egypt banking sector

Global Research

September 2008

Banking

Egypt Banking Sector

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Global Investment House KSCCSharq, Global TowerP.O. Box 28807 Safat13149 KuwaitTel: (965) 295 1000Fax: (965) 295 1005E-mail: [email protected]://www.globalinv.net

Global Investment House stock market indices can be accessedfrom the Bloomberg page GLOHand from Reuters Page GLOB

Omar M. El-Quqa, CFAExecutive Vice [email protected] No: (965) 295 1110

Faisal Hasan, CFAHead of [email protected] No: (965) 295 1270

Mahmoud SoheimManager-Egypt [email protected] No:(202) 37609526

Cherine Fayez Farkouh, CFAFinancial AnalystSenior [email protected] No: (202) 37609526

Naveed AhmedFinancial [email protected] No: (965) 295 1280

Table of Contents

Investment Summary .......................................................................................................... 1

Economic Overview ............................................................................................................ 4

Background on the Banking Sector ................................................................................... 8

Financial Performance of the Banking Sector ............................................................... 15

Peer Group Comparison .................................................................................................. 28

Banking Sector Outlook ................................................................................................... 33

Valuation & Recommendation ........................................................................................ 34

Players Profile

Commercial International Bank .................................................................................. 37

National Societe Generale Bank ................................................................................. 58

Credit Agricole-Egypt ............................................................................................... 78

The Egyptian Gulf Bank ............................................................................................ 98

Export Development Bank of Egypt ......................................................................... 115

Global Research - Egypt Global Investment House

September 2008 Egypt Banking Sector 1

Investment Summary

The Egyptian banking sector has gone through major reforms in the last few years. The main reasons triggering such reforms were to eliminate disturbed banks and to enhance the assets quality and capital adequacy of the banking sector.

The problem rose when the large four public banks, constituting approximately 50% of the sector’s total assets in 2003, had a huge amount of Non Performing Loans “NPLs”, resulting mainly from extending large portions of loans to distressed public enterprises, in addition to having a lack of adequate risk management practices.

Therefore, the government decided to restructure the banking system through several methods. One of which was to sell stakes of public banks in other joint ventures in order to solve the NPLs problem. Another form was to amend regulations concerning the minimum required paid-in capital and the capital adequacy ratio.

A consolidation trend prevailed in the banking sector, during the last few years. Small banks and poor performers were easy acquisition targets, as they couldn’t abide by the regulations modified by the Central Bank of Egypt “CBE”, while foreign banks were involved in such actions, in an attempt to enter the Egyptian banking sector, especially after the government’s announcement that no banking licenses will be granted for the time being.

This foreign interest in the Egyptian banking sector reflects how the sector is perceived as having a promising growth potential, given the fact that there is a low banking penetration rate and many of the Egyptians do not have banking accounts. Besides, a large proportion of the population is in the youth age, lying between 20 and 45 years old, implying a potential growth of demand from this group. Another factor drawing the foreign interest is the continuing growth of the economy, which was reflected on many sectors. This growth, in turn, provided an improved business climate and encouraged investments by Egyptians and foreigners as well. The result was greater lending opportunities necessary to finance emerging projects, boosting the performance of the banking sector and implying promising aspects.

Foreign interest was illustrated by the participation of foreign players, whether international or regional banks in the bids that took place to acquire stakes in the Egyptian banks. These banks include BNP Paribas, Barclays, Piraeus, Credit Agricole, Societe Generale, BLOM and Audi. Foreign banks expressed their desire to enter the Egyptian banking sector by offering higher premiums in bids over local banks. The latest acquisitions that took place in 2007 were the acquisition of a 51.3% stake in the National bank for Development by Abu Dhabi Islamic Bank, as well as the acquisition of a 98.1% stake in Al Watany Bank of Egypt by the National Bank of Kuwait.

Another attempt by the Egyptian government to enhance the performance of the banking system was the privatization of Bank of Alexandria in 2006, where the Italian Intesa San Paolo Bank acquired an 80% stake in the Bank, reflecting again the attractiveness of the banking sector in Egypt.

Banque du Caire was about to be privatized, but the deal was cancelled in June 2008, as the presented bids did not match the value set by the government for the Bank. It is worth


2 Egypt Banking Sector September 2008

mentioning that there were 5 International and regional banks competing to acquire a stake in the Bank, which was set to be a maximum of 67% of the Bank’s shares. These banks were the Saudi Samba Bank, the National Bank of Greece, the British Standard Chartered Bank, a consortium composed of the Jordanian Arab Bank group and the Saudi Arab National Bank, and another consortium led by Mashreq Bank. The Saudi Samba Bank and the British Standard Chartered Bank did not participate in the auction, as they did not present bids. On the other hand, the three remaining banks presented their bids, with the highest price being that presented by the National Bank of Greece, amounting to US$1.4bn. Surprisingly, the government declined to sell the Bank’s stake at that price, revealing that the Bank’s intrinsic value is much higher.

As for the regulatory intervention in the banking system, the CBE has moved towards targeting inflation through employing a tight monetary policy and assigning the Monetary Policy Committee “MPC”, which main responsibility was to set each six weeks the deposit and lending rates at the CBE. This is done in accordance to the prevailing rate of inflation. Given the economic growth that the country is witnessing, along with skyrocketing food and energy prices internationally and in the local market, inflation reached 23.6% in August 2008, forcing the CBE to raise its rates to reach 11.5% and 13.5% in September 2008, respectively.

Our outlook for the Egyptian banking sector is positive, on the back of the promising prospects of the Egyptian economy and the resulting attractive investment climate. This climate is expected to spur projects in various sectors along with attracting foreign investments, representing enormous lending opportunities for banks in Egypt.

Additionally, there are still plenty of hidden opportunities in the sector. These are represented by many segments that do not participate extensively in the banking activity. The most apparent opportunities rely in the retail segment, which is almost unexploited. Large percentage of the population has no banking accounts. This represents a great potential for Egyptian banks, as they can capitalize on growth opportunities in this segment, given the growing demographics and the fact that more than half of the population is in the working age. Hence, demand from this segment is huge and is expected to increase furthermore. This is one of the reasons that triggered almost all private banks to announce the expansion of their branches in 2007 to satisfy larger client base.

Other untapped segments are the mortgage lending and lending to the Small and Medium Enterprises (SMEs). These segments constitute a minor fraction of the banks’ loans due to the high risks associated with them. However, the latest government regulations concerning the registration of the housing units and the SMEs, along with the establishment of the credit bureau are expected to boost lending to such segments.

Another key driver for potential growth is the fierce competition existing among local players. Though the number of banks was reduced from 62 banks in 2000 to 41 banks now, local lenders compete harshly to gain more market shares, through introducing new products and services, as well as investing in their infrastructural system.

The growth of the banking activity over the last few years supports our positive vision for the banking sector. This is expressed by the development of the total deposits and loans in the



sector. Total deposits (including government deposits) grew at a CAGR of 14.6% over the period from 2002/03 to 2006/07, reaching LE658.2bn, while total loans increased at a CAGR of 5.6% during the same period, reaching LE352.4bn in 2006/07.

Table 01: “Global” Valuation Matrix

Price (LE) Target (LE) Reco. Upside Potential BVPS* (LE) EPS* (LE) P/BV* (x) P/E* (x)

CIB 46.9 49.0 Hold 4.5 14.6 5.0 3.2 9.5

NSGB 30.0 34.3 Buy 14.4 13.2 4.0 2.3 7.5

CAE 15.2 17.0 Buy 11.8 5.8 1.7 2.6 8.7

EGBE (US$) 2.6 2.0 Sell -22.5 0.9 0.1 2.8 23.0

EDBE 21.1 20.6 Hold -2.2 12.8 2.9 1.6 7.2

Source: Global Research, market prices as of September 7th, 2008.* Based on 2008E for all banks and 2008/09E for EDBE, adjusted for goodwill and extraordinary items, if any.



Economic Overview

The Economy is Still Gaining MomentumFollowing the sound performance of the Egyptian cabinet led by Prime Minister Ahmed Nazif since 2004, the Egyptian economy has strengthened and showed positive signs. Effective means were carried out resulting in a buoyant GDP growth and major improvements in various sectors. The government implemented several economic reforms including privatization, cutting tax rates, attracting foreign investments, financial sector reforms, as well as public and private sector reforms. These reforms were reflected by a better investment climate.

Nominal GDP went up at a CAGR of 14.1% during the 5-year period from 2001/02 to 2006/07, whereas real GDP witnessed a 5.1% CAGR over the same period. Considering y-o-y growth, nominal GDP grew by 18.4% in 2006/07, reaching LE731.2bn, while real GDP increased by 7.1%, reaching LE486.5bn.

Moreover, nominal GDP grew by 21.0% y-o-y, over the 9M period ending March 2008, as it reached LE652.7bn, compared to LE539.4bn, realized in the same period of the previous year.

The development in the general economy was transmitted to a better standard of living for Egyptians, as the per capita GDP rose at a CAGR of 6.3% in the last five years and at 16.8% y-o-y, from US$1,460 in 2005/06 to US$1,706 in 2006/07.

Contributing SectorsThe sectors that showed major contribution to the GDP in 2006/07 were the agriculture sector with 13.8% of GDP, the extractive industry (compromising petroleum and natural gas), contributing to 15.2%, whilst the manufacturing industry alone constituted 16.8% of GDP. Finally, the wholesale and retail trade portion of GDP was 11.4%.

The extensive efforts of the Egyptian government resulted in better than planned figures, as the actual fiscal deficit in 2006/07 amounted to LE54.7bn, compared to an estimated figure of LE62.2bn. Such decline was a result of the 9.9% increase in the actual revenues over the budgeted figure, reaching LE180.2bn instead of LE163.9bn, which was a consequence of an 8.2% rise in tax revenues. The actual fiscal deficit realized in 2006/07 represented 7.5% of GDP, compared to 8.2% in 2005/06, showing evidence of the significant efforts implemented by the government.

Current AccountEgypt has proven competitiveness in the export market illustrated by the increase of the exports by 19.3% y-o-y in 2006/07, reaching US$22.0bn and a 25.3% CAGR from 2001/02 to 2006/07.

It is worth mentioning that the major component of exports in 2006/07 included fuels, mineral oil and products, constituting 46.6% of total exports. Finished goods, in turn, attributed to 34.2% of total exports in the same year.

The major export market for Egypt in 2006/07 was the European Union, with a share of 33.8%. The second highest market was the USA with a 31.1% share, followed by Asia, with



13.5%. Exports to the USA, growing by 21.4% from 2005/06 to 2006/07, have significant importance in the external trade market for Egypt. One of the main reasons that led to increasing exports to the USA was the Qualified Industrial Zones (QIZ) Protocol that Egypt entered in 2004, which helped boost exports to the USA, given the fact that Egypt could export goods to the USA without quota or duties. Exports to the Arab countries were 12.4% in the same year, while the remaining 9.2% of total exports were distributed among Europe, Africa and other countries.

On the other hand, imports grew by 24.3% y-o-y in 2006/07, realizing US$37.8bn. The major portion of imports was directed to the intermediate goods, which constituted 27.6% of the total Egyptian imports, then came the investment goods with 26.0%, while consumer goods reached 14.0%. It is worthy to note that the major export markets were the same main import markets, the European Union, the USA and Asia, with 34.4%, 21.8% and 15.9% of total imports, respectively.

The fact that imports reached US$37.8bn in 2006/07, while exports reached only US$22.0bn, resulted in a preliminary trade deficit of US$15.8bn. Fortunately, this deficit was compensated by a 39.8% increase in the services account, which was mainly attributed to receipts from transportation, especially from the Suez Canal, as well as growth in investment income.

Such improvements in the services account along with the 27.3% y-o-y increase of net transfers, contributed to a rise in the current account surplus by 53.9% y-o-y in 2006/07, reaching US$2.7bn, compared to US$1.8bn recorded the previous year.

In March 2008, exports proceeds surged by 31.1% y-o-y, reaching US$20.8bn. This incline was pushed by the 35.4% increase in oil exports and the 27.4% rise in other exports. As for imports, they amounted to US$37.6bn, realizing a y-o-y growth of 43.1%. This was attributed to the significant surge in oil imports, growing by 138.1% y-o-y, reaching US$6.8bn, along with the 31.5% rise in other imports, amounting to US$30.8bn. The fact that growth in imports surpassed that of exports resulted in an increase in the trade deficit balance, reaching US$16.8bn, compared to US$10.4bn, over the same period a year before.

It is worth mentioning that this deficit was compensated by a surplus in the service and transfers accounts by US$10.9bn and US$6.4bn, respectively. This led to a surplus in the current account, amounting to US$488.4mn.



Accelerated Inflation

After the floatation of the Egyptian pound in 2003 and the enhanced confidence in the Egyptian economy, as a result of the economic reforms adopted by the government, the demand for investing in Egypt increased, causing an appreciation of the local currency against the US$ starting from 2005. The exchange rate reached LE5.5:US$1 in Nov 2007, compared to LE5.8:US$1 in 2005. Fortunately, the appreciation of the Egyptian pound did not negatively affect the Egyptian exports, as shown earlier.

In 2005, the Central Bank of Egypt moved towards inflation targeting. For this purpose, it established the Monetary Policy Committee, which was scheduled to meet every six weeks to identify the corridor range, representing the overnight deposit and lending rates at the CBE, which were set initially at 9.5% and 12.5%, respectively. In June 2006, rates were reset at 8.0% and 10.0%. Since then, these rates have been moving according to the development of the inflation rate. In April 2008, the inflation reached 16.4%, while deposit and lending rates reached 10.0% and 12.0% in May 2008, respectively.

In May 2008, the government announced the removal of tax exemption on treasury bills, private schools and universities, as well as extensive energy consuming industries, operating under the free-zones system, mainly fertilizers, cement, steel and petrochemicals. In addition, energy subsidies have been reduced for all energy intensive industries. Moreover, new fees were imposed on car licensing, with different categories according to the engines types. Later on, the tax exemption on newly issued treasury bonds was also removed.

These decisions were reflected on higher inflation, reaching 23.6% in August 2008, pushing the MPC to further raise the corridor range, which reached 11.5% and 13.5% in September 2008, respectively.

Hikes in inflation during the last few years were also a result of the increased money supply in the Egyptian economy, which was illustrated by the jump of the Domestic Liquidity (M2) by 18.3% in 2006/07, reaching LE662.7bn. This could be attributed to the 20.1% growth in Narrow Money Supply (M1) and the 17.8% rise in Quasi Money. These rises were a result of the growth realized in the economy, which triggered the development of many investment projects, leading to the current increase in liquidity witnessed in the banking system.

On the other side, interest rates reflected a slight decrease over the period from 2003/04 to 2006/0 7, where deposit rate for less than one year declined to 6.9% in June 2007 from 7.77%. Also, the lending rate for less than one year went down from 13.27% to 12.60%.



Outlook for the Egyptian Economy

Our outlook for the Egyptian economy is positive given the strong growth realized since the appointment of the current cabinet in 2004. The achievements made in various sectors of the economy and the thriving investment climate are all signs of continuing development in the years to come.

The continuous efforts of the government towards improving the economy’s growth support our positive vision for the Egyptian economy, as the government announced many objectives to be achieved within the 5-year governmental plan ending mid 2012. Such objectives are represented by shifting the annual GDP growth to 8%, decreasing inflation to 6%, reducing unemployment to 5.5% down from 9% along with other objectives, which if achieved should bring fruitful benefits to the Egyptian economy. We believe such objectives could be realized relying on the fact that the Egyptian cabinet has proven to be successful in reaching planned goals.

Currently, the main challenges facing the Egyptian economy are the rising inflation rate and the weakening US Dollar. Up till now, the government has been successful in dealing with both problems, which are more external than internal.



Background on the Egyptian Banking Sector

Banking Structure DevelopmentThe first Egyptian bank was the National Bank of Egypt “NBE”, which was established in 1898, with a capital of GB£1mn. It used to perform the duties of a central bank in the 1950’s. Banque Misr “BM” was then established in 1920 followed by Banque du Caire “BdC” in 1952 and Bank of Alexandria “BoA” in 1957. The Central Bank of Egypt “CBE” was established in 1961. During the 1960’s, banks were nationalized and NBE acted as a commercial bank, while still carrying out some of the duties that were not covered by the CBE at that time.

The open door policy adopted in Egypt in the 1970’s to attract foreign investments resulted in an expansion of the banking system, which was composed at that time of 4 public banks, 3 investment banks and 19 specialized banks. Meanwhile, the banking law was established, identifying the three types of banks, along with the functions of each type.

The banking structure swelled significantly since then and until the 1990’s, as the number of banks soared from 26 to 63 banks in 1999. The branch network also expanded from 527 to 2,434 branches. As a result of the consolidation movement that took place in the sector during the last few years, represented by mergers and acquisitions actions, and the fact that 7 branches of foreign banks ended their business in Egypt, the number of banks shrank to 41 by 2007 and the branch network expanded to compromise currently 3,252 branches in order to cover larger client base.

Table 02: Banking Structure Development

End of JuneCommercial

BanksInvestment Banks Specialized Banks Total # of Banks

1970 5 0 20 25

1975 4 3 19 26

1980 19 29 4 52

1985 43 33 4 80

1990 44 33 4 81

1995 28 32 4 64

2000 28 31 3 62

2005 27 22 3 52

2006 23 17 3 43

Source: CBE, Global Research

Chart 01: Banking Structure in 2006/07

It is worthy to note that the private and joint venture banks constituted 68.3% of the total number of banks in 2006/07, whereas off-shore banks and public banks’ shares were 17.1 and 14.6%, respectively.

Public Sector14.6%

Off-Shore Banks17.1%

Private and JointVentures 68.3%




Poor Performance Triggered Reforms…The Egyptian banking sector was dominated by the four large public banks NBE, BM, BdC and BoA. As a result of long existence in the Egyptian market and accordingly, having huge number of branches serving greater share of the population compared to the private banks, the public banks constituted approximately half of the sector’s assets in 2003. This being the case along with the fact that these banks provided large portion of their loans to public enterprises had negatively impacted the performance of the four banks and resulted in a combined non-performing loans/ total assets ratio of approximately 12% in 2002.

That said, the Egyptian government was urged to alleviate the banking system’s turmoil, realizing its importance in the development of the economy. Therefore it devoted significant efforts to make major reforms in the sector, including amendments in some regulations, accompanied by privatization and consolidation actions. The main objective behind these reforms was to improve the sector’s efficiency, in terms of asset quality as well as capital adequacy.

Public Banks Being the Primary Concern…The Government adopting several reforms tools, began with selling stakes of public banks in joint venture banks to curb the problem of hefty bad debts. The following table summarizes the public stakes sold over the period from 2004 to 2007.

Table 03: Sale of Public Banks’ Stakes in Joint VenturesDivested Public Bank Acquirer Acquired Shares in Joint Ventures

Ripplewood Consortium Commercial International Bank

National Bank of Egypt Arab Banking Corporation International Suez Canal Bank

Societe Generale National Societe Generale Bank

Banque Misr National Societe Generale Bank Misr International Bank

BLOM Bank Egypt Romania Bank

Arab African International Bank Misr America International Bank

Banque du Caire Audi Cairo Far East

Union National Bank Alexandria Commercial and Maritime

Bank of Alexandria Barclays Cairo Barclays

Piraeus Egypt Commercial Bank

Credit Agricole Egypt American Bank

Shareholders in Delta International Bank Delta International Bank

National Investment Bank Misr Iran Development Bank

Source: Ministry of Finance, Global Research

In 2005, Non-performing Loans “NPLs” owed by public enterprises to public banks amounted to LE 26bn. The government paid as fractional settlements for these loans LE6.9bn in January 2006 and LE9.1bn in December 2006, with the remaining amount to be finalized by 2009, according to the government’s plan.

Moreover, the government has appointed skilled management and staff, along with improving internal processes of state-owned banks, in order to raise their competitiveness.



Notable Reforms to the Whole System…Aiming at enhancing the banking system’s competitiveness in terms of adequate capital together with improving the capabilities of banks to meet default on their loans, the government has set regulations for increasing the minimum required paid-in capital and capital adequacy ratio. Additionally, the government enhanced the role of the CBE in regulating the sector and assigned it more responsibilities.

As an additional attempt to control NPLs for the whole banking system, the CBE issued a decree in September 2004 to establish a unit in the CBE to monitor the banks’ NPLs books and asked banks to establish a similar internal unit. The role of the CBE would be to continuously monitor these units to make sure that they are well implemented and well performing to deal with NPLs. The efforts performed by this unit resulted in the settlement of 67% of NPLs in private banks over the period from 2004 to March 2007.

Recently, a credit bureau, under the supervision of the CBE, has been established with the aim of providing information to banks regarding personal and financial information on borrowers, as well as their financial history, including loans defaults, bankruptcies, court judgments and late payments. Other positive information such as timely settlements is also included. The objective of establishing this bureau was to facilitate time saving procedures. According to this process, borrowers will not have to wait for a long time until the bank investigates their financial position and approves loans’ requests. Furthermore the risk of default will diminish by providing banks with accurate information that will help them in their decision making.

Moreover, the government motivated the consolidation of the sector through privatization, mergers and acquisitions to get rid of disturbed banks.

Consolidation Dominated the Sector…The Government aimed at consolidating the banking sector in order to increase the players’ competitiveness and eliminate lowly performers. An important factor contributing to the consolidation of the banking sector was the amendments of regulations by the CBE.

According to the Unified Banking Law of 2003, the minimum required paid-in capital was raised to LE500mn from LE100mn. In addition, the capital adequacy ratio was raised from 8% to 10% of the risk-weighted assets. It is worthy to note that this law gave the CBE more responsibilities as a regulatory organization, where the governor directly reports to the country’s President.

Meanwhile, these amended regulations spurred local banks, especially small ones and poor performers to opt for mergers and acquisitions in order to conform to the new laws.



Table 04: Banks’ Mergers during the Period from 2004 to 2007First Bank Second Bank New Entity DateAmerican Express Bank (Branches in

Egypt)Egyptian American Bank Egyptian American Bank Sep-04

Misr Exterior Bank Banque Misr Banque Misr Sep-04

Credit Lyonnais Branch Credit Agricole Indosuez Calyon Mar-05

Misr America International Bank Arab African International Bank Arab African International Bank Sep-05

Mohandes Bank National Bank of Egypt National Bank of Egypt Oct-05

Bank of Commerce and Development National Bank of Egypt National Bank of Egypt Dec-05Nile Bank with Islamic International

Bank for Investment and DevelopmentUnited Bank of Egypt United Bank of Egypt Jun-06

Egyptian American Bank Calyon Credit Agricole Egypt Sep-06

Misr International Bank National Societe Generale Bank National Societe Generale Bank Nov-06

Banque du Caire Banque Misr Banque Misr Feb-07

Source: Ministry of Finance, Global Research

Foreigners Chasing Opportunities in the Sector…Foreign banks have shown continuous interest in the booming banking sector in Egypt in the last few years. This was due to a number of reasons, the majority of which were a pure result of the economic reforms, as well as the banking reforms that Egypt is currently witnessing. Such reforms helped boost the banks’ profitability over the last few years, along with decreasing NPLs gradually and entailing good lending prospects.

The major inducement for the foreign interest was the escalating demographics in Egypt and its resulting potential for the retail segment, as the population rose at a CAGR of 2% over the last 5 years, reaching 75mn in 2006/07, with a high percentage of youth, almost in the working age group. We believe that a wide range of the population in Egypt has a low or even zero banking penetration. This could be attributed to the low income levels, the lack of awareness of the importance of participation in banking activities, in addition to the informal job market. Foreign attention was thus stimulated by the short of saturation of the retail segment in an attempt to capitalize on the huge unfulfilled demand.

In addition, foreign players were enticed to participate in mergers and acquisitions, especially after the Government’s announcement regarding not granting any new banking licenses.

The foreign interest was divulged by the flow of international foreign and Arab banks acquisitions of local lenders since the banking sector reforms were initiated in 2004. It began when the British bank Barclays acquired from banque du Caire its 40% remaining stake in Cairo Barclays. Other foreign banks that acquired stakes in the sector over the last few years were Credit Agricole, Societe Generale, Piraeus, BLOM Bank, Abu Dhabi Islamic Bank and National Bank of Kuwait. Yet there was a larger range of foreign banks that revealed their interest in the Egyptian banking sector and strived to obtain stakes in it, but they did not reach their target to win the related bids.



Table 05: Most important Acquisitions over the Period from 2005 to 2007

Acquired Bank AcquirerAcquisition

Date%

Acquisition Price (LE)

Deal Value

(LEmn)

BV per share

BV Weights

P/BV *

Misr America

International Bank

Arab African

InternationalMay-05 100.0 239.5 239.5 146.0 18.2% 1.6

Egyptian Commercial

Bank**Piraeus Jun-05 88.0 20.0 169.0 18.0 2.2% 1.1

Suez Canal BankArab International

BankAug-05 16.8 10.0 48.2 29.4 3.7% 0.3

Misr International

BankNSGB Sep-05 90.7 43.2 2,204.0 21.4 2.7% 2.0

Misr Romania *** BLOM Bank Dec-05 99.4 11.8 590.0 13.7 1.7% 0.9Egyptian American

BankCredit Agricole Feb-06 74.6 45.0 2,176.6 11.8 1.5% 3.8

CIB****A consortium led by

Ripplewood HoldingsFeb-06 18.7 53.5 1,302.5 16.3 2.0% 3.3

Cairo Far East Audi Bank Mar-06 99.7 205.3 540.1 70.6 8.8% 2.9Misr Iran

Development Bank

National Investment

BankApr-06 29.9 223.4 107.7 411.8 51.4% 0.5

Delta International

Bank

A consortium led by

Ahli United BankAug-06 89.3 37.0 1,652.0 11.5 1.4% 3.2

Alexandria

Commercial MaritimeUnion National Bank Aug-06 94.8 23.0 244.5 15.3 1.9% 1.5

Bank of Alexandria San Paolo Dec-06 80.0 72.0 9,215.0 10.4 1.3% 6.2National Development

Bank

Abu Dabi Islamic

BankJul-07 51.3 11.0 159.1 11.2 1.4% 1.0

Al Watany Bank of

Egypt

A consortium led

by National Bank of

Kuwait

Dec-07 98.1 77.0 5,660.2 13.8 1.7% 5.6

Total 801.3 100%

Average P/BV (Simple) 2.3

Average P/BV (Weighted) 1.3

Source: News Announcements, Global Research

* P/BV Calculation (Equity less net profit of the year /outstanding number of shares).

**In June 2005, Piraeus acquired around 69% of the Egyptian Commercial Bank, bringing its total stake to

88.0%.

***In December 2005, Blom Bank acquired around 84% of Misr Romania Bank, in which it originally owned

12.5%, bringing its total stake to 96.7%.Later on, it raised its stake to 99.4%.

****Currently, the Consortium’s stake in CIB is 5.6%

Two Major Acquisition Bids in 2007…The year 2007 witnessed two acquisitions of local lenders by Arab banks mainly from the GCC countries, attracted by the positive sentiment on the Egyptian banking sector. In June 2007, the CBE announced its approval for three foreign banks to conduct due diligence on Al Watany Bank of Egypt. The three banks were National Bank of Kuwait “NBK”, Commercial Bank of Kuwait and the Greek EFG Eurobank. NBK won the bid and acquired 70.3mn shares of Al Watany Bank of Egypt at LE77.0 per share in November 2007, implying a P/BV of 5.6x. In addition, NBK acquired a 2.1% additional stake in the Bank in December 2007, where its total stake reached 98.1%.



In July 2007, a consortium led by Abu Dhabi Islamic Bank acquired 51.3% of the National Development Bank at LE11 per share, which was close to the share’s book value. The National Development Bank had NPLs of LE2bn, exceeding 50% of the Bank’s total loans, which- according to the acquirer- will be covered over a 5-year period, during which no cash dividends will be distributed.

It is worth mentioning that the Egyptian Gulf Bank and the Arab Investment Bank are potential acquisition targets, due to their relatively low market shares, low capital base and modest performance, compared to large peers in the market.

One of the Big Four Privatized…The foreign appetite in the Egyptian banking sector was again revealed in the privatization deal of BoA. In February 2006, the government announced its intention to privatize BoA, the smallest bank of the large four public banks, through selling a stake of 75-80% of the Bank’s shares to a strategic investor, 15-20% to the general public through an IPO and 5% to be allocated to the Bank’s employees. There were 13 banks that submitted requests to purchase the announced stake, comprising international, regional and local banks, of which 8 banks presented preliminary offers. The CBE allowed 6 of these banks to perform due diligence on BoA, among which were Mashreq Bank, Intesa San Paolo Bank, Arab Bank, CIB and BNP Paribas. The final purchase offers presented were from 4 European and Arab banks not including any local bank. Finally, in October 2006, the Italian Bank Intesa San Paolo won the bid and acquired after 2 months, 80% of the Bank’s shares at a total of LE9.2bn (US$1.6bn), representing US$12.6 per share, which was more than 5.5 times the share’s book value. The second highest premium was presented by the Arab Bank, which offered LE7.9bn (US$1.4bn).

The government is currently awaiting the right time to offer the remaining 15% of BoA shares through an IPO.

The privatization of BoA revealed the foreign players will to acquire a local bank at a high premium, just to ensure a seat in an under-banked country with robust growth potential.

Privatization of BdC Postponed Surprisingly…Still attracting foreign lenders, the government was about to privatize the third largest public bank “BdC”. The story began in May 2007 when the government announced the merge of BdC with BM. Three months later, it was announced that BdC, which captures a 6% market share in terms of total deposits and also of total assets of the banking sector, would be privatized. The privatization would have occurred through selling a maximum stake of 67% to a strategic investor, offering a 28% stake through an IPO in the stock exchange, with the 5% remaining stake to be distributed among the Bank’s employees. Among 14 financial advisory institutions, JP Morgan was assigned responsible for the sale. The preliminary offers presented, amounting to 12 offers illustrated the flow of foreign interest to gain presence in the market. These offers were represented by the Arab Bank Consortium, Deutsch Bank, Mashreq Bank, Kuwait’s Noor Financial Investment Company, Commercial Bank of Kuwait and other foreign and Arab banks. In March 2008, the CBE announced the short-list consisting of 5 banks that were allowed to make the due diligence on BdC, these banks were the Saudi Samba Bank, the National Bank of Greece, the British Standard Chartered Bank, a consortium composed of the Jordanian Arab Bank group and the Saudi Arab National Bank, and another consortium led by Mashreq Bank.



Surprisingly, the deal was cancelled in June 2008 and it was announced that the privatization of the Bank would be postponed, as the bids presented were below the minimum price set for acquisition. Two of the competing banks, Saudi Samba Bank and the British Standard Chartered Bank, were disqualified and did not participate in the bid. National Bank of Greece presented the highest bid, at US$1.4bn, followed by Mashreq Bank and the consortium composed of the Jordanian Arab Bank group and the Saudi Arab National Bank, presenting a price of US$0.9bn and US$0.8bn, respectively.

Though the cancellation of the deal was surprising and raised questions regarding the reasons for not undergoing the privatization procedures, this event ensures the existence of inherent opportunities in the Banking sector, as the government viewed that the presented bids did not meet the real value of the Bank.

Furthermore, the government announced that it was not planning to privatize the two remaining public banks (NBE and BM) in the coming five years to let the banks strengthen their institutional performance.



Financial Performance of the Banking Sector

Performance Positively Affected by ReformsThe reforms taking place in the Egyptian banking sector since 2004 had positively influenced the performance of the banks in terms of improved consolidated assets and liabilities and resulting performance ratios. The period under analysis in our report is from 2002/03 to 2006/07 to show how the adopted reforms positively affected the banks’ performance. We will analyze the development of the consolidated assets, liabilities, deposits, loans of the banking sector, along with some performance indicators.

Increased Money Supply The acceleration of the Egyptian economy, accompanied by the banking sector reform program, stimulated investments in various business sectors leading to an increase in the money supply in the market, which was translated into the incline of the consolidated assets and liabilities of the banking system.

Domestic Liquidity (M2) increased by 18.3% y-o-y in 2006/07, reaching LE662.7bn, compared to LE560.4bn in 2005/06. Narrow Money Supply (M1), represented by currency in circulation and demand deposits in local currency, rose by 20.1%, reaching LE131.3bn, while Quasi Money, which consisted of time and saving accounts in local currency along with demand, time and saving deposits in foreign currency, moved up by 17.8% reaching LE531.4bn in the same year.

Chart 02: Domestic Liquidity Development

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M1 Quasi Money


Vast Funding Base…The increased money supply in the banking system was reflected in rising figures of the aggregate assets and liabilities. The funding base, representing the key driver for the banks’ good performance has ameliorated in 2006/07 by 23.2% y-o-y, reaching LE937.9bn, compared to LE761.6bn in 2006.



Table 06: Aggregate System’s Liabilities

In LEmn 2002/03 2003/04 2004/05 2005/06 2006/07

Capital 18,155 20,346 22,949 27,112 33,037

Reserves 11,805 11,454 12,419 13,418 12,552

Provisions 40,099 44,584 49,541 54,950 53,469

Long-term loans and bonds 14,866 15,012 14,254 17,526 26,351

Obligations to banks in Egypt 35,579 29,933 22,671 21,488 82,619

Obligations to banks abroad 16,247 10,332 12,262 8,770 10,006

Total deposits 403,144 461,697 519,649 568,841 649,953

Other liabilities 38,043 40,078 49,883 49,457 69,936

Total Liabilities 577,938 633,436 703,628 761,562 937,923


Since 2002/03, total deposits have been the major component of the banking system liabilities, reaching around LE650bn in 2006/07 and representing 69.3% of total liabilities.

Chart 03: Composition of Aggregate Liabilities-2006/07

Capital 3.5%Other liabilities 7.5% Reserves 1.3%

Total deposits 69.3%

Provisions 5.7%

Long-term loans and bonds 2.8%

Obligations to banks abroad 1.1%

Obligations to banks in Egypt 8.8%


Deposits Moving Up…The aggregate deposits balance of the banking system, including government deposits, grew at a 15.2% y-o-y in 2006/07. The main driver behind the increase in total deposits was the escalating non-government deposits, which grew by 18.8% y-o-y in 2006/07, reaching approximately LE581.3bn and representing 88.3% of the total deposits.



Chart 04: Government and Non-Government Deposits Growth

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2002/03 2003/04 2004/05 2005/06 2006/07

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Total Government Deposits Total Non-Government Deposits


It is worth mentioning that deposits in local currency represented 71.6% of total deposits in the banking system in 2006/07, while deposits in foreign currency represented 28.4% in the same year. The household sector contributes to 75.5% of total non-government deposits in local currency and 62.9% in foreign currency. The private sector comes second with 18.2% in local currency and 31.4% in foreign currency.

Chart 05: Non-Government Deposits in Local Currency in 2006/2007 (Including cheques and drafts)

Chart 06: Non-Government Deposits in Foreign Currency in 2006/2007 (Including cheques and drafts)

Public Sector5.5%

PrivateSector18.2%

HouseholdSector75.5%

Non-Residents0.8%

Public Sector4.3%

PrivateSector31.4%

HouseholdSector62.9%

Non-Residents1.4%


Rise in Deposits Reflected on Total Assets …The aggregate banking system figures in 2006/07 illustrate remarkable growth in total assets on the back of the realized incline in the sources of funds, namely deposits. Total assets grew by 23.2% y-o-y, reaching LE937.9bn. Looking at the components of assets, we realize that the securities and investments in treasury bills declined by 9.2% in 2006/07 and the loans and discount balances went up by the same percentage, which can be explained by the decrease in treasury bills yields, which was compensated by the increase in lending rates.



Table 07: Aggregate System’s AssetsIn LEmn 2002/03 2003/04 2004/05 2005/06 2006/07

Cash 5,557 5,412 6,594 6,813 7,705

Securities and investments in treasury bills 111,337 137,431 170,659 193,965 176,098

Balances with banks in Egypt 110,874 116,290 124,986 121,695 217,363

Balances with banks abroad 29,798 43,290 51,204 72,554 124,366

Loans and discount balances 284,722 296,199 308,195 324,041 353,746

Other assets 35,650 34,814 41,990 42,494 58,645

Total Assets 577,938 633,436 703,628 761,562 937,923


Loans and advances have always captured the lion’s share of the banking system’s total assets. The growth in total assets in 2006/07 was mainly driven by the acceleration of the loans and discount balances, constituting 37.7% of the total aggregate asset base of the sector.

Chart 07: Composition of Aggregate Assets-2006/07

Cash 0.8%Other assets 6.3%Securities and investments intreasury bills 18.8%

Balances with banksin Egypt 23.2%

Balances with banksabroad 13.3%

Loans and discountbalances 37.7%


Growing Loans Books…Egyptian banks benefited strongly from the large available funding base to expand their lending capabilities in 2006/07. Loans books witnessed a y-o-y growth of 9.1%, which was stimulated by the reforms that have been occurring in Egypt over the past few years, impacting various sectors, where the need rose for loans to fund necessary investments. Alternatively, the reforms that took place in the banking system positively affected the banks’ performance and enhanced their ability to fulfill required loans.



Chart 08: Loans Growth

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2002/03 2003/04 2004/05 2005/06 2006/07

LEbn


Government loans in 2006/07 accounted for a minor fraction of the total loans in the banking system, representing only 7.6% and amounting to LE26.7bn, while the major component, consisting of 92.4% of total loans consisted of non-government loans reaching LE325.8bn. On the other hand, loans denominated in local currency represented 70.3% of the total loans in the same year.

Most of the non-government loans in 2006/07 went to the industrial sector, as this sector contributed to 31.3% of the non-government loans in local currency and 41.1% in foreign currency. Then comes the services sector with 26.3% of loans in local currency and 36.7% in foreign currency. It is worthy to note that the retail lending represented only 17.0% of the total loans in 2006/07, which could be explained by the huge risk associated with lending to individuals compared to institutions, as probability of default is much higher. Besides, information on the financial position of borrowers was not yet available, but should be accessible shortly, as the credit bureau that will be responsible for gathering data on the financial position of the banks’ clients has been recently established. When such information will be available, retail lending is expected to ameliorate, especially with the huge unfulfilled demand for loans in the household sector.

Chart 09: Non-Government Loans in Local Currency-2006/07

Chart 10: Non-Government Loans in Foreign Currency-2006/07

Agriculture Sector2.9%

Industry Sector31.3%

Trade Sector15.8%

Services Sector26.3%

Household &External Sector

23.7%

Agriculture Sector1.0%

Industry Sector41.1%

Trade Sector 13.2%

Services Sector36.7%

Household & ExternalSector 8.1%




Projected Banking Figures…We assumed future figures of the Egyptian banking system based on the forecasted figures of GDP by the International Monetary Fund. We took the average of the annual M2 as a % of GDP to project future balances of M2. We also projected future deposits balances based on the annual average of deposits/M2. It is worth mentioning that we have added a slight premium to this ratio to take into account the expected increase in deposits balances, as a result of the amendments on the corridor range. In addition, we projected future loans based on the average of the annual loans/deposits ratio, with a minor incline to reflect the increase that is expected to occur in loans balances as well.

Table 08: Projected Figures of the Banking SystemIn LEmn Jun-05 Jun-06 Jun-07 Jun-08 E Jun-09 E Jun-10 E Jun-11 E

GDP 538,528.0 617,676.4 731,201.6 857,633.0 1,005,339.0 1,161,365.0 1,337,537.0

M2 493,884.0 560,356.0 662,688.0 780,617.6 915,059.6 1,057,074.4 1,217,426.2

% of GDP 91.7% 90.7% 90.6% 91.0% 91.0% 91.0% 91.0%

% change y-o-y 13.5% 18.3% 17.8% 17.2% 15.5% 15.2%Deposits (including

government deposits)521,745.0 571,461.0 658,215.0 819,648.4 960,812.5 1,109,928.1 1,278,297.5

% of M2 105.6% 102.0% 99.3% 105.0% 105.0% 105.0% 105.0%

% change y-o-y 9.5% 15.2% 24.5% 17.2% 15.5% 15.2%

Loans 308,195.0 324,041.0 353,746.0 463,148.4 576,487.5 665,956.9 766,978.5

Loans/Deposits 59.1% 56.7% 53.7% 56.5% 60.0% 60.0% 60.0%

% change y-o-y 5.1% 9.2% 30.9% 24.5% 15.5% 15.2%

Source: International Monetary Fund, CBE and Global Research

Performance IndicatorsAs illustrated in the previous section, the banking reforms have positively influenced the performance of the banking sector, which was shown by the acceleration of the aggregate banking system figures over the period from 2002/03 to 2006/07. To highlight the effect of these reforms, we will present some performance indicators, including interest rate spread, a couple of profitability ratios and loans/deposits ratio.

Interest Rate SpreadThe interest rate spread is the best indicator to show banks’ performance, as it illustrates the income generated from core banking activities.

This income is generated through realizing a spread between the lending rate and the cost of funds, represented by interest rates on different deposits. The spread has been relatively stable over the last 4 years, as the rates are more or less moving together in the same direction.

Banks generate additional income through other sources, one of which is reaping fees and commissions from lending activities and contingent liabilities offered to clients, in addition to fees from investment banking activities. Banks have other sources of income, but these are volatile. These sources encompass dividend income, gains on sale of financial investments, profits realized from foreign exchange operations, financial investments valuation differences and other items.



Chart 11: Interest Rate Spread

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2003/04 2004/05 2005/06 2006/07

%

Less than three-months deposits Less than six-months deposits Less than one year deposits Loans of one year or less


ROAA and ROAE Moving Positively Profitability of the banking sector, measured by Return on Average Equity (ROAE) and Return on Average Assets (ROAA), have been positively affected by the reforms in the sector and the economy as a whole. ROAE and ROAA moved in an upward trend since 2003/04, reaching 14.3% and 0.8% in 2006/07, up from 9.8% and 0.5%, respectively.

Chart 12: Profitability Indicators (2003/04-2006/07)

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ROAE ROAA (right scale)


A Significantly Unleveraged Sector…Total loans witnessed a modest CAGR of 5.6% over the period from 2003/04 to 2006/07, compared to a CAGR of 14.6% in total deposits. As a result, the loans/deposits ratio declined from 64.2% to 54.4%. This implies that banks are still reluctant to use great portions of deposits in providing loans and having to bear the risk of default. Alternatively, banks prefer to invest more of their funds in less risky assets like treasury bills and other investments, while they have to abide by the minimum required liquidity ratio. They have to keep a minimum of 20% in liquid assets denominated in local currency and 25% in foreign currency. Meanwhile, the tax exemption previously exerted on treasury bills pushed banks to augment their investments in these instruments and put a break on their lending activity. This was another reason leading to the decline of the loans/deposits ratio.



As these practices were far away from the core banking activities, the government decided in May 2008 to remove the tax exemption shield on treasury bills’ gains, in an attempt to push banks to expand their lending facilities and restrain from investing their funds in a way that deviates from their core business. The tax exemption on treasury bonds was also cancelled afterwards.

In the meantime, the relatively low loans/deposits ratio indicates that banks have enough room if they decide to direct more of their funds to lending opportunities.

Chart 13: Loans/Deposits Ratio Development

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CBE and Regulatory Intervention

Inflation on the Rise…As described earlier, the growth in the Egyptian economy since 2004 led to an enhanced investment climate and increased money supply. This in turn led to a rise in aggregate demand and consumption, uncoupled with local production, resulting in soaring commodity prices. Simultaneously, the improvements achieved in many sectors resulted in increased raw material prices. Meanwhile, economic growth decreased the rate of unemployment and raised demand for labor, shifting wages upward. In addition, the increase in food and energy prices internationally was reflected on domestic prices. All these factors combined attributed to hiking prices and inflation reaching 23.6% in August 2008, compared to 6.9% in December 2007.

Tight Monetary Policy Targeting Inflation…The Unified Banking Law of 2003, which identified the various functions of the CBE, gave it a free-hand to implement the appropriate monetary policy. The policy adopted by the CBE is a tight one aiming at decreasing inflation, which if not adjusted would harm the economy.

Counteracting Inflation through the Corridor Range…In 2005, the CBE decided that its main tool to adjust inflation would be the overnight deposit and lending rates at the CBE, which is the “corridor range” that is adjusted every six weeks according to the MPC meeting. In 2005, deposit and lending rates at the CBE were set at 9.5% and 11.5%, respectively. In June 2006, rates were readjusted to be 8% and 10%. The MPC continuously amended the corridor range, in response to the accelerating inflation. Of late, precisely in September 2008, the deposit and lending rates stood at 11.5% and 13.5%, respectively, as the inflation reached 23.6% in August 2008.



Chart 14: Development of the Inflation and Corridor Range

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Deposit Rate at the CBE Lending Rate at the CBE Inflation Rate


Will the Tight Monetary Policy Succeed in Targeting Inflation?It is not certain whether the restrictive monetary policy will succeed to decrease the inflation rate, especially in the short run, as the government plans to expand the growth of the economy could alternatively lead to higher levels of inflation. Besides, the fiscal policy is contradicting with the monetary policy, where the government’s plan to decrease its expenditures through cutting subsidies, especially those concerning the energy intensive industries, in addition to removing some tax exemptions, could have a significant impact on rising prices and thus increasing inflation. Nevertheless, if inflation continues to rise, which will mostly be the case, the CBE is expected to further raise interest rates gradually.

Combined Effect on Interest Rate SpreadNot surprisingly, many banks have raised the interest rates on their deposits, following the consecutive climbs of the corridor range. This is expected to be followed by a similar or greater increase in rates posed on the banks’ loans. Albeit the banks will be able to widen their spread in 2008 and 2009, as a result of these practices, it is plausible that spreads will contract thereafter, as a result of the intensifying competition in the sector. This competition will push banks to decrease the rates on loans, while posing higher rates on deposits to be able to maintain their market shares, which will be negatively reflected on the bank’s interest rate spread.

The same goes for treasury bills yields, as they are expected to grow higher till 2009, compensating for the removed tax shield, then to decline afterwards, as banks will probably be less relying on these instruments in their investment portfolios.



Chart 15: Lending Rates vs. Treasury Bills Rates

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2007 2008 E 2009 E 2010 E 2011 E 2012 E

%

Commercial banks lending rate (average) 3-month Treasury-bill rate (year-end)

Source: Economic Intelligence Unit, Global Research

Other CBE Tools of Regulatory InterventionThe most important regulations of the CBE governing the banking sector are those related to liquidity, reserves, extended credit, capital adequacy and provisions. These are presented in more details below.

Capital AdequacyThe Unified Banking Law of 2003 requires banks in Egypt to raise the ratio of capital adequacy from 8% to 10%.

Minimum Paid-In CapitalThe Unified Banking Law of 2003 also obligated banks to raise their minimum paid-in capital from LE100mn to LE500mn, which was the main motive for small local banks and poor performers to opt for the mergers and acquisitions in the last few years.

Reserve RequirementBanks are required to keep 14% of their deposits denominated in local currency as reserves with the CBE to provide enough liquidity in case deposits are withdrawn by customers. It is worthy to note that these reserves are not interest earning.

This explains why banks seek to invest their excess liquidity in interest earning instruments like treasury bills and other government securities to decrease their cost of unused funds. Though banks should focus on exerting more lending activity and orienting fewer funds to investments in treasury bills, this has not been the case for several years, due to the banks’ unwillingness to get exposed to the risk of default.

It is worth mentioning that banks should also keep 10% of their deposits denominated in foreign currency as reserves with the CBE, but these reserves earn interest related to LIBOR.

Liquidity RatioBanks must keep at least 20% liquid assets denominated in local currency and 25% of assets denominated in foreign currency.



Extending Credit Banks must not extend credit to a single borrower in excess of 20% of the bank’s book value. In addition, banks are not allowed to extend credit to one particular borrower and his affiliates in excess of 25% of the bank’s total equity.

ProvisionsBanks are required to keep provisions according to the credit risk level associated with each loan. Loans are classified into two categories related to regular and irregular settlements. For regular settlements, loans are categorized under many risk levels ranging from low to watch list risk, where each level has a corresponding provision required rate ranging from 0% to 5%. For irregular loans, they are classified into three types, substandard debt, for which a 20% provision must be kept, doubtful debt, with a required 50% provision. Finally, loss debt must have a 100% provision. More conservative banks usually keep higher provision rates than required.

Untapped Segments as Key Prospects …

Retail Segment The retail banking activities in Egypt are considered an unexploited segment, promising high potentials for the banking sector. There is a great unfulfilled demand for banking activities in this sector. This comes from the fact that large percent of the population, which amounted to 75mn in 2006/07, after a 2% y-o-y increase, still does not participate in banking activities or even have a slight participation, which could be a result of low income levels or not enough understanding of the importance of banking activities. Moreover, 61.1% of the population is in the working age, which implies further increase of demand of the retail segment in the future. From the banks’ side, they have always been reluctant to direct great portions of their loans to individuals fearing of the risk of default, but this is expected to change in the future, especially after the establishment of the credit bureau that should facilitate the flow of necessary information to banks concerning clients’ history and would therefore minimize the risk of default. Lending to individuals is only provided according to salaries and usually not exceeding 20% of the monthly salary.

Currently, a large number of banks are expanding their branch networks to fulfill unsatisfied needs from the retail segment. As of March 2008, there were 3,252 branches in Egypt with each branch serving an average of 23.1 thousand people.

As for branch network, it is important to note that around 65% of the existing branches in Egypt are owned by the public banks. Some of the private banks that announced their intention to expand their branches were Commercial International Bank, National Societe Generale Bank, BoA, Audi, HSBC, Piraeus, Blom, Barclays, Export Development Bank of Egypt, BNP Paribas and Credit Agricole.

SMEs SegmentSmall and Medium Enterprises “SMEs” are defined as companies whose revenues do not exceed LE1mn. Banks are usually hesitant to lend to SMEs due to the high risk associated with these companies, in terms of lack of adequate capital and assets, in addition to the fact that they are usually not registered. As for the SMEs, interest rates could be high, making the cost of finance through banks higher. These factors explain the low banking penetration of this segment.



Recently, the government encouraged the registration of SMEs, which could reduce the reluctance of banks to SMEs lending, through the provision of collateral. If this happens, along with the presence of the credit bureau and its role in minimizing default risk, growth potential in this segment is expected to be high, as banks will be able to expand their banking activities for this sector and hence increase their client base, enabling them to realize higher margins.

Mortgage SegmentThe Mortgage Financing Law was launched in Egypt in 2001. Mortgage loans represent a small fraction of banks’ loans due to many factors. The fact that most properties were not registered due to high registration fees, made banks hesitant to extend mortgage loans, fearing of loans default, especially that unregistered properties could not be used as collateral. Another factor can be attributed to the high rates on mortgage loans reaching 14%, coupled with low purchasing power and low wages.

In 2005, the government reduced the registration fees on properties to 3% down from 12% of the property’s price or a maximum fee of LE2,000. Also, property taxes were cut from 46% to 10% of the annual rental value. Such regulations should facilitate property registration and thereby would give more confidence to banks or mortgage finance companies to extend mortgage loans now that they can rely on registered properties as collateral. Moreover, developers are now targeting middle and upper-middle class level, which may facilitate mortgage lending in the coming few years.

Mortgage lending opportunities are expected to boost, after the establishment of the governmental institution “the Egyptian Company for Mortgage Refinancing”, along with the emergence of new lending mortgage companies, in addition to the newly established credit bureau.

The potential growth expected in the mortgage segment induced the CBE to allow banks increasing the share of loans allocated to the real estate sector from 5% to 15% of their total loan books, to be equally distributed among real estate developers, mortgage borrowers and touristic development companies.

An Additional Key ProspectThe restructuring that occurred following the banking sector reform program, resulted in a reduction of the number of banks from 61 banks in 2004 to 41 banks in 2007 and raising the number of branches from 2,783 branches to a current number of 3,252 branches.

The major influence on the sector was the heating competition among lenders, which accelerated substantially in the last few years, especially with the emergence of foreign expertise. To boost competency, most banks currently provide a wide range of products and services including house and car loans, credit and ATM cards services, automated machines and 24-hour services, capital markets and investment banking activities, along with the traditional banking activities. This intense competition is expected to enhance the banks’ profitability by attracting greater client base through providing better quality of products and services to the public.



Issues to be Considered…As the Egyptian banking sector was ruled by the public sector banks for decades, the service was never an issue. These banks were serving the government in financing mainly public enterprises. Now that most of the banks became private, ameliorating the service became a must in order to boost, or at least maintain their market shares.

Another important issue is the dissemination of information to the public. As most of the banks are publicly traded now, there is a need for a minimum of disclosure for shareholders about the banks’ operations and performance in any given period. Still the fear of fierce competition stops banks from operating liberally.

The sector is shaping and these issues will improve with competition, which pours at the end in the clients’ interests.



Peer Group Comparison

Banks’ Current Market Shares of The Total Branching NetworkAs of March 2008. The banking system branch network encompassed 3,252 branches. It is worthy to note that public banks and other private banks outside our coverage universe, account for 90% of the branching network, approximately.

As for our covered banks, Commercial International Bank “CIB” captures the highest market share, represented by 4.2%, which is explained by the long presence of the Bank in the market, relative to the other banks. National Societe Generale Bank “NSGB” followed, with a market share of 3.6%.

Chart 16: Banks’ Branches Market Shares

CIB 4.2%NSGB 3.6%

CAE 1.6%EGBE 0.3%

EDBE 0.3%

Public & other PrivateBanks 89.9%

Source: Global Research

Balance Sheet Performance

Major Source of FundsIn terms of deposits market share, also CIB was able to make the highest contribution to the total deposits of the banking system, 6.0%, followed by NSGB, contributing to 4.8% of total deposits.

On the other hand, the highest growth realized in deposits over 2007, was performed by Credit Agricole Egypt “CAE”, which witnessed a 36.5% increase. This stems from the bank’s intention to increase its market share, as it stood at 2.6% in H1 2008, lagging far behind the two major players, CIB and NSGB.



Chart 17: Deposits market shares-H1 2008 Chart 18: Deposits Growth (2006-2007)

CIB 6.0%NSGB 4.8%

CAE 2.6%

EGBE 1.1%EDBE 0.5%


25.1%

18.0%

36.5%

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13.0%

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Deposits-2006 Deposits-2007 % change y-o-y (right scale)

Source: Banks’ financials, Global Research

Comparative Growth in Balance SheetNot surprisingly, the major contribution to total assets came from the two largest banks, CIB and NSGB, contributing to 5.2% and 4.1% of the total assets of the banking system, respectively. This was attributed to the large funding base of these banks, which was founded on the relatively immense deposits balances.

In the mean time, the highest y-o-y growth in deposits that CAE was able to realize in 2007, was translated into the highest growth realized in total assets in the same year, as well. That said, total assets of CAE swelled by the same growth of deposits realized in 2007.

Chart 19: Total Assets Market Shares-H1 2008 Chart 20: Total Assets Growth (2006-2007)

CIB 5.2%NSGB 4.1%

CAE 2.1%

EGBE 0.5%EDBE 1.2%


27.2%

19.8%

36.5%

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11.9%

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Total assets-2006 Total assets-2007 % change y-o-y (right scale)

`


Resulting Acceleration in Lending ActivityAs for loans, major share went to the two large players, as well. CIB and NSGB contributed to 6.4% and 6.1% of the total loans in the banking system, respectively.

The major growth in loans over the year was realized by NSGB and CAE, realizing 22.8% and 22.5%, respectively. This illustrates the two banks’ target of expanding their market shares, relative to their peers.



Chart 21: Loans Market Shares-H1 2008 Chart 22: Loans Growth (2006-2007)

CIB 6.4%NSGB 6.1%

CAE 1.8%

EGBE 0.7%

EDBE 1.9%


16.7%

22.8% 22.5%20.8%

39.3%

-

5,000

10,000

15,000

20,000

25,000


LEmn

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Loans-2006 Loans-2007 % change y-o-y (right scale)


Most Conservative While Having Lowest NPLs RatioAlthough CIB has the lowest NPLs ratio, 3%, it adopts the most conservative provisioning policy, as its coverage ratio stood at 166% in 2007. It is worth mentioning that the NPLs ratios of NSGB and CAE are magnified, as they inherited bad debts from the acquisitions of MIBank and EAB, respectively. Nevertheless, they are performing well, as their coverage ratios are close to 100%.

Chart 23: Provisioning Policies Adopted-2007

19.6%24.2%9.0%9.6%

3.0%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%


Coverge Ratio NPLs/Gross Loans


Income Statement Performance

Spreads were suppressed over the year…Net spread, representing the core income of banking activity, has narrowed for almost all banks under coverage in 2007, except for CAE and Export Development Bank of Egypt (EDBE), as it inclined from 2.7% to 2.8% and from 1.5% to 1.6%, respectively. The decline in spreads could be a result of the intensifying competition. Nevertheless, we expect spreads to rise until 2009, as a response to the successive jumps in the corridor range. Beyond 2009, the spreads are projected to decline, as a result of the foreseen competition.



As a consequence, net interest margin decelerated over the year for almost all banks, except for EDBE, which was able to raise its margin from 2.2% in 2006 to 2.5% in 2007.

Table 09: Net Interest Margin and Net Spread

Net Interest Margin Net Spread

2006 2007 2006 2007

CIB 3.5% 3.5% 3.9% 3.9%

NSGB 4.1% 3.3% 4.3% 3.3%

CAE 3.0% 3.0% 2.7% 2.8%

EDBE* 2.2% 2.5% 1.5% 1.6%

EGBE 3.3% 2.8% 2.8% 2.3% Source: Banks’ Financials, Global Research

* EDBE’s fiscal year ends in June.

Growing ProfitsLooking at net profit, we realize that all banks witnessed increases in their net income, except for EGBE, as its income grew at lower pace than the previous year, as a result of higher added provisions. On the other hand, the highest growth was realized by EDBE, which income rose by 104.6% in 2007. This growth was amplified, as the Bank realized losses the previous year. These losses were due to the large amount of provisions added that year, as required by the CBE. It is worth mentioning that growth in net income is calculated after adjusting for extraordinary items and goodwill amortization.

Chart 24: Net Profit Growth (2006-2007)

36.6%

2.8%

60.7%

104.6%

-17.3%

-400

-200

0

200

400

600

800

1000

1200

1400


LEmn

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

2006 2007 % change y-o-y (right scale)

`

Source: Banks’ Financials, Global Research

Profitability RatiosRegarding profitability ratios, the best performers were the two largest banks along with CAE. In terms of ROAA, CAE was the best performer followed by CIB then NSGB, where each one realized a ratio of 3%, 2.7% and 2.5% respectively.

Concerning ROAE, NSGB realized the highest ratio, which stood at 40.5%, followed by CAE and CIB, with 38.1% and 30%, respectively. It is worthy to note that these ratios are adjusted for extraordinary items and goodwill amortization.



Chart 25: Profitability Ratios-2007

2.7% 2.5% 3.0%0.1% 1.4%

30.0%

40.5%38.1%

1.0%10.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

CIB NSGB CAE EDBE EGBEROAA ROAE


Capital Adequacy RatiosThe Egyptian Gulf Bank “EGBE” was able to realize the highest equity/total assets ratio in 2007, as it stood at 13.4%. This could be explained by the fact that the Bank has the lowest market share of total assets, compared to its peers, reaching 0.5%.

In the mean time, equity/gross loans ratio was the highest in CAE, as it reached 30.4%. This in turn can be explained by the relatively low market share of the Bank, in terms of the loans of the total banking system relative to other players, as it ranked fourth in 2007, with a market share of 1.5%.

Chart 26: Capital Adequacy Ratios-2007

9.2% 9.1%7.3%

9.8%13.4%

0%

5%

10%

15%

20%

25%

30%

35%


Equity/Gross Loans Equity/Total Assets


Banks Performance in H1 2008The following table summarizes the performance of the banks under coverage during H1 2008, in terms of growth in assets and in net profit.



Table 10: H1 2008 Performance

Assets (LEmn) Net Profit (LEmn)

2007 H1 2008 q-o-q change H1 2007 H1 2008 y-o-y change

CIB 47,763.2 56,342.7 18.0% 663.4 961.7 45.0%

NSGB 47,256.7 44,233.3 -6.4% 339.3 549.4 61.9%

CAE 21,521.1 22,253.2 3.4% 211.5 215.5 1.9%

EDBE* 8,782.9 13,376.1 52.3% 7.5 310.7 4026.9%

EGBE 5,135.0 4,917.2 -4.2% 65.2 67.0 2.7%


* EDBE results are for the FYE June 2008, compared to the FYE June 2007.

Banking Sector Outlook

With the banking sector being primarily influenced by the economic status of the country, we maintain a positive outlook for the sector in Egypt. As GDP is expected to reach 7.4% in 2008, compared to 7.1% in June 2007, we believe the banking industry in Egypt will be significantly enhanced. An accelerated growth of GDP will tempt investors to explore investment prospects, which represent potential lending opportunities to the banking sector.

Moreover, improvements in several business sectors including tourism, real estate, telecommunication and financial services, will be translated into better investments in the country, as projects will expand in such sectors and financing needs will grow and thus better lending opportunities will be available for the banking sector, especially with the current extremely low loans/deposits ratio.

Meanwhile, these developments will attract foreigners to invest in the country, which will result in better Foreign Direct Investment (FDI). The latest figures support our opinion, as the FDI increased by more than 100% y-o-y from 2004/05 to 2005/06, then rose by 44%, amounting to US$13.1bn in 2006/07. This improvement came on the back of the growth experienced in the economy and the various sectors mentioned previously.

Alternatively, demographics outlook support the sector’s potential. With a population CAGR of 2% over the 5-year period from 2001/02 to 2006/07 and the fact that large percentage of the population is not engaged in the banking activity, the huge unfulfilled demand in the retail segment is expected to increase and sequentially be absorbed by the sector in the form of retail lending and mortgage financing. Banks will be encouraged to explore such fields together with lending to SMEs, as risk of default will be diminished, especially after the establishment of the credit bureau.

In addition, most of the banks are currently updating their IT systems and expanding their branch networks to improve their competency. This is expected to have a positive impact on the quality of products and services provided to the public, which will increase the client base coverage and will therefore enhance the banks’ profitability.

Though we believe the sector in Egypt has a promising growth, resulting from the inherent opportunities in the unexploited segments, there is a prevalent discomfited sentiment for the sector, stemming from the cancellation of the sale of Banque du Caire, in addition to the fail of the merge between CIB and AAIB.



The rising inflation rate in Egypt has been reflected in higher costs of equities for Egyptian banks’ valuations.

Valuation & Recommendation

For arriving at the fair value of the banks under review, we have used two valuation methods:

1. Cash flow approach represented by the Dividend Discounting Model.

2. P/BV target multiple approach using an adaptation of the Gordon Growth Model.

Dividend Discounting Model - DDM

The DDM is based on a 4-year forecast of dividends as cash flows (2008-11), except for EDBE Bank, as the Bank’s fiscal year ends in June 2008. That is why we have made a projection period for the Bank from 2008/09 to 2011/12. The dividends for the forecast period and the terminal value are then discounted back at the cost of equity to arrive at the total net present value (NPV) of the company. In our calculations, we have made the following assumptions in order to arrive at the equity value of individual banks:

1. Cost of Equity (COE) derived using Capital Asset Pricing Model.

a. Risk free rate of 8.4% (YTM of 2011 government bonds), except for EGBE, as we used a risk free rate of 4.7% (YTM of 2011 sovereign Eurobond) and EDBE, as we used the rate of 8.8% (YTM of 2012 government bonds)

b. Market risk premium of 7.8% for all banks and 6.5% for EGBE, taking into consideration that the Bank’s stock is traded in US dollars.

c. Beta of 5 years monthly figures. If the actual beta of the bank is less than 1 or if the data available is of less than 5 years, to more appropriately reflect the market risk, we have taken it as 1.

2. Terminal growth rate of 7.0%, which is close to the expected growth rate of GDP, taking into account the inherent opportunities in the banking sector, relying on the economic growth witnessed in the country, which is reflected in a stable investment climate, expected to boost lending opportunities.



Table 11: Value as per DDM Approach

DDM based price (LE)

CIB 49.1

NSGB 34.3

CAE 17.0

EGBE (US$) 2.1

EDBE 20.5

Source: Global Research, market prices as of September 7th, 2008

The adaptation of the Gordon Growth model uses the sustainable return on average equity (ROAE), cost of equity (COE) and expected growth in earnings (g) to calculate the target P/BV of the bank using the formula:

P/BV = (ROE - g) / (COE - g)

This P/BV is then multiplied with the BVPS of the bank at the next full year to arrive at the fair value of the bank over a medium term investment horizon. In our case, we calculated the BVPS at December 31, 2008, except for EDBE, as we calculated it at the end of the Bank’s next fiscal year in June 30th, 2009,

In our calculations, we have made the following assumptions in order to arrive at the equity value of individual banks:

1. Sustainable ROE calculated as the average ROAE of the forecasted 4 years for all banks.

2. Cost of Equity derived using Capital Asset Pricing Model taking the same assumptions as in the DDM.

3. Terminal growth rate of 7%, similar to the DDM.

Table 12: Value as per GGM Approach

P/BV based price (LE)

CIB 48.7

NSGB 34.6

CAE 16.9

EGBE (US$) 1.8

EDBE 20.8

Source: Global Research, market prices as of September 7th, 2008.



Weighted PriceAs the book value multiples vary with time and are dependent on several factors such as market sentiment and other qualitative factors, we have provided 20% weight to the P/BV multiple and 80% to the DDM method.

Table 13: ValuationWeighted DDM Price (LE) Weighted P/BV Price (LE) Weighted Final Price (LE)

CIB 39.3 9.7 49.0

NSGB 27.4 6.9 34.3

CAE 13.6 3.4 17.0

EGBE (US$) 1.7 0.4 2.0

EDBE 16.4 4.2 20.6Source: Global Research, market prices as of September 7th, 2008.

Table 14: “Global” Valuation Matrix

Price (LE)

Target (LE)

Reco.Upside

PotentialBVPS*

(LE)EPS* (LE)

P/BV* (x)

P/E* (x)

CIB 46.9 49.0 Hold 4.5 14.6 5.0 3.2 9.5

NSGB 30.0 34.3 Buy 14.4 13.2 4.0 2.3 7.5

CAE 15.2 17.0 Buy 11.8 5.8 1.7 2.6 8.7

EGBE (US$) 2.6 2.0 Sell -22.5 0.9 0.1 2.8 23.0

EDBE 21.1 20.6 Hold -2.2 12.8 2.9 1.6 7.2

Source: Global Research, Market prices as of September 7th, 2008

* Based on 2008E for all banks and 2008/09E for EDBE, adjusted for goodwill and extraordinary items, if any.



Commercial International Bank

Tickers:COMI.CA (Reuters)COMI EY (Bloomberg)

Listing:The Egyptian ExchangeAbu Dhabi Securities ExchangeKuwait Stock ExchangeLondon Stock Exchange

CMP: LE46.9 (September 7th, 2008)

Key Data

EPS* (LE) 5.0 Avg. daily vol. (‘000) 842.4

BVPS** (LE) 14.6 52 week Hi/Lo (LE) 66.0/ 43.3

P/E* (x) 9.5 Market Cap (LE mn) 13,715.3

P/BV** (x) 3.2 Target Price (LE) 49.0Source: Mubasher, Global Research, market prices as of September 7th, 2008

*Estimated (2008), earnings are adjusted for extraordinary items, goodwill amortization, number of shares and

before minority interest.

** Estimated (2008), book value represents the book value for equity shareholders, adjusted for goodwill and

number of shares.

BackgroundCommercial International Bank “CIB” was established in 1975 under the name of “Chase National Bank of Egypt”, as a joint venture between NBE and the Chase Manhattan Bank, owning 51% and 49% of the Bank’s shares, respectively. In 1987, Chase Manhattan sold its share to NBE, where the latter’s share reached 99.9% and the Bank’s name became Commercial International Bank. The Bank went public for the first time in 1993, through an IPO, resulting in a decline of NBE’s share to 43%. NBE’s shares in CIB declined furthermore by 20% in 1996, through the listing of its Global Depository Receipts “GDRs” on the London Stock Exchange. It is worthy to note that the Bank is currently listed in Egyptian, Kuwait and Abu Dhabi stock exchanges. Meanwhile, the Bank is traded internationally through GDR’s in London and American Depository Receipts “ADRs” in the USA. As part of the program set by the government for selling public stakes in joint ventures, NBE sold a stake of 18.7% in the Bank to a consortium led by Ripplewood Holdings in February 2006. Currently the consortium’s stake constitutes 5.6% of the Bank’s capital, while NBE’s stake is only 0.3%.

As of June 30th, 2008, the consortium led by Ripplewood Holdings, owns a stake of 5.6% in the Bank, while the free float constitutes 91.4% of the Bank’s shares.

It is worth mentioning that CIB announced that Dubai Capital Group acquired 5.2% of the Bank’s capital on July 31st, 2008.

Recommendation

HOLD



Chart 01: Shareholders’ structure

Ripplewood Consortium 5.6%Others 3.1%

Free-Float 91.4%

Source: EGID, as of June 30th, 2008, Global Research

High Quality Services…The Bank’s long presence in the Egyptian market and its exposure to International expertise through its start with Chase Manhattan, allowed it to gain extensive experience in providing a variety of products and services with high quality, satisfying clients of different classes. Services cover all segments including corporations, retail, mortgage finance and SME’s.

Corporate Segment Prioritized…The corporate segment captures the lion’s share of activities covered by the CIB. This stems from the Bank’s focus on realizing higher profits, while ensuring low risk of default, which was realized through serving big corporations, with sound business performance. This is illustrated through the orientation of 90% of the Bank’s loan book to big corporations.

The CIB extends loans to corporations of good reputation in sectors like tourism, petroleum and telecommunication, as they are all experiencing successful growth, which is expected to further boost lending to these sectors.

Services offered to the corporate segment include funding projects and capital expenditures, investment banking services, syndicated loans, letters of credit, letters of guarantee, along with various other services.

Growing Attention to Retail…The Bank plans to approach retail services more aggressively by 2010, responding to the huge unfulfilled demand arising from this segment. Currently, retail lending is executed through the corporate sector by offering payroll system -ATM cards for employees’ salaries- to corporations, in line with the Bank’s policy of lowering its exposure to risk of default.

Other retail services include ATM cards, electronic banking services, car loans, life insurance services, current and saving accounts, in addition to student cards, which provide discounts to students abroad in their visits to museums and their hotel accommodation.

In addition, new services will be provided through a new segment for high net worth individuals, by offering them priority service in branches, and later on, investment products in Egypt and abroad.



Minor Focus on Mortgage Finance and SME’s…Due to the high risk associated with mortgage lending, the Bank extends a minor percentage of its loans to finance housing units.

In July 2008, the Bank announced that it will be granted a loan, worth LE1.3bn from Overseas Private Investment Corporation (OPIC) and US government agency. CIB will use this loan in its mortgage finance activity, as it will direct 80% of it to other banks and companies operating in the mortgage finance field, whereas the rest of the loan will be used in the same field, according to the management discretion.

Concerning SMEs, the Bank established an SME business line in 2006, since this division is considered a potential segment for profitable lending opportunities.

Highest Market Shares…CIB is the largest private bank in Egypt. As of June 2008, it captured the highest market shares of the aggregate banking system, in terms of total assets, customer deposits and gross loans, at 5.2%, 6.0% and 6.4%, respectively.

Meanwhile, the number of branches reached 137 branches, implying a market share of 4.2%, as the total number of branches in the banking system amounted to 3,252 branches in March 2008.

Investments in AffiliatesAs of June 30th, 2008, CIB owns a stake of 50.09% in CI Capital Holding, which was reduced from 66.98% after the Bank sold 9.3mn shares of its stake in 2007. It is worth mentioning that CI Capital Holding obtained its license to begin activities in 2006. It was formed through a strategic alliance between CIB and an investment group led by Naguib Sawiris to combine their investment activities through the formation of CI Capital holding.

Table 01: Stakes of CI Capital Holding in Other Companies

Company Name Number of Shares CI Capital Stake (%)

CIBC Co. 539,880 90.0

CI Assets Management 445,499 89.1

Concept Co. 448,500 89.7

In Search Co. 448,500 89.7

Dynamic Brokerage Co. 3,392,000 99.9

Blue Nile Co. for Consultant* 50,000 100.0

United Brokerage Co.-Dubai 5,000,000 49.0

Source: CIB Financials, Global Research

*CI Capital sold Blue Nile Co. in July 2008

In July 2008, CIB fully acquired CI Capital Holding, in a deal worth LE768.2mn, where it acquired 27.4mn shares of CI Capital, at a price of LE28/share. The transaction was executed through a swap between CIB and Sawiris, where the latter used the proceeds from selling its shares in CI Capital Holding to acquire shares in CIB.

CI Capital Holding is considered a leading investment bank. Bringing it under the control of CIB is expected to boost the Bank’s performance in the investment banking domain.



CIB has also investments in several associated Companies. It is worth mentioning that the Bank sold its stake in Contact for Cars Trading Company during Q1 2008.

Table 02: Investments in Affiliates

Company Name2007 June 2008

Amount (‘000LE)Stake

(%)Amount (‘000LE)

Stake (%)

Contact for Cars Trading 31,000.0 38.4 0.0 0.0

Commercial International Life Insurance Co. 32,000.0 40.0 32,000.0 40.0

Corplease Co. 18,400.0 40.0 21,600.0 40.0

Cotecna Trade Support 48.8 39.0 48.8 39.0

Haykala for Investment 601.3 47.5 601.3 47.5

Egypt Factors 3,763.6 39.0 10,399.5 39.0

International Co. for Appraisal & Collection 400.0 40.0 1,000.0 40.0

International Co. for Security & Services 4,500.9 45.0 4,500.9 45.0


Recent Developments

Capital Structure…The CIB has an authorized capital of LE5bn, while its issued and paid-in capital amounted to LE1.95bn, distributed over 195mn shares, at a par value of LE10/share.

In July 2008, the Bank increased its capital by LE 975mn to reach LE2.93bn through a 1:2 stock dividend distribution, financed from reserves. This capital increase will provide further growth to the Bank’s operations, as it will further enhance its lending activity after expanding equity.

Expected Regional Exposure…CIB has a 51% stake in its Algerian subsidiary “Commercial International Bank-Algeria”, which is expected to start operations during 2008, according to the Bank’s announcement in 2007.

The new entity, which is a joint venture between the Bank and the Sawiris family, is expected to present promising opportunities to the Bank in Algeria, as the Bank aims at benefiting from the Sawiris’ operations in Algeria by providing the necessary funding to its infrastructure and construction projects.

It is worthy to mention that the Algerian market is seen as a promising location for banks, with significant lending opportunities for the booming industrial sector, mainly oil and gas.

Long Awaited Merge Failed…Following the announcements of studying the possibility of a merge between CIB and Arab African International Bank “AAIB” in 2007, many have projected that the result of the merge would be a strong entity that would capture the lion’s share in the Egyptian banking sector, as well as regionally. It is worth mentioning that AAIB shares in total assets, deposits and loans of the aggregate system reached 4.5%, 4.3% and 4.7%, respectively, as of March 2008.



After extensive due diligence acts from both parties in May 2008, the merge proposition was abandoned. Though nothing was disclosed on why the merge did not go through, it seems that the promising outlook of the sector in the short run was a far more important goal for both banks than undergoing legalities of the merger, which could hinder the two banks’ growth and miss the upside period.

2007 Financial Performance and Forecast Assumptions

Balance Sheet Analysis

Substantial Deposits Balances…The Bank’s long and successful presence in the market enabled it to be highly experienced in maintaining a large client base and capturing the highest market shares in the banking system in terms of customer deposits, which represent the main source of funds and value driver for the Bank.

Deposits constituted 82.6% of total equity and liabilities in 2007 and realized a y-o-y increase of 25.1%, reaching LE39.5bn, up from LE31.6bn the previous year. The y-o-y surge was mainly a result of the increase in time and demand deposits, as they rose over the year by 23.5% and 31.1%, respectively. Time deposits contribution to total deposits decreased slightly from 34.9% in 2006 to 34.5% 2007, whereas demand deposits contribution witnessed a minor increase from 27.9% to 29.3%.

Chart 02: Deposits by Type-2006 Chart 03: Deposits by Type-2007

Demand Deposits27.9%

CD’s 16.4%

Savings Deposits 16.9%

Time Deposits34.9%

Other Deposits3.8%


CD’s 15.1%


Time Deposits34.5%

Other Deposits4.6%


The household sector reported the highest share of total deposits in 2007. Its contribution was 52.0% of total deposits, decreasing slightly from 54.1% the previous year. The services sector followed with a 19.3% contribution, falling from 21.5% in 2006. The remaining deposits were distributed among industrial, trade and other sectors.



Chart 04: Deposits by Sector-2006 Chart 05: Deposits by Sector-2007

Industrial 10.4%

Trade 4.2%

Services21.5%

Household54.1%

Others 9.7%

Agriculture 0.1%

Industrial 13.0%

Trade 6.1%

Services19.3%

Household52.0%

Others 9.4%Agriculture 0.2%


Accelerating Total Assets…The surge in deposits in accelerating total assets balances, reaching LE47.8bn in 2007, compared to LE37.6bn the previous year, realizing a y-o-y increase of 27.2%. The major contributors to the increase in total assets over the year were gross loans and liquid assets, representing 45.7% and 47.0% of total assets, respectively.

Growing Loans…As a consequence of the surge realized in deposits, the Bank was able to expand its loan books by 16.7% y-o-y, reaching LE21.9bn, compared to LE18.7bn in 2006. During 2007, loans to other banks declined by 23.2%, whereas loans to customers grew by 18.4%. This could be explained by the fact that other banks needs for funding shrank, as a result of the excess liquidity existing in the banking sector. Meanwhile, the encouraging investment climate in Egypt led to the start of many projects, causing an increase in demand for credit.

Table 03: Loans and Advances Growth

Loans and Advances (in LEmn) 2006 2007 y-o-y Growth

Discounted Bills 345.2 369.4 7.0%

Loans and Overdrafts to Customers 17,719.3 20,979.6 18.4%

Loans and Overdrafts to Banks 652.5 501.4 -23.2%

Gross Loans and Advances 18,717.0 21,850.4 16.7%

Unearned Bills Discount 6.1 33.3 442.9%

Provision for Loan Losses 1,038.9 1,090.0 4.9%

Unearned Interest & Commission 207.6 248.6 19.7%

Net Loans and Advances 17,464.4 20,478.6 17.3%


Loans CompositionThe industrial sector captured the highest share of the Bank’s total loan portfolio in 2007, representing 40.0%, compared to 45.3% in 2006. The services sector followed with 37.3% of total loans, down from 37.8% the previous year. It is worthy to note that 50% of the total loan portfolio was denominated in foreign currency.



Chart 06: Loans by Sector-2006 Chart 07: Loans by Sector-2007

Industrial45.3%

Trade 3.7%

Services37.8%

Household7.7%


Industrial40.0%

Trade 4.4%

Services37.3%

Household9.5%



Conservative Provisioning Policy…Provision for loan losses rose by 4.9% in 2007. The CIB has a coverage ratio of around 166% of its NPLs, which represent approximately 3% of the Bank’s total loan portfolio. We believe that the Bank adopts a conservative provisioning policy and accordingly, we have forecasted future provisions based on the Bank’s historical practices, assuming that the Bank will keep a stagnant rate of NPLs and will maintain its coverage ratio at its current level.

Chart 08: NPLs, Loan Loss Provision and Coverage Ratio

-

500

1,000

1,500

2,000

2,500

3,000

2007 2008 f 2009 f 2010 f 2011 f

LEmn

140%

145%

150%

155%

160%

165%

170%

175%

180%

NPLs Loan Loss Provision Coverage Ratio (right scale)

Source: CIB, Global Research

Greater Space for Lending Based on Low Loans/Deposits Ratio…

The Bank’s loans, growing at a lower pace, relative to its deposits, resulted in a reduction of the gross loans/deposits ratio, as it decreased from 59.3% in 2006 to 55.4% in 2007. Meanwhile, the ratio has been moving in a declining trend, as it reached 65.2% in 2003, illustrating the Bank’s reluctance to extending large proportions of loans, to avoid the exposure to risk of default. Alternatively, the low loans/deposits ratio provides the Bank with a greater opportunity for lending, as a result of the available excess funds, after satisfying the reserve and liquidity ratios, required by the CBE.



This low ratio along with the latest governmental decision concerning the cancellation of tax exemptions on treasury bills are expected to encourage the Bank to orient more of its excess funds towards extending loans and lessening their investments in treasury bills. Relying on these assumptions, we expect an increasing growth of the loans/deposits ratio, reaching around 61% by 2011, on the back of rising loans and deposits balances.

Concerning deposits, we assumed that they would grow at an average of around 19% over our forecast period, which is in line with the Bank’s target. In addition, the latest developments of the corridor range are expected to boost interest rates on deposits and consequently on deposits balances.

On the other hand, the Bank’s target of approaching the retail segment by extending it greater share of its loan portfolio, especially by 2010, led us to assume that loans will grow at an average of 22% during the projection period, supported by the expected greater demand by the household sector, in addition to other sectors, represented by telecom, tourism and petroleum sectors.

Chart 09: Gross Loans, Deposits and Loans/Deposits

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2003 2004 2005 2006 2007 2008 f 2009 f 2010 f 2011 f

LEmn

45%

50%

55%

60%

65%

70%

Goss Loans Deposits Loans/Deposits Ratio (right scale)


Liquid Assets Incline As the surge in deposits had its effect on loans, it also affected the Bank’s liquid assets to a great extent. The low loans/deposits ratio resulted in an ample liquidity with the Bank, leading it to orient more of its excess funds towards liquid assets, rather than to increase its loans portfolio.

Liquid assets reached LE22.5bn in 2007, up from LE14.4bn in 2006, realizing a growth of 55.6% y-o-y. This surge resulted mainly from the hike in treasury bills and interbank assets by around 296.0% and 142.2%, respectively.

Treasury Bills expected to decline…The surge in treasury bills was a result of the Bank’s intention to get rid of its excess liquidity through investing in safe instruments, while enjoying the tax exemption benefit. However, we do not expect this to be the case in the future, after the latest governmental decision concerning the cancellation of the tax exemption on treasury bills, which should discourage banks from investing large proportions of their funds into such instruments.



We assumed the CIB would orient a portion of its funds in the future to invest in other liquid assets. The Bank would be urged to do so in order to comply with the minimum liquidity ratio required by the CBE and in the mean time to compensate for the expected decline in income generated from treasury bills.

Good Presence in the Interbank Market…The Interbank assets were the other item contributing to the hike in liquid assets. They were also affected by the low loans/deposits ratio and the resulting excess liquidity with the Bank, enabling it to be a net lender within the banking sector.

The Bank has been in a net lending position in the interbank market at all times. Its net lending position grew by 151.5% y-o-y, reaching LE13.6bn in 2007. This hike came on the back of the slow growth of gross loans, which lagged far behind the surge in deposits, allowing the Bank to lend other banks more aggressively.

Table 04: Interbank Market

In LEmn 2003 2004 2005 2006 2007

Interbank Assets 3,782.0 4,650.0 3,405.6 5,732.1 13,883.2

Interbank Liabilities 151.3 222.9 544.0 324.9 285.8Net Balance 3,630.8 4,427.1 2,861.7 5,407.2 13,597.4

y-o-y Growth 39.3% 21.9% -35.4% 89.0% 151.5%Source: CIB Financials, Global Research

Improving Capital Adequacy Ratios in 2007According to the Bank, the capital adequacy ratio, which relates tier 1 capital (excluding profits) to risk-weighted assets, reached 12.1% in 2007, which is more than the 10% required ratio by the CBE. This implies an adequate and sufficient capital for covering the Bank’s risky assets. It is worthy to note that the Bank has no tier 2 capital.

Meanwhile, the equity/total assets ratio was 9.2% in 2007, up from 9.0% the previous year. This rise was a result of the 29.8% increase in equity, which exceeded the 27.2% rise in total assets. This ratio indicates that the Bank’s equity can cover 9.2% of its total assets. Looking at the historical performance of the Bank, we can realize that this ratio has improved, as it was 7.9% in 2003, which indicates the enhancement of the capital adequacy of the Bank over time.

In the mean time, the equity/gross loans ratio reached 20.1% in 2007, compared to 18.0% in 2006. This was also a result of the rise in equity that exceeded the 16.7% increase in gross loans. Again this ratio confirms the adequacy of the Bank’s equity, as it illustrates that about 20% of the gross loans can be supported by equity in case of a delinquency. Also, the ratio has been moving in an upward trend, as it accelerated from 14.3% in 2003.

As we project more aggressive policy for lending activities by the CIB, we believe the ratios are to decline, as the loans are expected to grow at a higher pace than the Bank’s equity. That is why we projected the equity/total assets and equity/gross loans to reach around 6% and 11%, respectively, by the end of our projection period.



Other Balance Sheet Items

Goodwill The Bank reported a goodwill balance of LE130.2mn in June 2008, representing the share of CIB in the acquisition of CI Capital Holding over 2 companies. We assumed this balance would be fully amortized by 2009.

Investments Held to Maturity and Investments in AffiliatesThese investments combined represented an amount of LE357.0mn in the Bank’s balance sheet in June 2008. We assumed a stable balance over our projected period, close to that of the H1 2008 results.

Income Statement AnalysisThe Bank’s net income adjusted for extraordinary items and before minority interest witnessed a 36.7% y-o-y increase in 2007. The bottom line income was boosted by a non-recurring item represented by the LE148.4mn gain realized from selling 9.3mn of the Bank’s shares in its subsidiary CI Capital Holding the same year.

Net income was affected also by the growth of net interest income and the non-interest income, which grew by 27.5% and 46.9%, respectively.

The rise in net interest income comes mainly from the increase in loans and interbank assets balances, which resulted in an increase of the income generated from these items by 48.3%, offsetting the 30.7% incline in interest expense resulting from the rise in deposits. Alternatively, interest income generated from treasury bills and bonds dropped by 29.4%, due to the decline of the bonds balances and the reduction of the treasury bills yields during 2007. We expect that this income will decrease, as the Bank is to orient more of its funds towards loans, as a result of the latest decision taken by the government that were aimed at pushing banks to extend greater amounts of loans, through removing tax exemption on treasury bills.

On the other hand, non-interest income was affected by income generated from fees and commissions, rising by 50.7%, from LE441.3mn in 2006 to LE665.2mn in 2007. This incline came from the rise in loans, as well as the 67.9% climb in contingent liabilities. We projected future income from fees and commissions, assuming fees structure close to the Bank’s practices in 2007 and H1 2008.

Other items contributing to the non-interest income were the volatile items, represented by income generated from dividends, foreign exchange profits, financial investments valuation differences and gains from selling investments, which grew by 43.7%, 54.1%, 1718.1% and 19.9%, respectively.

Concerning expenses, SG&A (excluding depreciation) accelerated by around 28.8%, reaching LE575.2mn in 2007, compared to LE446.6mn in 2006. We assumed that SG&A will increase at declining rates, with an average of 20% over our forecast period.

The provisions rose by approximately 29% during the year, reaching LE251mn in 2007, compared to LE194mn the previous year, illustrating the conservative policy adopted by the



Bank. We projected future provisions assuming that the Bank will apply its same provisioning policy in the future.

Cost-Income RelationshipThe results of the Bank realized in 2007exhibited a drop in the cost to income ratio to 33.2%, from 35.2% in 2006. This decrease was attributed to the higher increase of income over cost. Gross revenues, which are composed of net-interest income and total non-interest income, grew by 36.2%in 2007, while the non-interest expense, composed of SG&A, depreciation and other expenses, grew at a lower pace by 28.4%. We expect that the Bank will be able to maintain its cost to income ratio, excluding goodwill amortization, below 35%, reaching around 32% by 2011.

Chart 10: Cost and Income Development

-

500

1,000

1,500

2,000

2,500

3,000

2003 2004 2005 2006 2007 2008 f 2009 f 2010 f 2011 f

LEmn

15%

20%

25%

30%

35%

40%

Net Interest Income Total Non-Interest IncomeTotal Non-Interest Expense Cost to Income Ratio (right scale)


Interest Rate SpreadThe Bank’s interest rate spread was kept within the range of 3.5% to 4% during the last 4 years. In 2007, the spread was 3.9%, following the rise in the cost of funds, which was balanced by a jump in the interest income. As mentioned earlier, such income came mainly from loans and interbank assets, as income from treasury bills was decelerating during the year, due to the decline in yields.

After the latest decision concerning the increase of the corridor range, we expect interest on deposits to incline, as well as interest on loans, causing a widening in the spread in 2008 and 2009, as it is expected to reach more than 4%. Nevertheless, the forecasted intense competition in the banking sector is to suppress the Bank’s spread afterwards, bringing it back to around 4% by 2011.



Chart 11: Interest Rate Spread Development

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

2003 2004 2005 2006 2007 2008 f 2009 f 2010 f 2011 f2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Interest Income / AVG Earning Assets Interest Expense / AVG Interest-Bearing FundsInterest Spread (right scale)


Net Income DevelopmentAs per our estimates, we believe the CIB would be able to raise its net income by an average of 18% over our forecast period, reaching around LE2.2bn by 2011. It is worthy to note that net income is adjusted for extraordinary items, goodwill amortization and before minority interest.

Chart 12: Net Income Development

- 500 1,000 1,500 2,000 2,500

2003

2004

2005

2006

2007

2008 f

2009 f

2010 f

2011 f

LEmn


Profitability RatiosThe 36.7% rise in net income, realized in 2007, exceeded the increase in average equity and average assets, which grew by 31.4% and 25.6%, respectively. The higher pace of increase in income over equity and assets resulted in an acceleration of ROAE and ROAA, reaching 30.0% and 2.7% in 2007, compared to 28.4% and 2.5% in 2006, respectively. Thus, the ratios under analysis proved improving performance of the Bank.

We expect ROAA to witness minor declines over our projection period, which could be attributable to the expected competition in the sector. That is why we expect it to reach around 2.6%, which is close to its current level. Alternatively, we expect ROAE to ameliorate, reaching around 42% by 2011, due to the lower increase expected in average equity over the projection period, compared to the expected growth in net income. It is worth mentioning that net income, average equity and average assets are adjusted for extraordinary items and goodwill.



Chart 13: ROAA-ROAE

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2003 2004 2005 2006 2007 2008 f 2009 f 2010 f 2011 f

ROAE

1.5%

1.7%

1.9%

2.1%

2.3%

2.5%

2.7%

2.9%

ROAA

ROAE ROAA


Stable Payout RatioWhen using the DDM method for valuation, we assumed a stable payout ratio of around 67% of net attributable income during the projection period. We took into consideration the stock dividends distributed for the capital increase when assuming the payout ratio, not only cash dividends.

H1 2008 Financial Performance

Balance Sheet AnalysisThe Bank’s results in June 2008 showed a 15.6% increase in deposits, compared to year end 2007. They constituted 81.0% of the Bank’s total equity and liabilities. The huge jump in deposits realized in H1 2008 supports our assumption for the deposits growth, especially after the amendments made on the overnight deposit and lending rates at the CBE.

Following the jump in deposits, the Bank was able to exhibit an 18.0% rise in total assets, compared to year end 2007. This was realized by the 17.3% YTD growth of gross loans, which constituted 45.5% of total assets. The loans growth affirms the ability of the Bank to extend greater amounts of loans due to its low loans/deposits ratio.

In turn, the interbank assets, representing 26.0% of the Bank’s total assets in June 2008, grew by 5.7% YTD. This comes from the excess funds available at the Bank after meeting the required liquidity and reserve ratios, along with the Bank’s low loans/deposits ratio, which enabled the Bank to be a net lender in the interbank market.

On the other hand, the Bank’s balances of treasury bills declined by around 6% from year end 2007, reaching LE2.8bn. This decline supports our assumption for the expected fall in treasury bills balances after the governmental decisions in May 2008 concerning the cancellation of tax exemption on these instruments. We believe investment in treasury bills is to decline considerably starting 2008, while other liquid investments are to experience minor growth.



Income Statement AnalysisNet income reached LE961.7mn in H1 2008, compared to LE663.4mn realized in H1 2007, implying a y-o-y growth of 76.9%, after adjusting for extraordinary items. This growth was fueled by the rise of net interest income and total non-interest income by 53.3% and 50.7%, respectively.

The growth in deposits led to an increase in interest expense by 4.3% y-o-y, but the Bank was able to compensate for such rise by increasing its income generated from loans and interbank assets by 30.8%, resulting from the inclination realized in these balances over the year.

Lower yields on treasury bills resulted in a decline in income generated from treasury bills and bonds by 17.8%, which we expect will decline furthermore, after the cancellation of tax exemption on treasury bills.

On the other hand, non-interest income was affected by the growth of fees and commissions, which rose by 30.7%, compared to the same period in the previous year, following the rise of loans. In the mean time, contingent liabilities grew by 12.1%, y-o-y. Another item contributing to the growth of non-interest income was dividend income, which grew by 191.1% y-o-y. Finally, other income encompassing gain from selling investments, foreign exchange profits, investments valuation differences and other items realized a growth of 54.2%.

Concerning expenses, SG&A-excluding depreciation- increased by 52.9%, compared to H1 2007. Meanwhile, cost/income ratio reached 31.1%. On the other hand, provisions declined by approximately 53%, caused by the provisions no longer used, amounting to LE95.1mn.

It is worth mentioning also that net profit was affected by a non-recurring gain amounting to LE50.3mn, resulting from selling CIB’s stake in Contact for Cars Trading Company, which was included in our projections for net income in 2008.

Valuation Assumptions For arriving at the fair value of the banks under review, we have used two valuation methods:

- Cash flow approach represented by the Dividend Discounting Model.- P/BV target multiple approach using an adaptation of the Gordon Growth Model.

Dividend Discounting Model - DDMThe DDM is based on a 4-year forecast of dividends as cash flows (2008-11). The dividends for the forecast period and the terminal value are then discounted back at the cost of equity to arrive at the total net present value (NPV) of the company. In our calculations, we have made the following assumptions in order to arrive at the equity value of individual banks:

- Cost of Equity derived using Capital Asset Pricing Model comes out to be 16.2% based on the following assumptions:

• Risk free rate of 8.4% (YTM of 2011 government bonds).• Market risk premium of 7.8%.• Beta of 5 years monthly figures. If the actual beta of the bank is less than 1 or

if the data available is of less than 5 years, to more appropriately reflect the market risk, we have taken it as 1.

- Terminal growth rate of 7.0%, which is close to the expected growth of GDP.



Table 05: DDM Valuation

(‘000LE) 2008F 2009F 2010F 2011F Terminal

ValueDividends Expected 975,046.1 1,078,946.4 1,286,136.5 1,516,932.6 17,613,867.6

NPV of dividends expected 3,646,602.2

NPV of Terminal Value 10,706,454.1

NPV of the Firm 14,353,056.3No. of Outstanding Shares

(‘000)292,500.0

DDM Value per share (LE) 49.1


Sensitivity – DDMWe have also prepared a sensitivity analysis for the estimated fair price based on various terminal growth rates and COE.

Table 06: DDM Sensitivity

Terminal Growth Rate

Cos

t of

Equ

ity

6.0% 6.5% 7.0% 7.5% 8.0% 8.5%

14.2% 56.0 59.0 62.4 66.3 70.9 76.3

15.2% 50.0 52.3 54.9 57.9 61.2 65.1

16.2% 45.2 47.0 49.1 51.4 53.9 56.8

17.2% 41.2 42.7 44.4 46.2 48.2 50.4

18.2% 37.9 39.2 40.5 42.0 43.6 45.4

19.2% 35.1 36.2 37.3 38.5 39.8 41.2


Gordon Growth Model - GGMThe adaptation of the Gordon Growth model uses the sustainable return on average equity (ROAE), cost of equity (COE) and expected growth in earnings (g) to calculate the target P/BV of the Bank using the formula:

P/BV = (ROE - g) / (COE - g)

This P/BV is then multiplied with the BVPS of the Bank at the next full year, in our case the BVPS at December 31st, 2008 to arrive at the fair value of the Bank over a medium term investment horizon.


- Sustainable ROE calculated as the average ROAE of the forecasted 4 years, represented by 37.7%.

- Cost of Equity derived using Capital Asset Pricing Model taking the same assumptions as in the DDM.

- Terminal growth rate of 7.0%, similar to the DDM.



Table 07: Gordon Growth Model

Sustainable ROE 37.7%

COE 16.2%

Terminal Growth Rate (g) 7.0%

2008: P/BV target multiple (x) 3.3

2008: BV/share (LE) 14.6

GGM Value per share (LE) 48.7


Sensitivity – GGMWe have also prepared a sensitivity analysis for the estimated fair price based on various terminal growth rates and COE.

Table 8: GGM Sensitivity


6.0% 6.5% 7.0% 7.5% 8.0% 8.5%

Cos

t of

Equ

ity

14.2% 56.4 59.2 62.2 65.8 69.9 74.7

15.2% 50.3 52.4 54.7 57.3 60.2 63.6

16.2% 45.4 47.0 48.7 50.7 52.9 55.4

17.2% 41.3 42.6 44.0 45.5 47.1 49.0

18.2% 38.0 39.0 40.0 41.2 42.5 44.0

19.2% 35.1 35.9 36.8 37.7 38.7 39.9


This sensitivity shows the movement in fair value as a consequence of different ROE and COE assumptions.


ROE

35.7% 36.7% 37.7% 38.7% 39.7% 40.7%

Cos

t of

Equ

ity

14.2% 58.2 60.2 62.2 64.3 66.3 68.3

15.2% 51.1 52.9 54.7 56.4 58.2 60.0

16.2% 45.5 47.1 48.7 50.3 51.9 53.5

17.2% 41.1 42.5 44.0 45.4 46.8 48.3

18.2% 37.4 38.7 40.0 41.3 42.7 44.0

19.2% 34.4 35.6 36.8 38.0 39.2 40.4


ValuationBased on the current market price of LE46.9/share, as of September 7th, 2008, CIB is trading at 2008E P/E and P/BV multiple of 9.5x and 3.2x, respectively, after adjusting for goodwill, extraordinary items, number of shares and minority interest.



Table 10: Valuation

Method Value Weight Weighted Value

DDM 49.1 80% 39.3

GGM 48.7 20% 9.7

Final Value 49.0


Our estimated value for this banking scrip is worked out to be LE49.0 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers an upside of 4.5% on the closing price of LE46.9/share (as of September 7th, 2008); we therefore recommend a HOLD on the scrip.

OutlookCIB is considered the largest private bank in Egypt in terms of its assets, deposits and loans market shares. Due to its long and successful existence in the market and its international experience, we expect a continuing positive performance of the Bank.

As the CIB’s loan portfolio has been mostly oriented to large entities, along with the current low loans/deposits ratio of 55.4%, the Bank is projected to increase its lending facilities easily, even with the coming up competition within the sector.

The Bank’s emergence in the Algerian market is another issue that is expected to positively propel its performance, due to the low banking penetration rate and the growing population in Algeria. CIB’s reliance on funding Sawiris projects in Algeria should further support the Bank’s prospects in such market.

The capital increase executed lately is expected to boost the Bank’s total assets, increasing its market shares and in the mean time ameliorating its capital adequacy.

The latest acquisition by Dubai Capital Group of a 5.2% stake in CIB is a positive sign, indicating the confidence of a regional investment management company in the Bank’s business.



BA

LA

NC

E S

HE

ET

Com

mer

cial

Int

erna

tion

al B

ank

(‘00

0LE

)20

05 A

2006

A20

07 A

20

08 F

2009

F20

10 F

2011

F

Cas

h &

Bal

ance

s w

ith th

e C

BE

3,07

7,73

5.0

3,74

2,87

6.5

4,95

3,20

5.4

6,78

9,34

6.4

8,08

8,42

9.7

9,50

3,39

8.2

11,1

25,7

41.4

Due

fro

m B

anks

3,40

5,64

5.0

5,73

2,12

5.0

13,8

83,2

32.5

16,5

21,2

40.5

18,9

20,9

20.5

20,8

86,4

99.6

23,9

77,0

69.4

Tre

asur

y B

ills

2,41

2,55

4.0

745,

417.

92,

951,

621.

11,

963,

004.

22,

063,

477.

92,

262,

826.

72,

649,

118.

2

Gov

ernm

ent S

ecur

ities

1,08

1,74

2.7

3,31

7,99

2.1

--

--

-

Tra

ding

Inv

estm

ents

1,83

9,12

9.5

901,

082.

468

3,83

2.9

904,

243.

21,

077,

262.

41,

265,

715.

81,

481,

788.

6

Ava

ilabl

e fo

r Sa

le I

nves

tmen

ts2,

183,

075.

83,

185,

837.

52,

286,

201.

