August 29, 2017 Monéscope 2Q2017 An Emerging Gradual Economic Recovery Executive Summary Preliminary data suggest that the real GDP growth rate rose from 4.3% in 3Q FY2016/17 to 4.9% in 4Q FY2016/17. Final consumption is estimated to lead the contribution to the real GDP growth, albeit with a declining on tight monetary and fiscal measures. We note that the external sector contribution to the real GDP growth turned positive in 3Q FY2016/17 on a narrower trade deficit following the exchange rate liberalization. We expect such an improvement to continue in 1Q FY2017/18. On a sectoral level, the improvement of tourist arrivals was reflected in a positive contribution to the real GDP for the first time since 2Q FY2014/15. Meanwhile, the hype in the oil and gas sector was also translated into a positive contribution to the real GDP growth. We expect such a positive contribution torise in the future as Zohr field becomes fully operational. While we expect the real GDP growth rate to slowdown in 1Q FY2017/18, we maintain our full fiscal year real GDP growth rate at 4.5% in FY2017/18. The unemployment rate stabilized at 11.98% in 4Q FY2016/17, versus 12.00% in 3Q FY2016/17. The latest figures showed a stable job creation pace across different sectors. On the other hand, the participation rate continued to decline from 46.40% in 2Q FY2016/17 to 45.40% in 4Q FY2016/17 as the labor force growth decelerated from 2.8% YoY in 1Q FY2016/17 to 2.3% YoY in 4QFY2016/17. While the low participation rate in Egypt has more structural origins, we believe that the current downward trend is temporary due to the pessimistic sentiment at the early stage of implementing such a broad economic reform program. As further signs of economic recovery emerges, the disappointed part of the working-age population would gradually turn active again. Aggregate system deposits expanded by 6.1% in 2Q17 with a CAGR of. The growth was mainly fueled by heavyweight household deposits that expanded a CAGR of 2.4% in contrast to corporate deposits that grew at a CAGR of 0.7%. quarter-end. Total system loan growth lagged behind deposit growth as it expanded by 1.9% in 2Q17 driven by private business sector lending that grew with a monthly CAGR of 0.9%. Net Interest income (NIM) jumped from 4.0% as of 4Q17 to record 4.6% as of 1Q17. NPL ratio inched down slightly in 1Q17 but remained high at 5.7% with a stable coverage ratio of 99.1%. Capital Adequacy Ratio strengthened in 2Q17 to stand at 11.9% as banks resorted to raising capital. EGX30 underperformed EGX70 and EGX100 MTD, and small caps remain to be the biggest winners YTD. Household products and healthcare sectors are the top performers YTD. Foreign investors continue to be net buyers for the sixth month straight. Ramy Oraby - Economist ramy.oraby@pharosholding.com Jaida Gamal Financials jaida.gamal@pharosholding.com Dalia Bonna Financials dalia.bonna@pharosholding.com ANALYST CERTIFICATIONS AND REQUIRED DISCLOSURES ON LAST PAGE OF THIS REPORT
Macro Indicators 2
Real GDP accelerated to 4.90% in 4Q FY2016/17 4Q2002/03 2Q2003/04 4Q2003/04 2Q2004/05 4Q2004/05 2Q2005/06 4Q2005/06 2Q2006/07 4Q2006/07 2Q2007/08 4Q2007/08 2Q2008/09 4Q2008/09 2Q2009/10 4Q2009/10 2Q2010/11 4Q2010/11 2Q2011/12 4Q2011/12 2Q2012/13 4Q2012/13 2Q2013/14 4Q2013/14 2Q2014/15 4Q2014/15 2Q2015/16 4Q2015/16 2Q2016/17 4Q2016/17 The real GDP growth rate accelerated from 4.3% YoY in 3Q2016/17 to 4.9% YoY in 4Q2016/17 1 Real GDP growth rate (%YoY) 8.0% 6.0% 4.0% - -4.0% -6.0% This has been supported by a positive contribution from the external sector as the trade deficit narrows following the recently implemented reform measures 1 1 8.0% 6.0% 4.0% - -4.0% -6.0% -8.0% Final consumption Private investment and inventories Trade balance Source: MoF, Pharos research On the sectoral level, the contribution of both hotels and restaurants and extractions turned positive in 3Q2016/17, reflecting the improvement in tourism and the oil & gas production 6.0% 5.0% 4.0% 3.0% 1.0% -1.0% - -3.0% Hotels and Restaurants Transportation, Storage, Communication and Information Electricity and construction Crude Oil and Mining Manufacturing Industries Others (services) The private sector economic activity contribution to the real GDP growth remain positive, which defies a contracting PMI since 2013 6.0% 5.0% 4.0% 3.0% 1.0% -1.0% Private sector Public sector Source: MoP, Pharos research Source: MoP, Pharos research 3
Unemployment rate stabilized at 11.98% in 4Q FY2016/17 The unemployment rate stabilized at 11.98% in 4Q2016/17, versus 1 in 3Q2016/17 12.9% Unemployment rate The sectoral breakdown shows that job creation has been stable across various sectors in 4Q FY2016/17 25.0% 4Q 2015/16 1Q 2016/17 2Q 2016/17 3Q 2016/17 4Q 2016/17 12.6% 2 12.3% 15.0% 1 1 11.7% 5.0% 11.4% 4Q 2015/16 1Q 2016/17 2Q 2016/17 3Q 2016/17 4Q 2016/17 Agriculture Wholesale and retail Construction Manufacturing Education activities Transportation and storage Others Source: CAPMAS, Pharos research The main concern remains the participation rate decline as the labor force growth rate slowed down. This suggests that a part of the working-age population have stopped looking for jobs Participation rate Labor force (% YoY) (RHS) Source: CAPMAS, Pharos research Both male and female participation rate declined marginally to 69.20% and 21.00%, respectively, in 4Q2016/17 Female Prticipation rate Male Prticipation rate (RHS) 46.5% 3.0% 21.8% 70.5% 46.2% 2.8% 21.6% 21.4% 70.2% 45.9% 2.6% 21.2% 21.0% 69.9% 45.6% 20.8% 69.6% 45.3% 2.4% 20.6% 20.4% 69.3% 45.0% 2.2% 20.2% Q2 Q3 Q4 Q1 Q2 Q3 Q4 69.0% 44.7% 4Q 2015/16 1Q 2016/17 2Q 2016/17 3Q 2016/17 4Q 2016/17 Source: CAPMAS, Pharos research 2015/16 2016/17 Source: CAPMAS, Pharos research 4
Banking Indicators 5
Deposits expand mainly on household savings; System loan growth slows down geared by Private Business sector lending Jun-07 Jun-07 Nov-07 Nov-07 Apr-08 Apr-08 Sep-08 Sep-08 Feb-09 Feb-09 Jul-09 Jul-09 Dec-09 Dec-09 May-10 May-10 Oct-10 Oct-10 Aug-11 Aug-11 Jan-12 Jan-12 Nov-12 Nov-12 Apr-13 Apr-13 Feb-14 Feb-14 Jul-14 Jul-14 May-15 May-15 Oct-15 Oct-15 Aug-16 Aug-16 Jan-17 Jan-17 Jun-17 Jun-17 Jun-07 Jun-07 Nov-07 Nov-07 Apr-08 Apr-08 Sep-08 Sep-08 Feb-09 Feb-09 Jul-09 Jul-09 Dec-09 Dec-09 May-10 May-10 Oct-10 Oct-10 Aug-11 Aug-11 Jan-12 Jan-12 Nov-12 Nov-12 Apr-13 Apr-13 Feb-14 Feb-14 Jul-14 Jul-14 May-15 May-15 Oct-15 Oct-15 Aug-16 Aug-16 Jan-17 Jan-17 Jun-17 Jun-17 System deposits had a monthly CAGR of over 2Q17 vs. a CAGR of 1.4% a quarter earlier. System deposits growth in June which recorded 2.4% was the highest MoM growth witnessed over 2Q17. FCY deposits in USD terms had a CAGR of 1.1%, while LC deposits had a CAGR of 2.4% over 2Q17. FCY deposits stood at USD38.3 billion in Jun-17. 3000 2500 2000 1500 1000 500 0 Household Deposits, EGP bn Corporate Deposits, EGP bn Deposits Growth YoY (RHS) 5 4 3 2 1 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - LC Depsoits, EGP bn FC Deposits, EGP bn FC Deposits (USD) Growth Rate MoM (RHS) 2 15.0% 1 5.0% -5.0% -1-15.0% System loans had a monthly CAGR of 0.6% over the quarter vs. first quarter monthly CAGR of 1.5%, geared by private business sector lending CAGR of 0.9%. Loans also witnessed the slowest MoM growth and slowest YoY growth in June-17post policy rate hike in May. Foreign currency lending was declining MoM in real terms during Feb-17 to Apr-17 (latest available), shrinking by a CAGR of 1.5% YTD. While LC loans expanded by a monthly CAGR of 3.1% YTD. 1,200 1,000 800 Corporate Loans EGP bn Retail Loans, EGP bn Loans Growth YoY% (RHS) 6 5 4 800 700 600 500 LC Loans, EGP bn FC Loans, EGP bn FC Loans (USD) Growth Rate MoM (RHS) 15.0% 1 5.0% 600 400 200 3 2 1 400 300 200 100-5.0% -1-0 -15.0% 6
LDR softens; NIM maintain strength; NPL ratio improves; CAR shows recovery signs sequentially Dec-05 Jun-06 Jun-11 Dec-06 Sep-11 Jun-07 Dec-11 Dec-07 Mar-12 Jun-08 Sep-12 Dec-08 Dec-12 Jun-09 Mar-13 Dec-09 Jun-13 Jun-10 Dec-10 Dec-13 Jun-11 Mar-14 Dec-11 Jun-14 Sep-14 Dec-12 Mar-15 Jun-13 Jun-15 Dec-13 Sep-15 Jun-14 Dec-15 Jun-15 Jun-16 Dec-15 Sep-16 Dec-16 Jun-16 Mar-17 Dec-16 Jun-17 Jun-11 Jun-11 Sep-11 Sep-11 Dec-11 Dec-11 Mar-12 Mar-12 Sep-12 Sep-12 Dec-12 Dec-12 Mar-13 Mar-13 Jun-13 Jun-13 Dec-13 Dec-13 Mar-14 Mar-14 Jun-14 Jun-14 Sep-14 Sep-14 Mar-15 Mar-15 Jun-15 Jun-15 Sep-15 Sep-15 Dec-15 Dec-15 Jun-16 Jun-16 Sep-16 Sep-16 Dec-16 Dec-16 Mar-17 Mar-17 LDR slipped to 45.1% in Jun-17 vs. 47.0% in Jun-17; LCY-LDR improved to 43.4% while FCY-LDR recorded 44.1% in Jan-17 down from 53.2% in Mar-17 CAR strengthened and recorded 11.9% in Mar-17 vs. 11.3% in Dec-16 as more banks resorted to distribute stock dividends and issue new capital to boost capital post EGP flotation. 90% LDR LDR LC LDR FC 16.0% 14.0% CAR ( Tier 1) 80% 1 70% 1 60% 50% 8.0% 6.0% 4.0% 40% 30% Sufficient provisions coverage ratio maintained at 99.1% as of 1Q17; providing a solid cushion against the high NPL ratio of 5.7% in 1Q17 down from 5.8% in Dec-16. NIM strengthens and records 4.6% as of 1Q17. We expect a gradual ease in margins by June-end 2017. Provisions Coverage NPL (RHS) Net Interest Margin (NIM) 101.0% 10 99.0% 98.0% 97.0% 96.0% 95.0% 94.0% 93.0% 9 91.0% 9 1 1 8.0% 6.0% 4.0% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 7
Stock Market Indicators 8
Small caps the biggest winners YTD; Foreigners continue to emerge as net buyers EGX30 slumped in USD terms, but rose in EGP terms post flotation EGX70 slumped in USD terms, but rose in EGP terms post flotation and continued an upward trend since then EGX30, EGP EGX30, USD (RHS) EGX70, EGP EGX70, USD (RHS) 16000 1050 800 45 14000 950 700 40 12000 850 600 35 10000 750 500 30 8000 650 400 25 6000 550 300 20 4000 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 450 200 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 15 Basic Resources Sector and Chemicals Sector have a positive MTD performance, while Household Products has the best YTD performance followed by Healthcare. Financial Services, and Travel and Leisure have the worst performance of -7.0% MTD, also Financial services has the worst YTD performance of -1. Basic Resources Chemicals Industrials Healthcare Food & Beverages EGX70 EGX100 Banks Telecommunications EGX30 Household Products Real Estate Construction Travel and Leisure Financial Services YTD -13% -3% 7% 17% 27% 37% 47% 57% MTD 3,800 3,300 2,800 2,300 1,800 1,300 800 300 (200) (700) (1,200) Net foreign purchases into EGX slowed down massively, post the 4% interest rate hike Net Foreign Buiying, EGP mn 9
PBV (x) EGX Still Cheaper Than Emerging Market Peers P/E (x) Relative to potential ROE, Egypt is ahead of peers Egypt cheaper than emerging markets on P/E multiples 3 Egypt India Indonesia 2.8 UAE 2.6 2.4 Philippines 2.2 Peru 2 Thailand 1.8 Brazil Hungary 1.6 Malaysia Qatar Pakistan 1.4 Turkey 1.2 1 9 12 15 18 21 24 27 ROE (%) EGX30 at 11.4x P/E 2017; Should rerate to 14.0x by 2017 end 16000 14000 12000 10000 8000 6000 4000 2000 0 22 20 Philippines India 18 Indonesia 16 Peru UAE Malaysia Thailand 14 Brazil Egypt 12 Qatar Hungary 10 Pakistan Turkey 8 5 10 15 EPS Growth (%) 20 25 DY 2017 improves compared to the previous year 7 6 5 4 3 2 1 0 10
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