• Global values Export Development Bank of Egypt at LE20.6 and recommends a 'HOLD' on the stock
Global Investment house –Kuwait - Export Development Bank of Egypt (EDBE) Initial Coverage – Kuwait . Export development Bank of Egypt "EDBE" was established in 1983. The Bank's main goal lies in developing and encouraging Egyptian exports, through building up an agricultural, industrial and commercial export sector.
EDBE was able to increase its net income figures in 2007/08 significantly, as it realized a net income of LE310.7, compared to LE7.5mn, the previous year, implying a 4 folds y-o-y growth. This jump was a result of the 100% decline in provisions added during the year. It is worthy to note that the CBE required adjusting the financials of 2006/07 to add higher provisions, to cover the Bank's financial commitments. According to the Bank, NPLs are currently fully covered.
The net income realized in 2007/08 was also caused by the increase in net interest income, which grew by 29.6%, reaching LE268.1mn, compared to LE206.9mn, realized the previous year. The Bank faced an increase in interest expense during the year, as a result of the increased deposits balances. In addition, the decline of treasury bills yields over the year resulted in a decline in the interest earned from these instruments by 41.0%. Despite the magnified costs, the Bank was able to realize a spread through generating more income from its loans and interbank assets, realizing a growth of 69.1% in income generated from these assets.
On the other hand, the non-interest income increased by 16.8%. This increase was a result of the rise in fees and commissions income, dividend income and other income, which grew by 13.2%, 178.1% and 2.6%, respectively. We projected future income from fees and commissions based on the same practices adopted by the Bank historically. The other income includes gains from sale of financial investments, profits from foreign exchange operations, financial investments valuation differences and other items.
Based on the current market price of LE21.1/share, EDBE is trading at 2008/09E P/E and P/BV multiple of 7.2x and 1.6x, respectively. Our estimated value for this banking scrip is worked out to be LE20.6 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip implies a downside of 2.2% over the closing price of LE21.1/share (as of September 7th). We therefore recommend a Hold on the scrip.
The jump in net income realized in 2007/08 pushed up the Bank's profitability ratios, represented by ROAE and ROAA, as they reached 27.7% and 2.8%, compared to 0.96% and 0.09% in 2006/07, respectively. We expect ROAE and ROAA are to reach approximately 24% and 2% by 2011/12, in that order. ROAA-ROAE Source: EDBE Financials, Global Research
Being a specialized bank, EDBE directs most of its operations to the export oriented corporates, which gives the Bank an advantage over other players, in terms of the unique services that it can provide. In addition, EDBE performs other commercial banking and investment banking activities that are expected to further boost its performance. The latest capital increase that the Bank has made in February 2008 is expected to have a positive effect on he Bank's performance. We believe the current market price of the Bank's stock is higher than its fair value, derived from our valuation assumptions.
We expect the Bank's loans/deposits ratio to reach around 92% by the end of our projection period, on the back of the projected growth in deposits and loans. The repeated jumps in the CBE corridor range are expected to boost the Bank's interest rates on deposits and loans. We relied on this assumption and assumed that deposits and loans will increase by an average of 14%, and 13%, over our projection period, respectively.
Gross Loans, Deposits and Loans/Deposits Ratio Source: EDBE Financials, Global Research
Based on our projections for the Bank's results over our projection period, we believe the Bank's net income will reach around LE320mn by 2011/12.