62,

375,

190.

82,

422,

694.

62,

471,

148.

52,

520,

571.

5In

vest

men

ts

Hel

d to

M

atur

ity

&

Inve

stm

ents

in A

ffili

ates

1,21

2,90

3.7

930,

344.

453

4,60

8.7

357,

118.

635

7,11

8.6

357,

118.

635

7,11

8.6

Net

Loa

ns a

nd A

dvan

ces

14,0

39,1

37.2

17,4

64,3

80.8

20,4

78,5

90.8

25,1

12,6

76.7

31,0

29,4

81.4

38,0

42,9

86.1

45,1

56,5

56.6

Net

Fix

ed A

sset

s37

6,40

1.6

506,

815.

962

0,23

8.9

708,

040.

076

0,92

5.3

744,

133.

872

5,66

3.1

Goo

dwill

-23

,118

.214

0,61

3.8

70,3

06.9

--

-

Def

erre

d T

axes

33,5

31.0

40,4

97.1

51,9

00.2

37,8

35.2

20,2

43.6

21,9

04.9

5,29

5.7

Oth

er A

sset

s72

7,68

7.9

962,

466.

81,

179,

202.

31,

444,

743.

81,

473,

638.

71,

503,

111.

41,

533,

173.

7

Tot

al A

sset

s30

,389

,543

.337

,552

,954

.547

,763

,248

.156

,283

,746

.366

,214

,192

.777

,058

,843

.789

,532

,096

.8

Cus

tom

er D

epos

its24

,870

,258

.031

,567

,391

.939

,476

,052

.847

,513

,905

.756

,605

,285

.166

,507

,663

.577

,861

,313

.3

Due

to C

entr

al B

ank

& O

ther

Ban

ks71

9,68

0.1

1,21

2,60

0.6

2,37

8,61

3.4

2,85

9,04

4.3

3,39

0,42

1.8

3,95

5,85

8.2

4,62

1,39

2.1

Oth

er L

iabi

litie

s99

1,85

8.8

948,

974.

695

9,78

6.9

970,

722.

498

1,78

2.5

992,

968.

61,

004,

282.

2

Div

iden

ds P

ayab

le20

0,16

5.8

-2,

300.

8-

--

-

Tax

es P

ayab

le34

,049

.5-

--

--

-

Oth

er P

rovi

sion

s94

8,00

0.0

342,

342.

239

7,92

4.5

457,

613.

252

6,25

5.2

605,

193.

569

5,97

2.5

Med

ium

and

Lon

g-T

erm

Loa

ns98

,271

.099

,166

.916

1,35

6.2

125,

900.

684

,128

.042

,355

.37,

747.

0

Tot

al L

iabi

litie

s27

,862

,283

.234

,170

,476

.243

,376

,034

.651

,927

,186

.361

,587

,872

.672

,104

,039

.184

,190

,707

.1

Min

ority

Int

eres

t-

5,82

5.2

5,26

3.2

2,21

8.3

--

-

Paid

-in

Cap

ital

1,30

0,00

0.0

1,95

0,00

0.0

1,95

0,00

0.0

2,92

5,00

0.0

2,92

5,00

0.0

2,92

5,00

0.0

2,92

5,00

0.0

Res

erve

s1,

227,

260.

157

5,07

2.7

1,11

6,45

3.8

1,35

5,09

1.0

1,61

7,08

9.2

1,92

9,61

2.7

2,29

8,17

6.1

Net

Pro

fit o

f th

e Y

ear

*-

851,

580.

41,

315,

496.

574

,250

.784

,230

.910

0,19

1.9

118,

213.

5

Tot

al E

quit

y2,

527,

260.

13,

376,

653.

24,

381,

950.

34,

354,

341.

74,

626,

320.

14,

954,

804.

65,

341,

389.

6

Tot

al E

quit

y &

Min

orit

y In

tere

st2,

527,

260.

13,

382,

478.

34,

387,

213.

54,

356,

560.

04,

626,

320.

14,

954,

804.

65,

341,

389.

6T

otal

Equ

ity

& M

inor

ity

Inte

rest

&

Lia

bilit

ies

30,3

89,5

43.3

37,5

52,9

54.6

47,7

63,2

48.1

56,2

83,7

46.3

66,2

14,1

92.7

77,0

58,8

43.7

89,5

32,0

96.8

Sour

ce:

CIB

Fin

anci

als,

Glo

bal R

esea

rch

*Thi

s ac

coun

t inc

lude

s ne

t pro

fit o

f the

yea

r in

200

6 an

d 20

07 o

f LE

851.

6mn

and

LE1.

29bn

, res

pect

ivel

y. R

etai

ned

earn

ings

rep

rese

nt L

E29

.7m

n in

200

7 an

d al

l the

figu

res

in th

e pr

ojec

ted

peri

od.



INC

OM

E S

TA

TE

ME

NT

Com

mer

cial

Int

erna

tion

al B

ank

(‘00

0LE

)20

05 A

2006

A20

07 A

2008

F20

09 F

2010

F20

11 F

Inte

rest

Inc

ome

2,02

8,17

0.4

2,31

7,34

7.9

2,99

8,35

5.3

3,94

2,27

8.0

4,70

3,63

4.8

5,53

8,08

4.8

6,46

4,75

4.5

Inte

rest

Exp

ense

1,13

2,31

7.9

1,37

5,48

1.4

1,79

7,84

2.9

2,31

2,87

1.8

2,79

2,11

1.8

3,31

6,87

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3,90

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6.4

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t In

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e89

5,85

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200,

512.

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629,

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177.

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Pro

visi

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530,

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Fees

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me

342,

974.

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1,31

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665,

185.

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2,81

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3,83

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1,59

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Div

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Fore

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Tra

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142,

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972.

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Oth

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Val

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Tot

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554,

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2,86

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356,

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Dep

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Tot

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474,

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Net

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610,

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1,05

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610,

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1,58

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5,37

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3,88

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Val

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National Societe Generale Bank

Tickers:NSGB.CA (Reuters)NSGB EY (Bloomberg) Listing: The Egyptian Exchange CMP: LE30.0 (September 7th, 2008)

Key Data

EPS* (LE) 4.0 Avg. daily vol.(‘000) 158.3

BVPS** (LE) 13.2 52 week Hi/Lo (LE) 45.5/ 25.3


P/BV** (x) 2.3 Target Price (LE) 34.3

Source: Mubasher, Global Research, market prices as of September 7th, 2008.

*Estimated (2008), earnings are adjusted for goodwill amortization and number of shares.

** Estimated (2008), book value is adjusted for goodwill and number of shares.

BackgroundNational Societe Generale Bank “NSGB” was established in 1978, as a joint venture between the National Bank of Egypt “NBE” and Societe Generale “SG”, which is one of the major lenders in France and Europe.

In 1994, NBE sold 20% of its stake in NSGB to its staff. Two years later, it sold an additional stake of 10.4% to the staff, whereas SG’s stake in the Bank reached 51% in the same year.

In line with the consolidation trend prevalent in the Egyptian banking sector since 2004, SG acquired 90.6% of Misr International Bank “MIBank” in 2005, in a deal worth LE2.2bn. The acquisition price per share was LE43.2, implying a P/BV of 2.0x. In November 2006, NSGB and MIBank announced their legal merger, which has been reflected on the Bank’s financial statements starting January 2006. Currently, SG has a controlling stake of 77.2% in NSGB.

Capital and Shareholders’ StructureThe Bank has an authorized capital amounting to LE5bn.

As of March 31st, 2008, the Bank had an issued and paid-in capital of LE2.8bn, distributed over 275.4mn shares, at a par value of LE10.

In June 2008, NSGB increased its issued and paid-in capital by LE275.4mn, reaching LE3.0bn, through a 1:10 stock dividends distribution, financed from reserves.

As mentioned earlier, NSGB is 77.2% owned by SG, while the free float constitutes 21.4% of the Bank’s capital.

Recommendation

BUY



Chart 01: Shareholders’ Structure

Societe Generale 77.2%

Others 1.5%

Free Float 21.4%


Societe Generale at a GlanceSG is one of the leading corporate and investment banks in Europe. It operates in 45 countries in Europe, Africa, the Americas and Asia Pacific. Its main focus is on the corporate division and investment banking services. Meanwhile, it also presents retail banking and investment management services worldwide.

Business Lines of NSGB

Pursuing the Same Strategy as Societe Generale…The business strategy of NSGB is affected by its parent bank, as it concentrates on the corporate segment, viewing it as the most lucrative business line. Several products and services are presented to this division. Medium and long-term loans are provided to trustworthy corporations, to finance capital expenditures and investment projects. Such loans are oriented to the sectors featuring high growth, in order to lessen the Bank’s exposure to higher risk of default. These sectors include fertilizers, cement, petrochemicals, telecom and infrastructure. The Bank is reluctant to providing loans to corporations in risky sectors, even though they may be more profitable, unless if they have diversified assets or expected cash flows.

The Bank also provides investment banking services to its corporate clients, represented by equity and acquisition finance, finance advisory, syndicated loans and other services. Also equipment and real estate leasing services are offered through the Bank’s joint venture company with NBE and SG, Sogelease Egypt, in which NSGB has a stake of 40%.

NSGB seeks high profits through exploring many areas, providing promising opportunities. One of which was the one realized by establishing an investment fund “Themar” in 2006.

Being a subsidiary of a leading international bank also provides NSGB with an advantage over local banks, as it is able to provide services to multinational companies, benefiting from the international client relationships of SG.

Growing Attention to Retail…Though the Bank perceives the retail segment profits as being minimal, compared to the corporate line, there is a greater orientation towards the retail activities, in an attempt to benefit from the huge opportunities inherent in this segment, resulting from unfulfilled demand for banking activities.



Retail banking include many products and services, represented by deposits and accounts, loans and credit facilities, in addition to electronic banking services. Other retail products and services are represented by ATM cards, credit cards and payroll cards, which are provided through the corporate line to prevent risks of default.

The Bank also provides its retail clients with life insurance savings plans through its 25% owned subsidiary “NSGB Life Insurance”, which is a joint venture between NSGB and its parent bank. In the mean time, specific offers are presented to high net worth individuals, as being a profitable and trustworthy client segment.

In order to satisfy a larger retail client base, the Bank improved the IT system for its entire branch network, as well as the automated service network, where 210 ATM machines are currently available.

The Bank initiated new products and services, with the aim of granting more benefits to the retail clients. These are represented by a new type of credit cards, with higher security features and added benefits, call center services available 24/7, as well as benefits associated with credit cards, including discounts at specific stores and other services.

Second Largest Private Bank…NSGB is the second largest private bank after CIB in terms of its market shares. As of June 2008, the Bank’s shares in the total assets, deposits and loans of the banking system were 4.1%, 4.8% and 6.1%, respectively.

In terms of the Bank’s branch network, comprising 117 branches, NSGB contributed to 3.6% of the total branch network of the banking system.

Recent Developments…

Expanding Branch Network…Major developments were made in 2007, aiming at targeting more retail clients. A primary tool used by the Bank was to expand its branch network, which reached 117 branches in 2007, compared to 96 branches in 2006. The network covers Cairo, Alexandria and many governorates in Egypt. Moreover, the Bank is planning to launch more branches in 2008 and 2009, at an average of 20 branches per year. The priority is to cover big cities in Upper Egypt, then open new ones in Cairo and Alexandria.

Promoting New Products and Services…The Parent Bank provides NSGB with experienced management and necessary assistance, which has enabled it to provide services with high quality to attract more clients and increase its client base.

Among the services that were offered to professionals in 2007 were the packages for health care providers. Also, following the success realized by the investment fund “Themar”, the Bank aims at establishing additional funds in 2008.

In addition, new mortgage offers are expected to be launched in the same year. It is worthy to note that mortgage activity is minimal, compared to the main areas of focus of the Bank, due to the high risks associated with it.





Since the effects of the merge between NSGB and MIBank were reflected on the Bank’s financial statements starting 2006, the period under analysis will start from 2005 results, to show how the Bank’s historical performance was affected by the merger.

Acceleration in Deposits Balances…After the merge in 2006, the Bank has realized a substantial growth in its main source of funds, represented by deposits. This was a result of merging the deposit balances of the two banks. In 2006, deposits grew by 154.2%, reaching LE33.3bn, compared to LE13.1bn, posted the previous year.

In 2007, the Bank was able to further raise its deposits balances by 18.0% y-o-y, reaching LE39.3bn and constituting 83.2% of the Bank’s total liabilities and shareholders’ equity. This surge came as a result of the 30.3% increase in time deposits balances, contributing to 54.4% of the total deposits in 2007, compared to 49.2% in 2006. Also, the rise in deposits balances in 2007 was a result of the incline of demand deposits by 22.7% in the same year, which contribution remained stagnant at 22%, approximately.

Chart 02 : Deposits by Type-2006 Chart 03: Deposits by Type-2007


CD’s 16.4%

SavingsDeposits 8.2%

TimeDeposits 49.2%

Other Deposits 4.6% DemandDeposits22.4%

CD’s11.8%

SavingsDeposits

7.3%

TimeDeposits54.4%

Other Deposits 4.2%

Source: NSGB Financials, Global Research

On the other hand, the industrial and services sectors had the greatest contribution in NSGB deposits in 2007. The industrial sector’s share represented 27.4% of total deposits, rising from 19.4% in 2006. Meanwhile, the services sector’s share remained stable at around 13%. In the mean time, deposits in foreign currency represented 44.5% of the total deposits in 2007, compared to 42.6% a year before. The industrial and services sectors had also the highest shares in deposits denominated in foreign currency in 2007, with 32.6% and 14.9%, respectively.




Industrial19.4%

Trade11.6%

Services13.2%

Household55.4%

Agriculture 0.4%

Industrial27.4%

Trade6.4%

Services12.6%

Household52.2%

Agriculture 1.3%


Resulting Rise of Assets Balances…The increase in deposits balances that the Bank was able to realize in 2007 had a positive effect on the Bank’s assets in the same year, as they grew by 19.8%, reaching LE47.3bn, compared to LE39.4bn in 2006. The major effects were on gross loans and liquid assets, which represented 46.9% and 44.5% of the Bank’s total assets, respectively.

Higher Balances in Uses of funds…The rise in the Bank’s deposits was translated into a higher use of the accumulated funds, by extending more loans to the Bank’s clients in 2007. This was illustrated by the 22.8% increase realized in gross loans and advances, as they reached LE22.2bn in 2007, compared to LE18.1bn in 2006. The overwhelming majority of loans were the ones extended to customers, which constituted 98.1% of gross loans and advances in 2007, as the Bank did not extend any loans to other banks during the same year. This was a result of the ample liquidity experienced by all banks in the banking sector, which did not derive demand for loans in the interbank market.



Discounted Commercial Papers 331.2 418.5 26.4%

Loans to Customers 17,591.5 21,752.2 23.7%

Loans to Banks 131.3 - -100.0%

Gross Loans and Advances 18,054.0 22,170.7 22.8%

Unearned Commercial Papers Discount - 20.5 N/A

Provision for Doubtful Debts 2,036.0 2,073.0 1.8%

Unearned Interest 382.2 341.6 -10.6%

Net Loans and Advances 15,635.8 19,735.6 26.2%


The industrial sector had the lion’s share in terms of NSGB’s loans in 2007, as its contribution reached 46.7% of total loans, compared to 39.2% in the previous year. The services sector



came second, with a contribution of 23.6%, down from 26.9% in 2006. It is worth mentioning that loans denominated in foreign currency accounted for 38.2% of total loans in 2007, up from 35.0%, a year before. The main contribution to loans in foreign currency went also to the industrial and services sector in 2007, representing 58.6% and 24.6%, respectively.


Industrial39.2%

Trade 14.0%

Services26.9%

Others18.8%

Agriculture 1.2%

Industrial46.7%

Trade 13.2%

Services23.6%

Others 15.4%

Agriculture 1.1%


Sufficient Provisioning for Inherited Bad Debts…The Bank had an approximate ratio of bad debts to gross loans of 10% in 2007. This was mainly attributed to an inheritance of MIBank’s loan portfolio, which represented a negative outcome of the executed merge. Nevertheless, the Bank was able to effectively set an adequate provisioning policy by covering around 97% of its NPLs.

We assumed declining ratios of NPLs over our forecast period, along with the same provisioning practices adopted historically by the Bank. The result was a coverage ratio, reaching around 110% by 2011, as a result of the accelerating loan balances.

Chart 08: NPLs, Loan Loss Provisions and Coverage Ratio

-

500

1,000

1,500

2,000

2,500

3,000

2007 2008 f 2009 f 2010 f 2011 f

LEmn

90%

95%

100%

105%

110%

115%

NPLs Loan Loss Provisions Coverage Ratio (right scale)

Source: NSGB, Global Research



Expected Greater Ability to Extend Loans…As mentioned earlier, the deposits and loans balances grew by 18.0% and 22.8% in 2007, respectively. The Bank extended greater amounts of loans, realizing a higher increase over that realized in deposits. This was easily achieved, as the Bank’s loans/deposits ratio reached 54.2% in 2006, implying an availability of excess funds for use in lending opportunities, after satisfying the reserve and liquidity ratios required by the CBE. As the rise in loans exceeded that realized in deposits in 2007, the loans/deposits ratio was pushed up further to 56.4% in the same year. Still, this ratio indicates little utilization of available funds and a strong ability for expanding the Bank’s loan books.

We believe this low utilization of excess funds comes from the Bank’s target of diminishing its risk of default, which urged it to use the available unused funds through investing in safer and profitable instruments, represented by treasury bills. This was the case with almost all banks in the banking system, which was the reason behind the latest decisions in May 2008, concerning canceling the tax exemption on such instruments, as the government aimed at encouraging banks towards directing more of their funds to customer loans.

Our projections for the Bank’s loans were based on its low loans/deposits ratio and also the effects of the latest governmental decisions on treasury bills, which will induce it to orient more amounts of its excess funds towards loans. Meanwhile, we expect an average growth rate of 16% in the Bank’s deposits, relying on the expectations that Banks will raise their rates on deposits, in response to the increases in the CBE rates, which was actually the case with NSGB. This is expected to increase the Bank’s deposits balances. Based on these assumptions, we projected an average growth rate of loans of 20% over our projection period, implying a growing loans/deposits ratio, reaching more than 60% by 2011.

Chart 09: Loans, Deposits and Loans/Deposits Ratio

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2005 2006 2007 2008 f 2009 f 2010 f 2011 f

LEmn

45%

50%

55%

60%

65%



Liquid Assets Surge following the Rise in DepositsThe rise in the Bank’s major source of funds has also accelerated the Bank’s liquid assets by 12.0%. This was a result of the inclination that occurred in the interbank assets and the treasury bills balances, where each one grew by 53.6% and 35.6%, respectively.

Dominant Excess liquidity…The surge realized in the Bank’s deposits balances, especially after the merger with MIBank,



along with the Bank’s relatively low loans/deposits ratio, led to a surplus of funds available with the Bank, which it had to invest in order to maximize spreads. That is how NSGB became a net lender in the interbank market in 2006 and its net balance jumped by 292.7%. The case was different before the merger took place, as deposits balances in 2005 were far less than those achieved after the merge. Its net lending position was even declining by 30.4% than the previous year prior to the merge.


In LEmn 2005 2006 2007

Interbank Assets 3,582.4 8,812.2 13,537.5

Interbank Liabilities 1,584.6 966.8 1,580.0Net Balance 1,997.8 7,845.4 11,957.5

y-o-y Growth -30.4% 292.7% 52.4%Source: NSGB Financials, Global Research

Higher Treasury Bills BalancesThe rise in deposits also had its effect on the increased balances of treasury bills. The common practices adopted by the banks in 2007 were also undertaken in NSGB, as it invested greater portions of its excess funds in treasury bills, which balances grew by 35.6% in the same year. This resulted from the Bank’s intention to invest in safe instruments with associated tax benefits instead of having to bear greater exposure to credit risk through extending more loans to customers. We expected lower balances of treasury bills over our projection period, in response to the cancellation of tax shield.

Sufficient Capital AdequacyThe Bank gained the fruits of the merge in 2006, through realizing higher capital adequacy ratios, where equity to total assets and equity to total loans rose from 7.4% and 17.2%, prior to the merge to 8.5% and 18.5%, after the merge, respectively. This resulted from the 169.8% increase in equity, which far exceeded the increases realized in total assets and gross loans, growing by 136.2% and 151.5%, respectively. The ratios rose further in 2007, where equity to total assets reached 9.1%, while equity to gross loans was 19.4%. The case was the same as the previous year, as the equity rose by 29.0%, exceeding the acceleration of total assets and gross loans, as they inclined by 19.8% and 22.8%, respectively. Such increasing ratios indicate the ability of the Bank to maintain an adequate capital supporting its assets. According to the Bank, the capital adequacy ratio relating its capital to its risk-weighted assets is 11.2%, exceeding the CBE required ratio. Our projections for the Bank’s performance over the coming three years, including growth of equity, assets and loans resulted in an expected equity to total assets ratio exceeding 6% and an equity to loans ratio expected to hover at around 12%. Such decrease compared to the Bank’s historical performance could be attributed to the expected high growth in loans over the forecast period.


Goodwill The acquisition of MIBank by NSGB in 2005 resulted in a goodwill balance of LE1.8bn, which should be amortized over five years, where the annual amortization costs amount to LE361.9mn. In our projection, we applied these annual costs, implying that goodwill will be fully amortized by 2010.



Subordinated DebtIn December 2006, SG provided NSGB with a subordinated debt, worth LE799.1mn, with a 7 years maturity and an annual interest expense, implying a 0.9% over LIBOR 12 months.

Gross Fixed AssetsThe Bank’s plan to expanding its branch network, to gain a larger client base and increase its market share of the deposits and loans, led us to assume an average growth rate of around 18%, in the gross fixed assets balance over the forecast period.

Income Statement AnalysisThe Bank reported net income of LE147.9mn in 2006, the first year reflecting the merge with MIBank, implying a negative growth of 70.0%, compared to the previous year prior to the merge.

The main reason behind the sharp decline in net income growth in 2006 was the accelerated expenses incurred by the Bank, which were related to the merger process. The major contributor was the extraordinary item related to the liquidation of MIBank employees’ pension fund, which resulted in a deficit of LE497.9mn that the Bank had to report as an expense in 2006 results. The second factor behind the decline was the goodwill amortization recorded in the same year’s income statement, amounting to LE361.9mn. Also SG&A jumped by 194.4%, reaching LE513.9mn in 2006, compared to LE174.6mn the year before the merge. This was also a result of the increased costs associated with the merge. Adjusting for the effect of extraordinary items and goodwill amortization, we end up with a 104.0% increase in net income in 2006.

On the other hand, NSGB posted net income of LE674.2mn in 2007, implying a 2.8% rise in net income, adjusted for extraordinary items and goodwill amortization.

After accounting for the extraordinary costs associated with the merge, the modest increase in net income was attributed to a 25.6% increase in net interest income and a 10.1% increase in non-interest income.

In terms of net interest income, the surge in deposits balances increased the Bank’s interest expense by 9.1%. In addition, the declining yields of treasury bills experienced in 2007 resulted in a lower income from treasury bills and bonds by 4.5%. Nevertheless, the Bank was able to overcome these additional costs through increasing its income from loans and interbank assets by 21.9%. This was easily achieved given the Bank’s net lending position and its high loans growth realized in 2007.

On the other hand, non-interest income was mainly affected by fees and commissions income, which grew by 15.7%, as a result of the growth in loans and the 32.5% increase in contingent liabilities. We projected future income generated from fees and commissions, assuming the Bank will utilize the same structure adopted last year.

Other volatile non-interest income, represented by gain from sale of investments, income from foreign exchange operations, investments valuation differences and other income grew only by 2.4%, from LE102.9mn in 2006 to LE105.4mn in 2007. Meanwhile, investment income declined by 45.3%, resulting from a decrease in some trading investments, along with the



decline in investments held to maturity and investments in affiliates. Long-term investments declined, as the Bank has eliminated its stakes in Egycap for Investment Company and Alexandria Company for Commerce and Development, which represented 53.3% and 20.0% of the Companies’ shares, respectively. Meanwhile, the Bank’s stake in SGAM Company was transferred to sundry debit balances, as the Company was under liquidation.

On the other hand, the Bank faced a surge in its depreciation expense, in addition to goodwill amortization. Gross fixed assets grew by 56.6%, as a result of the launch of 21 branches in that year. This expansion had its effect on depreciation costs, which rose by 288.3%. We projected depreciation costs over our forecast period assuming practices close to those used in 2007, taking into consideration the branch expansion plan of the Bank. Meanwhile, SG&A-excluding depreciation expense and goodwill amortization- grew by 3.2% over the previous year, due to the costs associated with the launching of new branches. We assumed that SG&A will grow by an annual rate of 12%, relying on the expected costs associated with the branch expansion, as well as the Bank’s costs incurred in H1 2008.

Concerning provisions, they increased by 187.5%, reflecting a conservative provisioning policy applied by the Bank. As explained earlier, we relied on the Bank’s historical provisioning practices to project future provisions.

Cost and Income RelationshipIn 2007, the Bank’s cost to income ratio was 35.2%, down from 36.5%, realized the previous year. This decline was a result of the higher increase of the Bank’s net interest and non-interest income over its non-interest expense. Non-interest expense, composed of SG&A, depreciation and other expenses, excluding goodwill amortization, rose by 15.9%, whereas the net interest income and the non-interest income combined, grew by 20.2%.

