• Revenue growth, better efficiency are key drivers of recent ROE gains HDB trades at a P/E of just 4.2x and P/B of 0.8x in 2016e. These multiples are unjustified, in our view, as we expect a 2016 ROE of 19.7%. HDB has often been overlooked by investors, partly as: i) it has been traditionally a low ROE bank, with its semi-public status leading to weak costs efficiency; and ii) it is not a pure banking sector play, as it owns and develops land and has associates/subsidiaries linked to real estate. Its ROE has however seen a strong improvement in the past two years, and at c20%, is above CoE of 18%. Real estate dynamics in Egypt continue to be favourable, with prices unaffected by the current macro backdrop. We reiterate our Buy rating, with our FV of EGP28.47 (down from EGP29.65) implying 48% upside potential.
• HDB is undervalued, even using conservative assumptions in SOTP We value HDB’s three key businesses: i) the bank; ii) real estate projects owned directly by HDB on land, which was allocated by the Ministry of Housing several years ago; and iii) HDB’s direct 36.9% stake in Hyde Park, New Cairo, the largest of HDB’s associates. Key valuation drivers are the bank and Hyde Park, as they account for 90% of our SOTP value of EGP28.47. We use what we view as very conservative valuation assumptions i) a 14% sustainable ROE for the bank; and ii) a value of Hyde Park’s land bank which is 40% lower than the latest land auction price in New Cairo.
• Strong capital adequacy, high dividend yield are additional positives HDB has a high dividend yield of 8%, backed by strong CAR of 16.6%. In the short term, we expect loan growth to slow in 2016 on weaker retail lending demand (HDB is a retail play), but expect earnings growth to be solid at 27% Y-o-Y, thanks to wider NIMs, following the recent 150bps increase in rates, despite factoring in an increase in the cost of risk. A key driver of HDB’s net interest income growth is free funding from down payments linked to land auctions conducted by NUCA. This can lead to volatile NII growth, but it is a recurrent funding source for the bank.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel