We expect CAR to increase to 16.2%, following the first tranche issuance, comfortably above the 10.625% required by the CBE by end-2016.

Rajae Aadel
Elena Sanchez-Cabezudo, CFA