• Global values Egyptian Gulf Bank at US$2.0 and recommends a 'SELL' on the stock
Global Investment house - Egypt - Egyptian Gulf Bank (EGBE) -The Egyptian Gulf Bank "EGBE" was established in 1981. Through a network composed of 11 branches, the Bank provides a wide variety of products and services to its retail and corporate clients.
EGBE reported net income of LE70.5mn in 2007, compared to LE86.1mn, realized in 2006, implying a negative growth of 17.3%. This negative growth is mainly a result of the high amount of provisions added during the year, amounting to LE77.7mn, to cover the Bank's high ratio of NPLs.
The Bank's interest income grew by 2.9% in 2007, reaching LE131.3mn, up from LE127.6mn in 2006. This minor increase was a consequence of the 10.0% increase in interest expense, resulting from the surge in deposits, along with the decline in income generated from treasury bills and bonds, which in turn came on the back of the decline in treasury bills over the year. Nevertheless, EGBE compensated for such costs by generating income from loans and interbank assets, which rose by 37.5%, resulting from their rising balances as well.
Non-interest income witnessed a 31.9%, reaching LE91.4mn in 2007, compared to LE69.3mn, the previous year. Fees and commissions income grew by 9.4% y-o-y, resulting from the accelerating loans balances during the year and also the contingent liabilities, which increased by 91.9%. Other sources contributing to non-interest income were the volatile items, represented by dividend income, which grew by 10.2% and other income, which in turn grew by 61.2%. It is worth mentioning that other income includes gain from sale of investments, foreign exchange profits, financial investments valuation differences and other items. It is worthy to note that we raised our projections for investment income, taking into consideration the Bank's announcement of its contribution in the capital of Prime Holding by LE108mn, representing a stake of 22% approximately.
Based on the current market price of US$2.6/share, EGBE is trading at 2008E P/E and P/BV multiple of 23.0x and 2.8x, respectively. Our estimated value for this banking scrip is worked out to be US$2.0 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip implies a downside of 22.5% over the closing price of US$2.6/share (as of September 7th, 2008). We therefore recommend a SELL on the scrip.
The negative growth in net income witnessed in 2007, resulted in a decline of the Bank's profitability ratios, represented by ROAA and ROAE, reaching 1.0% and 10.7%, compared to 2.1% and 14.3% the previous year, respectively. According to our assumptions for the Bank's future performance, we believe ROAA and ROAE are expected to reach around 2% and 17% by 2011, respectively.
ROAA-ROAE
Source: EGBE Financials, Global Research
EGBE realized a slight increase in net income by 2.7% y-o-y, reaching LE67.0mn, compared to LE65.2mn in H1 2007. This rise was a result of the increase in net interest income and non-interest income, where each one grew by 23.5% and 59.2%, respectively.
Concerning net interest income, interest expense grew by 2.1% y-o-y, resulting from the increase in deposits over the year. Meanwhile, income from treasury bills declined by 5.7%, but the Bank was able to control its added costs and realize a positive spread through increasing its income from loans by 15.6%, leading to the rise in net interest income.
As for fees and commissions income, it rose by 60.7%, as a result of the jump in loans balances and also the 102.1% y-o-y surge in contingent liabilities. On the other hand, dividend income grew by 23.0%, while other income, including gains on sale of investments, foreign exchange profits, financial investments valuation differences and other items, grew by 63.9%.
Provisions grew by 416.1% y-o-y, reaching LE38.3mn, compared to LE7.4mn in the same period the previous year. This huge increase was the reason behind the net income growing by a small percent, despite the jump realized in net interest income and non-interest income.
We believe the scrip is currently overvalued, as its market price exceeds its fair value. This could be a result of the Bank being viewed as a potential acquisition target, which attracts investors to purchase the stock, driving its price higher. The increase of the capital base presents a promising potential for growth, as EGBE will be able to extend greater portions of loans, and hence realizing higher profits. In addition, the Bank's 22% contribution in Prime Holding's capital is expected to boost investment income. In the mean time, H1 results showed the incline in the Bank's investments in other affiliates, in addition to its intention to contribute in other companies and mutual funds, which is expected to enhance the Bank's performance and realize higher profits.
Based on the latest climbs of the CBE rates, the Bank increased its interest rates on deposits, which is expected to attract more clients and increase deposits balances. That is why we projected an average growth rate of 14% for deposits balances over the forecast period. Meanwhile, the latest released government decision of canceling the tax exemption on treasury bills is expected to discourage banks from increasing their investments in these instruments and direct greater amounts of their excess funds to loans. We relied on this assumption and assumed an average loan growth of 17% over the projection period. The result was a growing loans/deposits ratio, reaching around 60% by 2011.