According to our assumptions concerning the Bank’s future income and expense, we expect a cost to income ratio reaching around 32% by 2011.


-

500

1,000

1,500

2,000

2,500

2005 2006 2007 2008 f 2009 f 2010 f 2011 f

LEmn

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

Net Interest Income Total Non-Interest Income Total Non-Interest Expense Cost to income Ratio (right scale)


Interest Rate SpreadThe Bank realized an interest rate spread of 3.3% in 2007, as a result of the rise in income from interest earning assets, which exceeded the costs of funds incurred over the year, as described earlier.



The interest rate spread is expected to widen starting 2008, justified by the rise of interest rates on loans and interbank assets, following the rise in the CBE lending rates. We expect the Bank will be able to raise its lending rates higher than its deposits rates, which are expected to increase also, in response to the CBE deposits rates. Meanwhile, we expect a modest income from treasury bills, as a result of the cancellation of tax exemption on them.

We expect the spread is to narrow after 2009, due to the intense competition that will exist at that time, bringing the spread again to a level close to its current one.


0%

2%

4%

6%

8%

10%

12%

2005 2006 2007 2008 f 2009 f 2010 f 2011 f

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

Interest Income / AVG Earning Assets Interest Expense / AVG Interest-Bearing Funds Interest Spread (right scale)


Net IncomeBased on our assumptions for the Bank’s performance over the forecast period, we project net income to grow at an average of 11% approximately, reaching around LE1.6bn by 2011. It is worthy to note that net income is adjusted for non-appropriation items, extraordinary items and goodwill amortization.


- 200 400 600 800 1,000 1,200 1,400 1,600 1,800

2005

2006

2007

2008 f

2009 f

2010 f

2011 f

LEmn


Profitability RatiosThe Bank’s profitability ratios (adjusted for extraordinary items and goodwill) witnessed a decline in 2007, as ROAA was 2.5%, down from 3.7% in the previous year. Meanwhile, ROAE declined to 40.5%, compared to 64.4%. This was attributed to the minor increase in net income by 2.8%, which lagged far behind the increase of average assets and average equity by 53.9% and 63.4%, respectively.



We expect further decline of the ROAA and ROAE-adjusted for goodwill, reaching around 2% and 30% by 2011, respectively. This would be a result of the higher increase that will be witnessed in average assets and average equity over net income, which is in turn, attributed to the effect of our 20% assumptions for income tax.

Chart 13: ROAA-ROAE

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2005 2006 2007 2008 f 2009 f 2010 f 2011 f

ROAE

1.8%

2.3%

2.8%

3.3%

3.8%

ROAA

ROAE ROAA


Assumed Payout RatioIn 2006, NSGB did not make any dividend distribution, due to the costs associated with the merge with MIBank. The following year, it applied a payout ratio of around 10%. When using the DDM method for valuation, we assumed a payout ratio of around 72%, taking into account the stock dividends that were distributed for the capital increase.


Balance Sheet AnalysisThe Bank’s deposits balances decreased by 7.3% in H1 2008, reaching LE36.4mn, compared to LE39.3mn in 2007. Nevertheless, we made our projections for the deposits growth based on the assumption that the Bank’s orientation towards increasing its deposit rates, responding to the rise in the CBE rates, will have its effect on increasing the Bank’s deposits balances by 2008. In turn, the Bank’s total assets declined by 6.4% YTD, reaching LE44.2bn.

The Bank was able to increase its loan portfolio by 10.2%, resulting from its current low loans/deposits ratio, which enabled it to raise its lending facilities, despite the decrease in deposits, which supports our expectations for loans growth.

Concerning treasury bills, they were affected by the cancellation of tax exemption, as their balances declined by 36.9%, compared to 2007, reaching LE2.5bn. We expect lower investments in these instruments during the forecast period. Meanwhile, we assumed the Bank will extend a minor portion of its excess funds to other liquid assets, to compensate for the decrease in treasury bills balances and to abide by the liquidity ratio required by the CBE.

Income Statement AnalysisNet income reached LE549.4mn in H1 2008, realizing an increase of 40.4% y-o-y, after adjusting for goodwill amortization. This achievement was a result of a 17.7% y-o-y increase in net interest income, accompanied by a 106.8% y-o-y increase in total non-interest income.



While the income from treasury bills fell by 34.7% y-o-y in the same period, the Bank was able to realize a 17.3% y-o-y increase in income from loans and interbank assets, which resulted from the increased loans balances, compared to the same period last year, as they grew by 26.4% y-o-y. In addition, the Bank was able to decrease its interest expense by 3.6%, compared to the same period the previous year.

The surge in total non-interest income was mainly affected by volatile income, including gain from sale of investments, profits from foreign exchange operations, financial investments valuation differences and other income. These items combined surged by 257.6%. The other income’s rise was primarily a result of provisions reversal of around LE278.6mn. In addition, fees and commissions income rose by 39.2%, compared to H1 2007, as a result of the increased loans balances, as well as the 14.0% y-o-y surge in contingent liabilities. Also, investment income grew to LE6.0mn in H1 2008, up from LE4.1mn, realized in the same period the previous year.

Valuation AssumptionsFor arriving at the fair value of the banks under review, we have used two valuation methods:




• Risk free rate of 8.4% (YTM of 2011 bonds).• Market risk premium of 7.8%.• Beta of 5 years monthly figures. If the actual beta of the bank is less than 1 or if the

data available is of less than 5 years, to more appropriately reflect the market risk, we have taken it as 1.



(‘000LE) 2008F 2009F 2010F 2011F Terminal

ValueDividends Expected 607,096.3 659,485.4 795,037.1 1,134,067.0 13,168,222.8



NPV of the Firm 10,376,330.4

No. of Outstanding Shares (‘000) 302,941.0








6.0% 6.5% 7.0% 7.5% 8.0% 8.5%

Cos

t of

Equ

ity

14.2% 39.2 41.4 43.8 46.7 50.0 53.915.2% 34.9 36.6 38.5 40.6 43.0 45.816.2% 31.4 32.8 34.3 35.9 37.7 39.817.2% 28.6 29.7 30.9 32.2 33.6 35.218.2% 26.2 27.1 28.1 29.2 30.3 31.619.2% 24.2 25.0 25.8 26.7 27.6 28.6



P/BV = (ROE - g) / (COE - g)

This P/BV is then multiplied with the BVPS of the Bank at the next full year, in our case the BVPS at December 31st, 2008 to reach at the fair value of the Bank over a medium term investment horizon.

In our calculations, we have made the following assumptions in order to attain the equity value of individual banks:

- Sustainable ROE calculated as the average ROAE of the forecasted 4 years, which represented 31.2%.





COE 16.2%



2008: BV/share (LE) 13.2GGM Value per share (LE) 34.6Source: Global Research






6.0% 6.5% 7.0% 7.5% 8.0% 8.5%C

ost

of E

quit

y14.2% 40.4 42.1 44.1 46.4 49.1 52.315.2% 36.0 37.3 38.8 40.4 42.3 44.516.2% 32.5 33.4 34.6 35.8 37.2 38.717.2% 29.6 30.3 31.2 32.1 33.1 34.318.2% 27.1 27.7 28.4 29.1 29.9 30.719.2% 25.1 25.6 26.1 26.6 27.2 27.9




ROE

29.2% 30.2% 31.2% 32.2% 33.2% 34.2%

Cos

t of

Equ

ity

14.2% 40.5 42.3 44.1 46.0 47.8 49.615.2% 35.6 37.2 38.8 40.4 42.0 43.616.2% 31.7 33.1 34.6 36.0 37.4 38.817.2% 28.6 29.9 31.2 32.5 33.7 35.018.2% 26.0 27.2 28.4 29.6 30.7 31.919.2% 23.9 25.0 26.1 27.1 28.2 29.3


ValuationBased on the current market price of LE30.0/share, as of September 7th, 2008, NSBG is trading at 2008E P/E and P/BV multiple of 7.5x and 2.3x, respectively, after adjusting P/E for extraordinary items, goodwill and number of shares and adjusting P/BV for goodwill and number of shares.

Table 08: Valuation


DDM 34.3 80.0% 27.4

GGM 34.6 20.0% 6.9

Final Value 34.3Source: Global Research

Our estimated value for this banking scrip is worked out to be LE34.3 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers an upside of 14.4% on the closing price of LE30.0/share (as of September 7th, 2008); we therefore recommend a BUY on the scrip.



Outlook

Our outlook for NSGB is positive. We believe the Bank possesses various key prospects, which will enable it to maintain its current well established position in the Egyptian market. The fact that its majority stake is owned by Societe Generale, a sound international lender, provides confidence that the parent bank will provide it with the necessary financial support, in case needed, in addition to the qualified management as technical assistance. The fact that the Bank was not negatively affected by the fraud crisis that happened in Societe Generale in the beginning of this year assures that NSGB is well positioned in the Egyptian market.

Despite being the second largest private bank in Egypt, the Bank still plans to expand its branch network, in an attempt to enlarge its client base and gain higher market shares, which is expected to boost its lending opportunities and consequently its future profits. Besides, the latest capital increase that occurred in June 2008 is expected to enhance the Bank’s growth and to ameliorate its capital adequacy.



BA

LA

NC

E S

HE

ET

Nat

iona

l Soc

iete

Gen

eral

Ban

k

(‘00

0LE

)20

05 A

2006

A20

07 A

2008

F20

09 F

2010

F20

11 F

Cas

h &

Bal

ance

s w

ith th

e C

BE

946,

219.

12,

945,

720.

13,

315,

680.

43,

861,

682.

64,

156,

709.

94,

518,

726.

94,

887,

987.

4

Due

fro

m B

anks

3,58

2,38

3.2

8,81

2,20

4.2

13,5

37,4

68.3

16,5

13,0

29.1

17,4

63,9

74.8

19,6

61,4

04.0

21,7

56,7

16.6

Tre

asur

y B

ills

1,32

9,00

4.4

2,91

1,08

1.6

3,94

5,97

7.3

2,49

3,45

3.1

2,87

1,46

2.0

3,12

6,44

4.2

3,59

5,43

7.9

Gov

ernm

ent S

ecur

ities

854,

490.

43,

799,

208.

0-

--

--

Tra

ding

Inv

estm

ents

17,8

70.9

323,

034.

124

1,14

4.8

280,

854.

830

6,98

9.8

338,

004.

639

2,44

5.8

Ava

ilabl

e fo

r Sa

le I

nves

tmen

ts18

6,22

7.0

1,99

9,67

4.5

3,63

2,10

5.6

4,17

6,92

1.5

4,80

3,45

9.7

5,33

8,03

2.4

5,93

4,19

6.5

Inve

stm

ents

Hel

d to

Mat

urity

&

Inve

stm

ents

in A

ffili

ates

2,68

8,96

0.5

504,

572.

745

2,39

4.1

294,

056.

226

4,65

0.6

269,

943.

618

8,96

0.5

Net

Loa

ns a

nd A

dvan

ces

6,77

9,06

8.9

15,6

35,7

84.3

19,7

35,5

69.6

23,8

16,1

10.3

29,4

43,9

63.8

35,3

85,3

39.3

42,2

72,8

92.9

Net

Fix

ed A

sset

s16

5,01

6.3

526,

317.

267

6,05

5.3

795,

526.

788

8,97

4.7

934,

042.

690

8,74

0.7

Goo

dwill

-1,

447,

670.

71,

085,

753.

072

3,83

5.3

361,

917.

70.

00.

0

Def

erre

d T

axes

2,84

1.9

106,

921.

777

,639

.997

,942

.013

3,47

5.3

--

Oth

er A

sset

s14

3,29

9.9

423,

511.

255

6,88

0.9

696,

101.

180

0,51

6.3

920,

593.

71,

012,

653.

1

Tot

al A

sset

s16

,695

,382

.439

,435

,700

.247

,256

,669

.353

,749

,512

.761

,496

,094

.570

,492

,531

.380

,950

,031

.3

Cus

tom

er D

epos

its13

,104

,368

.033

,311

,605

.739

,299

,391

.545

,770

,930

.453

,180

,452

.061

,762

,996

.671

,710

,941

.8

Due

to C

entr

al B

ank

& O

ther

Ban

ks1,

584,

590.

796

6,75

7.0

1,58

0,00

0.0

1,19

0,31

8.7

1,29

6,89

9.3

1,47

5,14

9.8

1,65

9,17

3.0

Oth

er L

iabi

litie

s33

3,28

2.7

983,

702.

51,

143,

595.

51,

240,

801.

11,

302,

841.

21,

328,

898.

01,

355,

476.

0

Div

iden

ds P

ayab

le85

,600

.033

,500

.013

0,35

0.2

--

--

Tax

es P

ayab

le56

,172

.6-

--

--

-

Oth

er P

rovi

sion

s29

4,35

7.1

764,

331.

174

0,08

2.1

777,

086.

281

5,94

0.5

856,

737.

589

9,57

4.4

Def

erre

d T

axes

--

--

-3,

121.

54,

270.

3

Med

ium

and

Lon

g-T

erm

Loa

ns-

38,7

96.2

58,8

45.7

59,1

26.4

43,5

63.6

28,6

25.7

14,3

12.9

Tot

al L

iabi

litie

s15

,458

,371

.136

,098

,692

.542

,952

,265

.049

,038

,262

.956

,639

,696

.665

,455

,529

.175

,643

,748

.4

Paid

-in

Cap

ital

660,

000.

02,

027,

952.

12,

754,

009.

03,

029,

409.

93,

029,

409.

93,

029,

409.

93,

029,

409.

9

Res

erve

s57

6,83

4.8

509,

865.

877

7,92

6.9

936,

446.

51,

108,

645.

41,

316,

238.

41,

612,

355.

9

Ret

aine

d E

arni

ngs

176.

569

.943

8.4

453.

549

2.6

593.

984

7.1

Tot

al P

rim

ary

Cap

ital

1,23

7,01

1.3

2,53

7,88

7.7

3,53

2,37

4.3

3,96

6,30

9.8

4,13

8,54

7.9

4,34

6,24

2.2

4,64

2,61

3.0

Seco

ndar

y C

apita

l (Su

bord

inat

ed L

oan)

-79

9,12

0.0

772,

030.

074

4,94

0.0

717,

850.

069

0,76

0.0

663,

670.

0

Tot

al E

quit

y1,

237,

011.

33,

337,

007.

74,

304,

404.

34,

711,

249.

84,

856,

397.

95,

037,

002.

25,

306,

283.

0

Tot

al E

quit

y &

Lia

bilit

ies

16,6

95,3

82.4

39,4

35,7

00.2

47,2

56,6

69.3

53,7

49,5

12.7

61,4

96,0

94.5

70,4

92,5

31.3

80,9

50,0

31.3

Sour

ce:

NSG

B F

inan

cial

s, G

loba

l Res

earc

h



INC

OM

E S

TA

TE

ME

NT

Nat

iona

l Soc

iete

Gen

eral

Ban

k

(‘00

0LE

)20

05 A

2006

A20

07 A

2008

F20

09 F

2010

F20

11 F

Inte

rest

Inc

ome

1,06

1,61

3.9

2,64

7,52

6.6

3,04

7,29

8.7

3,71

5,23

9.1

4,32

6,30

8.1

4,98

9,14

8.0

5,76

6,94

4.6

Inte

rest

Exp

ense

558,

058.

31,

681,

726.

51,

834,

358.

22,

259,

258.

52,

626,

604.

13,

069,

304.

63,

567,

445.

5

Net

Int

eres

t In

com

e50

3,55

5.7

965,

800.

21,

212,

940.

61,

455,

980.

61,

699,

704.

01,

919,

843.

42,

199,

499.

0

Prov

isio

ns20

,849

.731

,426

.390

,342

.511

7,83

2.4

138,

891.

915

2,23

3.8

180,

380.

3

Net

Int

eres

t In

com

e af

ter

Pro

visi

ons

482,

706.

093

4,37

3.9

1,12

2,59

8.1

1,33

8,14

8.3

1,56

0,81

2.1

1,76

7,60

9.6

2,01

9,11

8.7

Fees

& C

omm

issi

ons

Inco

me

206,

926.

538

6,63

5.2

447,

456.

553

8,41

6.0

626,

561.

872

9,50

2.7

843,

550.

6

Div

iden

d In

com

e4,

865.

224

,844

.113

,601

.614

,502

.215

,110

.716

,824

.118

,543

.2

Gai

ns f

rom

For

eign

Exc

hang

e T

rans

actio

ns50

,958

.035

,821

.515

,696

.010

,816

.811

,033

.111

,253

.811

,478

.9

Gai

n O

n Sa

le o

f Fi

nanc

ial I

nves

tmen

ts-

(11,

980.

2)54

,626

.155

,718

.656

,833

.057

,969

.659

,129

.0

Tra

ding

Inv

estm

ents

Val

uatio

n D

iffe

renc

es6,

388.

712

,220

.122

,203

.223

,313

.424

,479

.125

,703

.026

,988

.2

Oth

er O

pera

ting

Inco

me

-76

,648

.73,

154.

83,

217.

93,

282.

33,

347.

93,

414.

9

Prov

isio

ns N

o lo

nger

Use

d-

--

130,

000.

0-

--

Oth

er F

inan

cial

Inv

estm

ents

Val

uatio

n D

iffe

renc

es20

.0(9

,776

.5)

9,68

7.7

10,1

72.1

10,6

80.7

11,2

14.7

11,7

75.5

Tot

al N

on-I

nter

est

Inco

me

269,

158.

451

4,41

3.0

566,

425.

978

6,15

6.9

747,

980.

785

5,81

5.9

974,

880.

3

Gen

eral

& A

dmin

istr

ativ

e E

xpen

ses

174,

563.

151

3,93

3.7

530,

350.

359

3,99

2.4

665,

271.

574

5,10

4.1

834,

516.

5

Dep

reci

atio

n30

,620

.323

,763

.292

,265

.811

7,10

5.7

143,

129.

116

7,85

1.4

188,

540.

1

Goo

dwill

Am

ortiz

atio

n-

361,

917.

736

1,91

7.7

361,

917.

736

1,91

7.7

361,

917.

7-

Oth

er O

pera

ting

Exp

ense

s-

2,14

5.5

2,86

9.0

2,92

6.4

2,98

4.9

3,04

4.6

3,10

5.5

Tot

al N

on-I

nter

est

Exp

ense

205,

183.

490

1,76

0.0

987,

402.

91,

075,

942.

11,

173,

303.

21,

277,

917.

81,

026,

162.

1

Net

Ope

rati

ng I

ncom

e54

6,68

0.9

547,

026.

870

1,62

1.1

1,04

8,36

3.1

1,13

5,48

9.7

1,34

5,50

7.7

1,96

7,83

6.8

Tax

es53

,330

.7(9

7,61

4.3)

29,2

81.8

205,

612.

221

9,99

1.3

241,

782.

239

3,33

7.6

NP

AT

493,

350.

264

4,64

1.1

672,

339.

284

2,75

0.9

915,

498.

41,

103,

725.

51,

574,

499.

2

Ext

raor

dina

ry I

tem

s*-

(497

,851

.5)

--

--

-

Non

-App

ropr

iatio

n It

ems*

*(2

5.6)

(1,1

34.7

)(1

,841

.5)

--

--

Net

Inc

ome

493,

375.

814

7,92

4.3

674,

180.

884

2,75

0.9

915,

498.

41,

103,

725.

51,

574,

499.

2So

urce

: N

SGB

Fin

anci

als,

Glo

bal R

esea

rch

* E

xtra

ordi

nary

item

s in

200

6 re

pres

ent d

efic

it of

the

MIB

ank

empl

oyee

s’ p

ensi

on fu

nd.

** N

on-a

ppro

pria

tion

item

s re

pres

ent g

ain

from

sal

e of

fixe

d as

sets

.



CA

SH F

LO

W S

TA

TE

ME

NT

Nat

iona

l Soc

iete

Gen

eral

Ban

k(‘

000L

E)

2005

A20

06 A

2007

A20

08 F

2009

F20

10 F

2011

FN

et I

ncom

e A

fter

Tax

493,

375.

814

7,92

4.3

674,

180.

884

2,75

0.9

915,

498.

41,

103,

725.

51,

574,

499.

2D

epre

ciat

ion

30,6

20.3

23,7

63.2

92,2

65.8

117,

105.

714

3,12

9.1

167,

851.

418

8,54

0.1

Goo

dwill

Am

ortiz

atio

n-

361,

917.

736

1,91

7.7

361,

917.

736

1,91

7.7

361,

917.

7-

Prov

isio

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Credit Agricole-Egypt

Tickers:CIEB.CA (Reuters)CIEB EY (Bloomberg)

Listing:The Egyptian Exchange

CMP:LE15.2 (September 7th, 2008)

Key Data


BVPS* (LE) 5.8 52 week Hi/Lo (LE) 28.5/ 13.0


P/BV* (x) 2.6 Target Price (LE) 17.0Source: Mubasher, Global Research, market prices as of September 7th, 2008.

* Estimated (2008).

BackgroundCredit Agricole-Egypt “CAE” was established in September, 2006. The history of the Bank begins in 1977, when it started-up under the name of Credit International d’Egypte. In 2001, Calyon-France, formerly Credit Agricole Indosuez-France, acquired a 72.4% stake in the Bank, that is why it was renamed Credit Agricole Indosuez-Egypt. The latter merged with Credit Lyonnais-Egypt in 2004. A year later, the Bank was renamed Calyon-Egypt, as it was 52.9% owned by Calyon-France and 29.5% owned by Credit Lyonnais-France.

In January 2006, Credit Agricole Group along with El Mansour and El Maghraby Investment and Development Group acquired a majority stake in Egyptian American Bank “EAB”. In August 2006, Calyon-Egypt was merged with EAB forming one entity under the name of Credit Agricole-Egypt, starting from the beginning of September 2006.

Capital and Shareholders’ StructureThe Bank has an authorized capital of LE3.5bn, whereas its issued and paid-in capital amounts to LE1.1bn, distributed over 287mn shares, at a par value of LE4.

CAE is 59.3% owned by Credit Agricole Group and 17.1% by El Mansour and El Maghraby Group. The free float constitutes 21.0%.

Recommendation

BUY




Credit AgricoleGroup 59.3%

Others 2.6%

Free Float 21.0%

El Mansour and El MaghrabyInvestment and Development

Group 17.1%


Synopsis on Credit Agricole-FranceCredit Agricole France is a reputable French Bank that operates in 66 countries and is specialized in retail banking. After reaching 9,000 branches in France, which became a saturated market, the Bank decided to expand its branch network by acquiring other banks outside France. Since 2005, more than 12 mergers and acquisitions were executed by the Bank internationally.

Business Strategy of the CAE

Influenced by parent bank core practices…CAE follows the business strategy of Credit Agricole-France and focuses on retail banking in Egypt. Its target is to gain growth in several business lines, taking the retail segment as a starting point, as it perceives it as the fastest growing segment, which could lead to further growth in other divisions.

Among the products and services that the Bank was able to offer to its clients, since the merge in 2006, are electronic services, deposits and savings accounts, cash and car loans, investments in mutual funds, credit cards and long term investments including marriage, retirement and other plans.

The Bank also has a private banking division, which main role is to provide products and services to special, high net worth individuals. These customers could also be foreigners who are interested in investing in Egypt. Services provided include deposits and savings accounts, investments in mutual funds, electronic services, as well as other services.

Seeking growth in the corporate segment…Though the Bank’s main focus is on the retail banking, it still aims at increasing its activities in other business lines. Concerning the corporate segment, the Bank recognizes its importance as a profitable line and presents high quality services to corporations, including short and long-term financing, participation in syndicated loans, as well as funding projects in many growing sectors, like food and tourism.

The Bank also provides services related to other financial institutions around the globe, as it aims at promoting a banking network enabling it to serve clients in different banks worldwide, in addition to participating in trade financing and other activities.



Enterprises’ banking is another segment, which finances the investments of corporations, through overdrafts, letters of credit, bank guarantees, foreign exchange services, swaps, short-term and long-term financing and other services.

Also, the Bank serves the retail segment through its business with corporations by providing payroll system and loans to employees.

Increasing Focus on Mortgage Finance and SME’s…Mortgage and SME’s segments comprise a minor percent of the Bank’s activities, due to the limitations set on mortgage lending and the risks associated with funding SME’s.

Nevertheless, the Bank aims at increasing its services to SME’s. The main current services are represented in deposits but the Bank expects more lending opportunities to be presented to this division afterwards. In addition, the Bank has appointed a team in 2007, devoted especially to serve this segment.

As for mortgage finance, the Bank relies on its sister company “the Egyptian Company for Mortgage Finance”, in which it owns a stake of 50.0%, to expand its activities in this domain.

Relatively Small Market Shares…CAE captures lower market shares than NSGB and CIB, in terms of total assets, loans and deposits, but higher than those of EGB and EXPA, except that EXPA has a market share of loans slightly higher than that of CAE. As of June 2008, the Bank’s shares of the total assets, loans and deposits in the banking system were 2.1%, 1.8% and 2.6%, respectively.

The same goes for the Bank’s market share of the aggregate branch network, as its branches reached 53 branches, implying a market share of 1.6%, taking into consideration that the banks’ number of branches reached 3,252 branches in March 2008.

Recent Developments

Targeting Higher Market Shares… Aiming at increasing its market shares relative to its peers, the Bank plans to aggressively expand its branch network, which will in turn increase its client base and consequently its sources of funds and lending opportunities. In order to achieve this goal, the Bank launched 7 new branches in 2007. Currently, CAE operates through 53 branches, which are targeted to reach around 100 branches by 2011. According to the Bank’s plan, the new branches will serve mainly retail clients and in the mean time services will be promoted to private banking segment, through representatives that will serve high net worth individuals.

New Products Launched…The intense competition taking place among banks induced CAE to initiate new products and services. Among such products offered in 2007, was the launching of Visa Platinum. Other products have been offered in the same year and the Bank plans to promote more services in 2008 and thereafter. The Bank’s ability to provide products and services with high quality can be assured on the back of the international experience acquired through its parent bank.




Balance Sheet AnalysisAs 2007 is the first year to fully reflect the Bank’s performance after the merger, for analysis purposes, we concentrated on comparing FY 2006 and 2007, as before that the results were not representative of the Bank’s current status.

Major increase in the major source of funds…The first year for the merged entity exhibited an impressive growth in the deposits balances, constituting 87.1% of the Bank’s total liabilities and equity, as they reached LE18.7bn in 2007, compared to LE13.7bn in 2006, realizing a 36.5% y-o-y. This growth was mainly attributed to the 46.6% rise in time deposits, which represented around 63.8% of total deposits in 2007, compared to 59.4% a year before. This indicates the ability of the Bank, supported by its international expertise, to effectively collect the sources of funds, on which the entire business of the Bank relies.



CD’s 4.9%

Savings Deposits14.5%

Time Deposits59.4%

Other Deposits 2.7% Demand Deposits16.8%

CD’s 5.5%


Time Deposits63.8%

Other Deposits 1.9%

Source: CAE Financials, Global Research

On the other hand, the household sector had the highest contribution to total deposits in 2007, as it had a share of around 45.6% in 2007, compared to 56.1% in 2006. The public services sector share was 17.1% in 2007, down from 18.3% the previous year. The remaining deposits were distributed among the mutual funds, with no contribution the previous year, services sector and other sectors.




Industrial 5.5%

Trade 6.9%

Public Services18.3%

Household 56.1%

Mutual Funds 0.0%

Others 2.2%

Services 11.0%

Agriculture 0.1%

Industrial 3.5%

Trade 5.1%

Public Services17.1%

Household 45.6%

Mutual Funds 15.1%

Others 1.9%

Services 11.6%

Agriculture 0.1%


Affected Assets Balances…The notable growth in deposits led to an amelioration of the total assets balances in 2007, which rose by 36.5%, from LE15.8bn in 2006 to LE21.5bn in 2007. The major acceleration was in the loans and advances, as well as the liquid assets, which when combined represented the majority of total assets for the same year.

Boosted Loan Books…The sources of funds generated by the Bank in 2007 enabled it to extend greater amounts of loans during the same year, enhancing its gross loans and advances balances by 22.5%, from LE4.2bn in 2006 to LE5.2bn in 2007. This rise mainly came from the customer loans, constituting 94.6% of the gross loans, as they grew by 22.4% in 2007. This was an indication of the accelerating demand arising from various sectors to fund their investments and projects, in addition to the growing demand taking place in the retail segment.

On the other hand, loans to banks dropped by 19.6%, which was a common phenomenon in many banks in 2007, due to the excess liquidity that the banking sector was and is still experiencing.




Customer Loans 4,006.8 4,902.9 22.4%

Banks Loans 205.7 165.4 -19.6%Gross Loans and Advances 4,228.8 5,181.5 22.5%

Unearned Bills Discount 0.1 0.1 46.5%

Provision for Doubtful Debts 538.7 471.1 -12.6%

Unearned Interest 45.7 48.0 5.1%Net Loans and Advances 3,644.3 4,662.3 27.9%Source: CAE Financials, Global Research

The major portion of the Bank’s loans in 2007 went to the industrial sector, as it contributed



to 44.0% of total loans, down from 47.3% in 2006. The household sector ranked second, as its share increased from 22.5% in 2006 to 25.9% in 2007, giving rise to promising lending opportunities to the Bank from this sector, as noted earlier.


Industrial47.3%

Trade 12.4%

Banks 4.9%

Household22.5%

Others 0.8%

Services9.6%

Agriculture 2.4%

Industrial44.0%

Trade 10.1%

Banks 3.2%

Household25.9%

Others 0.5%

Services14.1%

Agriculture 2.2%


Adequate Provisioning Policy...CAE has inherited bad debts, mainly from EAB, resulting in a NPLs ratio of 9%. The Bank adopted a successful policy in terms of providing adequate provisions to such inflated ratio in 2007, as the coverage ratio reached around 101% of NPLs during the same year. The 12.6% decrease in loan loss provision was partly attributed to the provision reversal made by the Bank, reducing the balance from LE538.7mn in 2006 to LE471.1mn in 2007.

We projected the provisioning practices over the forecast period to be somehow close to those adopted in 2007, while assuming declining rates of NPLs, which brings the coverage ratio around 106% by 2011, in response to growing loans balances.


-

200

400

600

800

1,000

1,200

2007 2008 f 2009 f 2010 f 2011 f

LEmn

96%

98%

100%

102%

104%

106%

108%

NPLs Loan Lo s s Pro v is io n Co v erag e Ratio (rig h t s cale)

Source: CAE, Global Research



Insufficient Orientation to Lending opportunities…The Bank’s loans/deposits ratio decreased from 30.8% in 2006 to 27.7% in 2007, as a result of the growth in deposits that was not matched by a relative growth in loans. After satisfying the reserve and liquidity ratio, the Bank did not orient a significant portion of its excess funds to loans, which could be a result of the Bank’s intention to minimize the risk of default, in order not to be exposed to the NPLs crisis witnessed in the sector between 2000 and 2003.

The government decision of May 2008 concerning canceling the tax exemption on treasury bills was mainly announced in order to encourage banks to increase their lending portfolios, through decreasing the Banks’ investments in other instruments that do not represent the core business of banks.

We relied on this view along with our expectations on the Bank’s loans and deposits in the coming few years and assumed an inclining loans/deposits ratio, reaching around 44% by 2011.

This anticipated positive trend came on the back of our expectations for an average growth rate of around 18% in deposits over the forecast period, which comes in line with the Bank’s target and the expected rise in interest rates on deposits, following the successive climbs in the corridor range, which are expected to boost the deposits balances. On the other hand, we expected an average growth rate of approximately 34% in the Bank’s loan portfolio over the same period, which also corresponds to the Bank’s target and the expected inclination of the Bank towards orienting more of its excess funds to loans, in response to the cancellation of the tax shield on treasury bills. This could be easily achieved by the Bank, given its current low loans/deposits ratio, which gives it greater ability to extend more loans in the future.


-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2006 2007 2008 f 2009 f 2010 f 2011 f

LEmn

0%

10%

20%

30%

40%

50%

Gross Loans Deposits Loans/Deposits ratio (right scale)


Boosted Deposits Triggering Enhancement in Liquid AssetsLiquid Assets were, in turn, affected by the huge growth realized in deposits. They inclined by 44.4%, mainly fueled by the growth in treasury bills and interbank assets by 196.3% and 42.1%, respectively.



Common Trend in Treasury Bills…As was the case in almost all players in the banking sector, treasury bills represented a significant portion of the CAE’s balance sheet assets in 2007, amounting to LE3.4bn This was coming from the Bank’s intention to invest the excess liquidity, arising from the acceleration of deposit balances along with the low loans/deposits ratio, in safe instruments, to benefit from the lower risk of default and the tax exemption benefit as well.

The latest decision concerning the cancellation of tax exemption on treasury bills led us to assume that the Bank will lower its investments in such instruments in the coming few years and compensate this by a minor increase in other liquid assets to satisfy its liquidity ratio, ending up with more space for lending opportunities.

Rising Interbank Assets …Liquid assets growth was also affected by the rise in interbank assets, which was also a result of the growth in the main source of funds, represented by deposits, accompanied by the low loans/deposits ratio. This helped the Bank to use its available funds to lend other banks and realize a net lending position, with a balance of LE10.5bn in 2007.


In LEmn 2006 2007

Interbank Assets 7,528.0 10,700.1

Interbank Liabilities 84.3 241.1

Net Balance 7,443.7 10,459.0

y-o-y Growth 30.8% 40.5%


Capital Adequacy Ratios…The capital adequacy ratios relating equity to total assets and gross loans declined over 2007, as a result of the low increase in equity by 12.0%, compared to the rise in total assets and gross loans. Meanwhile, the capital adequacy ratio relating capital to risk-weighted assets reached 21%, according to the Bank, which is higher than the ratio set by the CBE, indicating sound capital, supporting risk-weighted assets. We expected declining capital adequacy ratios, as equity/total assets is expected to reach around 5% by 2011, while equity to gross loans is expected to be around 12%. This could be justified by the high growth in loans that is expected to exceed the equity growth.


GoodwillBefore the merge, EAB executed an acquisition over American express Bank in 2005, resulting in a goodwill balance, amounting to LE51.4mn. The Bank fully amortized the remainder of this balance in 2007, which reached approximately LE36mn.

Income Statement AnalysisCAE results in 2007 showed an enormous jump in net income, illustrating the successful performance of the Bank’s management, taking into consideration that 2007 was the first full year representing the Bank’s results as a new entity after the merge.



The Bank reported a net income of LE523.9mn in 2007, compared to LE20.7mn, realized in the previous year. It is worth mentioning that the Bank experienced an extraordinary loss in 2006, resulting from the deficit witnessed in the EAB employees’ pension fund, amounting to LE317.5mn. This has negatively affected the Bank’s results in 2006 and consequently boosted the growth in net income realized the following year.

Though the Bank had fully amortized the remaining goodwill balance, amounting to LE36mn in 2007, it was able to realize an impressive growth in net profit over 2006, reaching 60.7%, after eliminating the effects of unusual items and goodwill amortization.

Excluding these items, net income surged over the previous year, as a result of the rise in net interest income and total non-interest income by 23.1% and 64.6%, respectively.

Concerning net interest income, the Bank experienced a 55.5% increase in its interest expense, resulting from the increase in its deposits balances. Though interest income from treasury bills and bonds dropped by 36.5%, as a result of the declining yields on treasury bills, the Bank was able to generate income from loans and interbank assets, realizing an interest income growth of 78.8%, which compensated for the drop in income from treasury bills and bonds and the cost associated with deposits and interbank liabilities. This was a result of the rise of the loans balances and interbank assets.

In the mean time, the rise in non-interest income was partially attributed to income generated from fees and commissions, which rose by 12.2%, in response to the increase in loans balances, along with the 162.5% increase in contingent liabilities. We projected future income from fees and commissions by assuming that the Bank will apply the same fees structure of 2007.

Other contributing factors to non-interest income were some volatile factors, represented by dividend income, gain on sale of investments, foreign exchange operations, financial investments valuation differences and other income, which grew by 838.2%, 317.1%, 41.3%, 777.9% and 322.7%, respectively.

Other important factor affecting the rise in net income was the reversal of provisions in 2007, amounting to LE57.4mn, which has been the Bank’s strategy in 2006 also.

Regarding expenses, SG&A-excluding depreciation and goodwill amortization- rose by 10.0%, reaching around LE371.9mn in 2007, compared to LE338.3mn the previous year. This could be attributed to the costs related to the branch network expansion and the launching of new products and services. We projected SG&A to grow at an average of 16%, on the back of the Bank’s target of expanding its branch network.

Cost and Income RelationshipThe Bank was able to bring down its cost to income ratio from 57% in 2006 to 45% in 2007. This was partially a result of the Bank’s ability to raise its net-interest income and non-interest income, which combined, grew by 39%, over its operating expenses, which increased by only 10% and was composed of SG&A, Depreciation and other expenses, excluding goodwill amortization. Meanwhile, 2006 results were negatively affected by the costs associated with the merger, implying a higher cost to income ratio. We believe the Bank will be able to further decrease its cost to income ratio, bringing it to around 42% by 2011.




-

200

400

600

800

1,000

1,200

2006 2007 2008 f 2009 f 2010 f 2011 f

LEmn

0%

10%

20%

30%

40%

50%

60%



Interest Rate SpreadThe Bank was able to realize an interest spread of around 2.8% in 2007, compared to 2.7% the previous year.

We projected an interest spread reaching approximately 3% by 2011. We forecasted the spread based on many assumptions concerning interest rates applied by the Bank. We assumed that interest income on treasury bills and bonds will not accelerate much, due to lower investments in these instruments after the cancellation of the tax exemption. Then, following the rise in the CBE deposit and lending rates, we assumed that the Bank would increase its deposit and lending rates, realizing a higher spread in 2008, reaching more than 3%. This ratio is to decline in the future, taking into consideration the fierce competition that will squeeze interest spread thereafter.


0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

2006 2007 2008 f 2009 f 2010 f 2011 f

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Interest Income / AVG Earning Assets Interest Expense / AVG Interest-Bearing FundsInterest Spread (right scale)


Net IncomeOur assumptions regarding net income implies a net income of more than LE660mn by 2011, taking into account that we expect a negative growth in the bottom line income in 2008, as a result of the provisions added during the year, in contrast with the Bank’s previous practices towards reversing provisions. It is worthy to note that net income is adjusted for extraordinary items and goodwill amortization.




- 100 200 300 400 500 600 700

2006

2007

2008 f

2009 f

2010 f

2011 f

LEmn


Profitability RatiosThe Bank was able to increase its ROAA and ROAE - adjusted for extraordinary items and goodwill - from 2.4% and 25.7% in 2006, to 3.0% and 38.1% in 2007, respectively. This surge resulted from the remarkable growth in net income during the year, which far exceeded the growth of average assets and average equity, represented by 25.3% and 4.9%, respectively. Based on our assumptions, we believe the Bank’s ROAA and ROAE will reach around 2% and 36% respectively by 2011.

Chart 13: ROAA-ROAE

0%

10%

20%

30%

40%

2006 2007 2008 f 2009 f 2010 f 2011 f

ROAE

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

ROAA

ROAE ROAA


Assumed Payout RatioCAE did not make any dividend distribution in 2006, due to the low net income reported that year, resulting from the expenses associated with the merger. Alternatively, a payout ratio of around 46% was used in 2007. In our DDM method, we assumed that the Bank would apply the same payout ratio over the projected period.


Balance Sheet AnalysisThe Bank raised its customer deposits by around 4% in H1 2008, compared to year end 2007, keeping its same contribution of 87% to total liabilities and equity.

This surge resulted in a 3.4% growth in total assets, reaching LE22.3bn in H1 2008, which mainly came from the rise in gross loans. The Bank was able to extend greater amounts of



loans, relying on the availability of funds resulting from its low loans/deposits ratio, which pushed loans to grow by 40.1%, compared to year end 2007, supporting our assumption for loans growth over 2008.

On the other hand, treasury bills balances declined by 8.0% YTD in H1 2008. We expect these balances would not reach their previous levels, as a result of the cancellation of the tax exemption on such instruments.

Income Statement AnalysisThe Bank posted a net income of LE215.5mn in H1 2008, compared to LE211.5mn, realized in the same period of the previous year, implying a growth of 1.9%. This increase was a result of the rise of the net interest income and total non-interest income by 8.6% and 28.3%, respectively. It is worth mentioning that after adjusting for goodwill amortization, net income witnessed a negative growth of 0.5% in H1 2008, compared to H1 2007.

The rise in deposits resulted in a rise in interest expense by 41.7% y-o-y. Nevertheless, the Bank was able to compensate for the increase in costs through generating a 30.3% boost in income from loans and interbank assets, mainly fueled by the hike in loans balances. In addition, income generated from treasury bills and bonds accelerated by 12.2%, as a result of the increase in treasury bills balances over the year. We expect a modest increase in this income, due to the expected decline in treasury bills over our projection period, compared to 2007.

The rise in non-interest income was triggered by the growth in fees and commissions income by 15.8%, compared to H1 2007, following the rise in the loans balances and the 157.2% y-o-y growth in contingent liabilities. As for other accounts such as gain from sale of investments, foreign exchange profits, investments valuation differences and other items, they grew combined by 77.7%, compared to the H1 of 2007. During the same period, the dividend income dropped by 77.7%. Another contributor to the surge in net income was the provision reversal, amounting to LE20.7mn.

Alternatively, SG&A (excluding depreciation) jumped significantly by 23.5%, compared to H1 2007, as a result of the expansions taking place in the Bank’s branch network and the newly initiated products and services. We relied on these incurred expenses in our projections for SG&A over the forecast period.

Other expenses, amounting to LE50.5mn in H1 2008, included LE48.0mn, representing expenses associated with interest rate swap contracts restructuring. We posted the whole amount as other expenses in 2008, while assuming lower expenses over the following three years.




- Cash flow approach represented by the Dividend Discounting Model.

- P/BV target multiple approach using an adaptation of the Gordon Growth Model.



• Risk free rate of 8.4% (YTM of 2011 government bonds).• Market risk premium of 7.8%.• Beta of 5 years monthly figures. If the actual beta of the bank is less than 1 or if

the data available is of less than 5 years, to more appropriately reflect the market risk, we have taken it as 1.


Table 03: DDM valuation

(‘000LE) 2008F 2009F 2010F 2011F Terminal Value

Dividends Expected 350,672.3 415,271.5 465,851.5 506,372.0 5,879,740.4



NPV of the Firm 4,886,415.2









6.0% 6.5% 7.0% 7.5% 8.0% 8.5%

Cos

t of

Equ

ity

14.2% 19.4 20.4 21.6 22.9 24.5 26.3

15.2% 17.3 18.1 19.0 20.0 21.2 22.5

16.2% 15.7 16.3 17.0 17.8 18.7 19.7

17.2% 14.4 14.9 15.4 16.0 16.7 17.5

18.2% 13.2 13.7 14.1 14.6 15.2 15.8

19.2% 12.3 12.6 13.0 13.4 13.9 14.4



P/BV = (ROE - g) / (COE - g)



- Sustainable ROE calculated as the average ROAE of the forecasted 4 years, represented by 33.8%





COE 16.2%



2008: BV/share (LE) 5.8

GGM Value per share (LE) 16.9Source: Global Research






6.0% 6.5% 7.0% 7.5% 8.0% 8.5%

Cos

t of

Equ

ity

14.2% 19.6 20.5 21.6 22.7 24.1 25.715.2% 17.5 18.2 18.9 19.8 20.8 21.916.2% 15.8 16.3 16.9 17.5 18.2 19.017.2% 14.4 14.8 15.2 15.7 16.3 16.918.2% 13.2 13.5 13.9 14.3 14.7 15.119.2% 12.2 12.5 12.7 13.0 13.4 13.7




ROE

` 31.8% 32.8% 33.8% 34.8% 35.8% 36.8%

Cos

t of

Equ

ity

14.2% 20.0 20.8 21.6 22.4 23.2 24.015.2% 17.5 18.2 18.9 19.6 20.4 21.116.2% 15.6 16.3 16.9 17.5 18.1 18.817.2% 14.1 14.7 15.2 15.8 16.4 16.918.2% 12.8 13.4 13.9 14.4 14.9 15.419.2% 11.8 12.3 12.7 13.2 13.7 14.2


ValuationBased on the current market price of LE15.2/share, as of September 7th, 2008, CAE is trading at 2008E P/E and P/BV multiple of 8.7x and 2.6x, respectively.

Table 08: Valuation


DDM 17.0 80% 13.6

GGM 16.9 20% 3.4Final Value 17.0Source: Global Research

Our estimated value for this banking scrip is worked out to be LE17.0 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value, the banking scrip offers an upside of 11.8% on the closing price of LE15.2/share (as of September 7th, 2008); we therefore recommend a BUY on the scrip.



Outlook

Carrying the name of an international reputable lender, promote a positive outlook for the Bank, ensuring promising growth, supported by international expertise, as well as financial support, if needed.

The results of the Bank in its first year after the merger supports our positive view, as it was able to quickly overcome the costs associated with the merge and furthermore realize high net income growth.

The Bank’s target of expanding its network should provide CAE with greater opportunities, resulting from extended client base and consequently, increasing the Bank’s market shares in terms of total assets, deposits and loans relative to the banking system.



BA

LA

NC

E S

HE

ET

Cre

dit

Agr

icol

e -

Egy

pt

(‘00

0LE

)20

06 A

2007

A20

08 F

2009

F20

10 F

2011

F

Cas

h &

Bal

ance

s w

ith th

e C

BE

713,

435.

31,

703,

872.

12,

597,

903.

93,

099,

703.

23,

632,

216.

84,

233,

817.

8

Due

fro

m B

anks

7,52

7,99

2.3

10,7

00,0

79.1

12,7

54,7

28.7

14,1

24,3

44.9

15,1

24,4

69.5

15,8

79,2

38.7

Tre

asur

y B

ills

1,15

4,53

7.8

3,42

1,09

9.2

1,89

9,27

4.9

2,26

6,13

0.2

2,65

5,44

0.1

3,09

5,25

8.4

Gov

ernm

ent S

ecur

ities

1,33

3,58

2.8

--

--

-

Tra

ding

Inv

estm

ents

388,

098.

922

3,84

1.5

343,

827.

441

0,23

9.5

480,

716.

656

0,33

7.3

Ava

ilabl

e fo

r Sa

le I

nves

tmen

ts52

6,78

9.4

46,0

58.8

70,4

26.5

77,8

70.7

82,2

25.9

84,1

75.2

Inve

stm

ents

Hel

d to

Mat

urity

& I

nves

tmen

ts in

Aff

iliat

es12

4,19

1.2

257,

911.

030

9,49

3.3

355,

917.

239

1,50

9.0

411,

084.

4

Net

Loa

ns a

nd A

dvan

ces

3,64

4,25

8.0

4,66

2,30

7.7

6,59

0,73

7.9

8,79

0,38

3.8

11,6

05,4

69.1

15,1

24,2

24.2

Net

Fix

ed A

sset

s15

7,87

9.4

145,

691.

117

9,13

0.0

219,

256.

721

6,58

1.6

213,

639.

0

Goo

dwill

35,9

69.3

--

--

-

Oth

er A

sset

s15

4,89

6.7

360,

232.

436

7,43

7.0

374,

785.

738

2,28

1.5

389,

927.

1

Tot

al A

sset

s15

,761

,631

.021

,521

,092

.925

,112

,959

.729

,718

,631

.934

,570

,910

.139

,991

,702

.0

Cus

tom

er D

epos

its13

,723

,929

.918

,735

,195

.722

,380

,455

.126

,703

,361

.931

,290

,867

.236

,473

,546

.4

Due

to C

entr

al B

ank

& O

ther

Ban

ks11

7,75

5.4

284,

893.

633

9,71

1.0

380,

680.

041

3,94

3.3

443,

071.

1

Oth

er L

iabi

litie

s32

2,84

9.7

458,

349.

459

5,85

4.2

744,

817.

889

3,78

1.3

1,02

7,84

8.5

Div

iden

ds P

ayab

le2,

065.

533

6,77

4.6

--

--

Oth

er P

rovi

sion

s18

7,87

3.6

130,

831.

713

3,44

8.3

136,

117.

213

8,83

9.6

141,

616.

4

Def

erre

d T

axes

1,89

3.1

1,89

3.1

--

--

Tot

al L

iabi

litie

s14

,356

,367

.219

,947

,938

.123

,449

,468

.627

,964

,976

.832

,737

,431

.438

,086

,082

.4

Cap

ital

1,14

8,00

0.0

1,14

8,00

0.0

1,14

8,00

0.0

1,14

8,00

0.0

1,14

8,00

0.0

1,14

8,00

0.0

Res

erve

s13

6,05

1.0

162,

248.

218

7,33

9.5

216,

212.

324

7,53

5.8

280,

852.

4

Ret

aine

d E

arni

ngs

121,

212.

726

2,90

6.6

328,

151.

638

9,44

2.7

437,

942.

947

6,76

7.2

Tot

al E

quit

y1,

405,

263.

81,

573,

154.

81,

663,

491.

11,

753,

655.

11,

833,

478.

71,

905,

619.

6

Tot

al E

quit

y &

Lia

bilit

ies

15,7

61,6

31.0

21,5

21,0

92.9

25,1

12,9

59.7

29,7

18,6

31.9

34,5

70,9

10.1

39,9

91,7

02.0

Sour

ce:

CA

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inan

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l Res

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INC

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Cre

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(‘00

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06 A

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08 F

2009

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10 F

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F

Inte

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Inc

ome

935,

557.

71,

320,

749.

51,

804,

941.

42,

160,

527.

62,

528,

513.

72,

912,

145.

8

Inte

rest

Exp

ense

521,

946.

681

1,65

1.3

1,07

4,81

1.6

1,30

7,36

0.5

1,55

7,90

4.6

1,87

3,36

5.0

Net

Int

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t In

com

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3,61

1.0

509,

098.

273

0,12

9.8

853,

167.

197

0,60

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8,78

0.8

Prov

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822.

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7,44

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69.2

123,

854.

317

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Net

Int

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ter

Pro

visi

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479,

433.

456

6,54

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657,

760.

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9,31

2.9

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201.

485

5,07

1.6

Fees

& C

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Inco

me

174,

739.

219

6,10

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289,

350.

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1,47

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Div

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450

,167

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Gai

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For

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Exc

hang

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rans

actio

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,545

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.596

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.198

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0,24

0.6

102,

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Gai

n O

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f Fi

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414.

426

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Tra

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Inv

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Val

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275.

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Oth

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8,02

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19.5

34,5

97.8

35,2

89.8

35,9

95.6

36,7

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Oth

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Inv

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Val

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Tot

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246,

578.

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5,90

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498,

465.

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0,68

6.6

630,

318.

670

7,02

3.7

Tot

al O

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ting

Inc

ome

726,

012.

097

2,44

3.9

1,15

6,22

6.4

1,28

9,99

9.4

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0,52

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1,56

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Gen

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dmin

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338,

285.

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1,94

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590,

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7,15

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Dep

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n36

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Tot

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385,

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529,

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156

8,68

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Net

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523,

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721,

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2,56

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832,

388.

4

Oth

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7.0

538.

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es2,

559.

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124,

983.

214

4,36

4.1

156,

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338,

130.

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3,94

3.5

501,

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7,45

6.4

626,

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166

6,33

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577,

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200

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3,94

3.5

501,

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Dep

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Rat

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Egyptian Gulf Bank

Tickers:EGBE.CA (Reuters)EGBE EY (Bloomberg)


CMP:US$2.6 (September 7th, 2008)

Key Data

EPS* (US$) 0.1 Avg. daily vol. (‘000) 109.0

BVPS* (US$) 0.9 52 week Hi/Lo (US$) 4.1/ 2.2

P/E* (x) 23.0 Market Cap (US$ mn) 367.8

P/BV* (x) 2.8 Target Price (US$) 2.0Source: Mubasher, Global Research, market prices as of September 7th, 2008

* Estimated 2008

BackgroundThe 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.

Retail products include current and savings accounts, internet banking, ATM network and other services. On the other hand, corporate products cover short and medium-term financing, letters of credit, letters of guarantee, trade finance and other activities. Meanwhile, the Bank provides services to the retail segment through its corporate clients, represented by payroll systems.

In addition, the Bank presents Islamic products to its clients, represented by morabahat. A morabaha is defined as an agreement between the Bank and its client to perform a sale transaction, where the Bank acts as the seller of goods or products, which it buys from its original owner and resells it to the client. There are no interest payments in this transaction. The customer pays the Bank a higher price for the purchased commodity on installments, as per a predetermined schedule.

Shareholders’ StructureEGBE is 19.4% owned by public companies, whereas private companies’ ownership is 14.9%. Top management has a stake of 2.4%, while shares owned by individuals and physical shares represent 14.5% of the Bank’s capital. The remaining stocks, representing 49.0%, constitute the free float.

Recommendation

SELL




Top Management 2.4%

Individuals 14.3%

Public Companies 19.3%

Private Companies 14.8%

Physical Shares 0.2%

Free Float 49.0%


Potential Acquisition Target…EGBE is viewed as a potential acquisition target. Being among the banks with small caps, its market shares are very small, compared to large banks under our coverage. This is expected to present an attractive opportunity for acquisition by foreign banks, having an intention to enter the Egyptian market, or even local players planning to augment their market shares.

As of June 2008, the Bank’s market shares of the aggregate banking system’s total assets, deposits and loans were 0.5%, 0.5% and 0.7%, respectively. In terms of branches, the Bank has a market share of 0.3% of the banking system branch network.

Recent Developments

Seeking Growth through Capital Increase…EGBE has an authorized capital of US$250mn, whereas its issued and paid-in capital reached US$140.4mn, equivalent to LE575.3mn, distributed over 140.4mn shares, at a par value of US$1.

The Bank announced that it would increase its issued and paid-in capital in September 2008, to reach US$150.2mn, through a 7:100 stock dividends distribution, financed from distributable net income of 2007. Such increase clarifies the Bank’s intention towards ameliorating its growth and capital adequacy.

Expand Banking Activities …The Bank plans to expand its banking activities, aiming at widening the range of products and services offered to its clients, in an attempt to increase its market shares and consequently, realize higher profits.

This was illustrated through the latest announcement in July 2008, concerning the Bank’s contribution in the capital of Prime Holding, which should be executed through the subscription in the Company’s capital increase shares, amounting to 16mn shares, at a price of LE6.75/per share and a total value of LE108mn.



Higher Stakes in Affiliate Companies…Another way adopted by the Bank to diversify its range of products and services is done through exploring many fields and acquiring stakes in affiliates companies, on which the Bank will rely to implement its activities. This was shown when the Bank announced in February 2008 that it would participate in the establishment of some companies working in real estate finance and car trading services. This would in turn help the Bank to promote more lending facilities related to mortgage and car loans.

The latest contribution of the Bank in affiliate companies was posted in the Q2 2008 balance sheet, showing a 26% stake in the Arab Investment Urbanization Company.



Boosted Sources of Funds…EGBE was able to expand its main source of funds, realizing a y-o-y increase of 13.0% in its deposits balances, reaching LE4.3bn, compared to LE3.8bn in 2006. This increase implies a reasonable ability of the Bank for collecting funds and in the mean time presenting attractive products to its clients. The main contributors to this increase were the time deposits, constituting 43.0% of the Bank’s total deposits in 2007, as they rose by 46.4%, compared to 2006.



CD’s 9.4%


Time Deposits33.2%

Other Deposits 5.7%


CD’s 8.3%


Time Deposits43.0%

Other Deposits 3.5%

Source: EGBE Financials, Global Research

Assets Balances on the Rise…The rise of the Bank’s deposits in 2007 had its effect on the total assets, which surged by 11.9% y-o-y, reaching LE5.1bn, compared to LE4.6bn in 2006. The main items affected by the surge in deposits were gross loans and interbank assets, constituting 44.9% and 42.3% of total assets in 2007, respectively.

Rising Loan Portfolio…The Bank was able to extend greater proportions of loans in 2007, in response to the rise in its deposits balances. Gross loans rose by 39.3% y-o-y, reaching LE2.3bn, up from LE1.7bn, the previous year. The major contributor to the incline of the gross loans was the amplified customer loans balances, growing by 39.1%, as they constituted 96.5% of gross loans.



Table 01: Loans Growth

Loans (in LEmn) 2006 2007 y-o-y Growth

Discounted Bills - 3.2 N/A

Customer Loans 1,599.1 2,224.4 39.1%

Morabahat 56.7 78.3 38.1%Gross Loans and Advances 1,655.8 2,305.9 39.3%

Unearned Interest 87.0 92.2 6.0%

Loan Loss Provision 426.8 466.2 9.2%

Prepaid Morabahat Interest 0.0 1.8 6502.1%

Prepaid Interest 0.0 2.6 6428.5%Net Loans 1,141.9 1,743.1 52.6%Source: EGBE Financials, Global Research

Adequate Provisions Policy…We believe EGBE adopts an adequate policy when it applies provisions for its NPLs, which we believe represented a considerable amount in 2007, exceeding more than LE450mn and representing around 20% of gross loans. The coverage ratio for NPLs reached around 103% in the same year, as total provisions for loan losses exceeded LE460mn.

Based on the Bank’s practices in 2007, we assumed the Bank will adopt the same provisioning policy over our projected period, maintaining a somehow stable coverage ratio, while assuming a declining growth of NPLs.


0

100

200

300

400

500

600

700

800

2007 2008 f 2009 f 2010 f 2011 f

LEmn

80%

85%

90%

95%

100%

105%


Source: EGBE, Global Research

Accelerating Loans/Deposits Ratio…As described earlier, EGBE was able to increase its lending facilities at a higher pace than the growth in deposits realized the same year. This implied a higher loans/deposits ratio of 53.9% in 2007, compared to 43.8%, the previous year.

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 the fact that the Bank has an ability to extend large amounts of loans, even exceeding the growth of its deposits, as was shown in 2007, and assumed an average loan growth of 17% over the projection period.



Relying on our expectations for loans and deposits growth, the loans/deposits ratio is to grow over our projected period, reaching around 60% by 2011.


-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2003 2004 2005 2006 2007 2008 f 2009 f 2010 f 2011 f

LEmn

35%

40%

45%

50%

55%

60%

65%



Another Effect on Assets The second effect of the rise of deposits on total assets was the rise of interbank assets, as they grew by 9.1% in 2007, reaching LE2.27bn, compared to LE2.0bn in 2006. As was the case for almost all banks in 2007, the excess liquidity existing in the banking system was the main reason behind the boosted interbank assets balances.


LE mn 2003 2004 2005 2006 2007

Interbank Assets 1,312.0 995.9 1,273.6 1,992.5 2,174.3

Interbank Liabilities 10.7 57.5 585.6 37.2 14.7Net Balance 1,301.3 938.4 688.0 1,955.3 2,159.6

y-o-y Growth 76.4% -27.9% -26.7% 184.2% 10.5%Source: EGBE Financials, Global Research

Decelerating Capital Adequacy RatiosIn 2007, the Bank’s equity rose by 9.5%, reaching LE686.7mn, compared to LE627.2mn in 2006. As total assets grew by 11.9%, a higher growth, the equity/total assets ratio witnessed a slight decline, as it reached 13.4%, down from 13.7% in 2006.

Meanwhile, the jump of gross loans by 39.3% in the same year was behind the sharp decline of the equity/gross loans ratio from 37.9% in 2006 to 29.8% in 2007. Nevertheless, the accelerating loans growth that we expect will happen during the forecast period would have its effect on capital adequacy ratios, declining the equity/total assets and equity/gross loans ratios, reaching around 10% and 18%, respectively.


Treasury BillsTreasury bills balances declined by 18.2% from LE245.1mn in 2006 to LE200.4mn in 2007. We projected low balances of treasury bills in the future, affected by the removal of the tax shield, according to the latest government decision in May 2008.



Investments Held to Maturity and Investments in AffiliatesThese investments were boosted from LE20.2mn at year end 2007, to LE86.2mn in June 2008, as a result of the LE66.0mn contribution of the Bank in 26% of the Arab Investment Urbanization Company’s capital. We projected future long-term investments based on this new affiliate, in addition to an amount of LE5mn, which EGBE plans to use as a contribution in the capital of First Gas Company, which is currently under establishment. Also, we raised the balance by LE108mn, representing the Bank’s contribution in the capital of Prime Holding, in addition to LE8.6mn, representing the Bank’s contribution in Union Capital Equity Fund, which is now under establishment. Moreover, we added LE20mn, representing the acquisition of a stake of 13.3% in National Glass and Crystal Company, through a consortium led by Prime Holding.

Income Statement AnalysisEGBE 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. EGBE had to orient great proportions of its income to provisions to cover its high ratio of NPLs.

The Bank was able to generate income from its core business, represented by interest income, which grew by 2.9% in 2007, amounting to 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% increase, 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%. We projected future income from fees and commissions, assuming the Bank will employ the same strategy set for these items over the projection period.

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.

Concerning SG&A, it grew by 27.7%, reaching LE68.4mn, up from LE53.6mn in 2006. As for depreciation, it grew by 68.5%, from LE3.0mn in 2006 to LE5.1mn in 2007. We projected future SG&A and depreciation expenses assuming they would grow by an average of 11% and 9%, respectively, over our projection period.

Cost and Income RelationshipThe Bank’s gross revenues composed of interest and non-interest income grew by 13.1% in



2007, whilst its total operating expenses, including SG&A, depreciation and other expenses, realized a higher growth in the same year, represented by 29.9%. The higher surge in costs over income resulted in an acceleration of the cost/income ratio to 33.1%, up from 28.8% in 2006.

Based on our expectations for the Bank’s future income and costs, we forecasted a somehow stable cost/income ratio, reaching around 32% by 2011.


-

50

100

150

200

250

2003 2004 2005 2006 2007 2008 f 2009 f 2010 f 2011 f

LEmn

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%



Interest Rate SpreadIn 2006, the Bank’s net interest income increased by 55.0%. The interest expense surged by 39.6%, but this surge was compensated by a 45.9% increase in interest income, realizing a spread of 2.8%. In 2007, the 10.0% increase in the interest expense was compensated by only 6.9% increase in interest income, leading to a decrease in the Bank’s spread to 2.3%.

We projected a higher interest rate spread in the first couple of years, reaching around 2.9%, based on the assumptions that the Bank will increase its deposit and lending rates, following the increases in the CBE overnight deposit and lending rates. The following years are to experience lower spreads, resulting from the forecasted rising competition.


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2003 2004 2005 2006 2007 2008 f 2009 f 2010 f 2011 f-2%

-1%

0%

1%

2%

3%

4%

Interest Income / AVG Earning Assets Interest Expense / AVG Interest-Bearing Funds Interest Spread (right scale)


Net IncomeOur assumptions for the Bank’s performance resulted in an expected average growth of net income of around 17% over our forecast period. It is worthy to note that net income is adjusted for non-appropriation items.




- 20 40 60 80 100 120 140

2003

2004

2005

2006

2007

2008 f

2009 f

2010 f

2011 f

LEmn


Profitability RatiosThe 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.

Chart 09: ROAA-ROAE

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2003 2004 2005 2006 2007 2008 f 2009 f 2010 f 2011 f

ROAE

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

ROAA

ROAE ROAA


Payout RatioEGBE announced in its general assembly, held in March 2008, that it will distribute 74.9% of 2007 distributable income to shareholders in the form of cash and stock dividends, for the purpose of increasing the Bank’s capital. We assumed in the DDM method used for valuation that the Bank will apply a payout ratio of 55% over the projection period.




Balance Sheet AnalysisThe Bank’s results in June 2008 showed a 6.6% decline in the Bank’s deposits balances, compared to year end 2007, as they reached LE4.0bn, down from LE4.3bn. Despite the decrease of deposits, we maintain our projections for the 13% deposits’ growth in 2008. We believe the increase in interest rate on the Bank’s deposits, as a response to the announcements related to the CBE rates increases, will have its effect on boosting the Bank’s deposits balances.

As a result of the fall in deposits balances over the period, total assets declined by 4.2%, reaching LE5.0bn. Nevertheless, the Bank was able to boost its loan books by 23.3%, reaching LE2.8bn. This indicates the Bank’s ability to extend great amounts of its excess funds, despite the growth in deposits balances, which is due to the current low loans/deposits ratio.

As for treasury bills, their balances decreased by 76.7%, compared to year end 2007. We expect small balances of treasury bills in the future, as a result of the elimination of the tax exemption, which shall discourage banks from investing in these instruments.

Income StatementEGBE 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%.

Alternatively, SG&A and depreciation grew by 20.3% and 50.8%, respectively. Other expenses, amounting to LE1.4mn in H1 2008, were assumed to remain stable over the projection period. Meanwhile, total non-interest expense rose by 25.6%, bringing the cost to income ratio to 30.0%.

As for provisions, they 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.







• Risk free rate of 4.7% (YTM of 2011 sovereign Eurobonds).• Market risk premium of 6.5%, taking into consideration that the stock is traded in a

foreign currency.• Beta of 5 years monthly figures. If the actual beta of the bank is less than 1 or if the




(‘000US$) 2008F 2009F 2010F 2011F Terminal Value

Dividends Expected 8,762.8 11,337.2 12,713.2 14,223.6 363,228.8

NPV of dividends expected 38,298.9

NPV of Terminal Value 255,619.2

NPV of the Firm 293,918.1


DDM Value per share (US$) 2.1







6.0% 6.5% 7.0% 7.5% 8.0% 8.5%

Cos

t of

Equ

ity

9.2% 2.8 3.3 4.0 5.1 7.2 12.210.2% 2.1 2.4 2.7 3.2 3.9 5.011.2% 1.7 1.9 2.1 2.4 2.7 3.112.2% 1.5 1.6 1.7 1.9 2.1 2.313.2% 1.3 1.3 1.4 1.5 1.7 1.814.2% 1.1 1.2 1.2 1.3 1.4 1.5



P/BV = (ROE - g) / (COE - g)



- Sustainable ROE calculated as the average ROAE of the forecasted 4 years, represented by 14.9%





COE 11.2%



2008: BV/share (US$) 0.9GGM Value per share (US$) 1.8Source: Global Research






6.0% 6.5% 7.0% 7.5% 8.0% 8.5%

Cos

t of

Equ

ity

9.2% 2.6 2.9 3.4 4.1 5.5 8.710.2% 2.0 2.1 2.3 2.6 3.0 3.611.2% 1.6 1.7 1.8 1.9 2.0 2.212.2% 1.4 1.4 1.4 1.5 1.6 1.613.2% 1.2 1.2 1.2 1.2 1.3 1.314.2% 1.0 1.0 1.0 1.0 1.1 1.1


This sensitivity shows the movement in fair value as a consequence of different ROE and COE assumptions. Table 07: GGM Sensitivity

ROE

12.9% 13.9% 14.9% 15.9% 16.9% 17.9%

Cos

t of

Equ

ity

9.2% 2.5 3.0 3.4 3.8 4.3 4.710.2% 1.7 2.0 2.3 2.6 2.9 3.211.2% 1.3 1.6 1.8 2.0 2.2 2.512.2% 1.1 1.3 1.4 1.6 1.8 2.013.2% 0.9 1.1 1.2 1.4 1.5 1.714.2% 0.8 0.9 1.0 1.2 1.3 1.4


ValuationBased on the current market price of US$2.6/share, as of September 7th, 2008, EGBE is trading at 2008E P/E and P/BV multiple of 23.0x and 2.8x, respectively.

Table 08: Valuation


DDM 2.1 80% 1.7


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 potential of 22.5% on the closing price of US$2.6/share (as of September 7th, 2008); we therefore recommend a Sell on the scrip.

OutlookThough there is a positive sentiment for EGBE, stemming from the management’s efforts targeting promising opportunities, we initiate our coverage for the Bank with a sell recommendation. 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.

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 throughout our projection period.



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.260

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.062

,861

.865

,376

.2

Div

iden

ds P

ayab

le21

,874

.124

,302

.411

,000

.0-

--

-

Oth

er P

rovi

sion

s30

,254

.933

,312

.665

,294

.852

,235

.854

,325

.356

,498

.358

,758

.2

Def

erre

d T

axes

199.

260

4.9

1,46

2.7

2,13

0.4

2,16

4.8

2,31

6.4

2,47

8.5

Med

ium

and

Lon

g-T

erm

Loa

ns28

,259

.128

,183

.828

,925

.521

,694

.114

,462

.87,

231.

4-

Tot

al L

iabi

litie

s3,

148,

344.

93,

959,

963.

44,

448,

303.

25,

031,

104.

55,

708,

808.

56,

459,

318.

17,

295,

727.

0

Paid

-in

Cap

ital

500,

000.

053

7,19

0.1

575,

343.

157

5,34

3.1

575,

343.

157

5,34

3.1

575,

343.

1

Res

erve

s65

,391

.187

,610

.511

1,13

8.1

129,

895.

815

3,76

2.1

180,

410.

921

0,21

2.9

Ret

aine

d E

arni

ngs

-2,

358.

620

6.8

4,28

8.5

5,95

0.5

6,78

6.8

7,60

6.1

Tot

al E

quit

y56

5,39

1.1

627,

159.

268

6,68

7.9

709,

527.

473

5,05

5.7

762,

540.

879

3,16

2.1

Tot

al E

quit

y &

Lia

bilit

ies

3,71

3,73

5.9

4,58

7,12

2.6

5,13

4,99

1.2

5,74

0,63

2.0

6,44

3,86

4.2

7,22

1,85

8.9

8,08

8,88

9.0

Sour

ce:

EG

BE

Fin

anci

als,

Glo

bal R

esea

rch



INC

OM

E S

TA

TE

ME

NT

Egy

ptia

n G

ulf

Ban

k

(‘00

0LE

)20

05 A

2006

A20

07 A

2008

F20

09 F

2010

F20

11 F

Inte

rest

Inc

ome

201,

976.

629

4,60

1.1

315,

002.

838

8,81

3.7

439,

877.

049

3,12

5.6

552,

989.

3

Inte

rest

Exp

ense

119,

651.

316

6,98

3.0

183,

665.

323

0,95

0.1

268,

017.

630

7,18

5.0

351,

175.

6

Net

Int

eres

t In

com

e82

,325

.412

7,61

8.1

131,

337.

515

7,86

3.6

171,

859.

418

5,94

0.6

201,

813.

6

Prov

isio

ns42

,600

.154

,577

.677

,675

.167

,587

.670

,768

.773

,025

.676

,176

.1

Net

Int

eres

t In

com

e af

ter

Pro

visi

ons

39,7

25.3

73,0

40.6

53,6

62.4

90,2

76.1

101,

090.

711

2,91

5.0

125,

637.

6

Fees

& C

omm

issi

ons

Inco

me

28,8

33.2

32,8

44.5

35,9

20.8

47,5

05.1

55,9

70.6

64,2

54.7

73,0

36.5

Div

iden

d In

com

e4,

234.

76,

466.

07,

125.

57,

516.

620

,476

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.123

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Gai

ns f

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For

eign

Exc

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e T

rans

actio

ns18

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987.

89,

940.

710

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.410

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.411

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.111

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.4

Gai

n O

n Sa

le o

f T

radi

ng I

nves

tmen

ts20

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.527

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.421

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.322

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.722

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.923

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Tra

ding

Inv

estm

ents

Val

uatio

n D

iffe

renc

es5,

568.

0(6

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9,99

8.5

10,4

98.4

11,0

23.3

11,5

74.5

12,1

53.2

Oth

er O

pera

ting

Inco

me

3,12

8.5

3,16

1.7

5,47

1.9

5,58

1.4

5,69

3.0

5,80

6.9

5,92

3.0

Ava

ilabl

e fo

r Sa

le I

nves

tmen

ts V

alua

tion

Dif

fere

nces

-(1

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1,04

2.1

1,09

4.2

1,14

8.9

1,20

6.3

1,26

6.6

Tot

al N

on-I

nter

est

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80,8

04.2

69,2

85.7

91,3

70.8

104,

872.

712

7,81

4.5

139,

027.

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0,90

3.9

Gen

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& A

dmin

istr

ativ

e E

xpen

ses

45,8

25.9

53,5

95.3

68,4

34.8

80,0

68.8

88,0

75.6

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02.4

102,

722.

6

Dep

reci

atio

n2,

924.

43,

018.

35,

085.

57,

407.

17,

526.

98,

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88,

617.

6

Oth

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pera

ting

Exp

ense

s12

4.5

180.

523

2.2

1,40

2.7

631.

256

8.1

539.

7

Tot

al N

on-I

nter

est

Exp

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48,8

74.9

56,7

94.1

73,7

52.5

88,8

78.5

96,2

33.8

104,

624.

411

1,87

9.9

Net

Ope

rati

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ncom

e71

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.371

,280

.610

6,27

0.2

132,

671.

414

7,31

8.3

164,

661.

6

Tax

es19

9.2

405.

685

7.8

21,1

20.5

26,5

27.4

29,4

33.3

32,8

99.9

NP

AT

71,4

55.3

85,1

26.6

70,4

22.8

85,1

49.7

106,

144.

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7,88

4.9

131,

761.

7

Non

-App

ropr

iatio

n It

ems*

(1,6

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43.9

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05.9

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--

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Net

Inc

ome

73,1

13.7

86,0

70.5

70,5

28.7

85,1

49.7

106,

144.

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7,88

4.9

131,

761.

7So

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: E

GB

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inan

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pres

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from

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sets

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CA

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LO

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2005

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2007

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08 F

2009

F20

10 F

2011

FN

et I

ncom

e A

fter

Tax

73,1

13.7

86,0

70.5

70,5

28.7

85,1

49.7

106,

144.

011

7,88

4.9

131,

761.

7

Dep

reci

atio

n2,

924.

43,

018.

35,

085.

57,

407.

17,

526.

98,

053.

88,

617.

6

Prov

isio

ns42

,600

.154

,577

.677

,675

.167

,587

.670

,768

.773

,025

.676

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.1

Ava

ilabl

e fo

r Sa

le I

nves

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ts V

alua

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Dif

fere

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106.

8(1

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Tra

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Inv

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ents

Val

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iffe

renc

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0,49

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153.

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Non

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Prov

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21,1

20.5

26,5

27.4

29,4

33.3

32,8

99.9

Prov

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efer

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Tax

199.

240

5.6

857.

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et I

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ustm

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111,

611.

115

0,87

2.8

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716

9,67

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198,

794.

821

5,61

6.8

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Tre

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95,5

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94,6

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Gov

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(436

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--

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Tra

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5,63

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3,13

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Ava

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69,6

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(185

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(44,

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Net

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nd A

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Def

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667.

734

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Oth

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(2,0

43.5

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Cus

tom

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2,26

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1,34

3,27

2.2

492,

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1,48

3.4

836,

393.

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Due

to C

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Tax

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5,69

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646.

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8,67

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(70,

852.

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3,91

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Oth

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957.

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22,3

75.3

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6,26

5.5

196,

931.

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6,37

3.3

352,

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948

3,78

6.6

Inve

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Hel

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nves

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Aff

iliat

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917.

084

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--

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956.

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(5,6

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(6,4

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Non

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ems

1,65

8.4

943.

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5.9

--

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h F

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ivit

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10,3

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(14,

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5,69

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Med

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& L

ong-

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2,47

8.4

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1.7

(7,2

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31.4

)(7

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Cha

nge

in C

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l23

7,92

4.6

37,1

90.1

38,1

53.0

--

--

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h F

low

fro

m F

inan

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224,

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1,94

9.5)

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560.

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0,54

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7,63

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in C

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257,

416.

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8,33

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177,

854.

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2,86

9.9

248,

566.

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8,93

8.9

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inni

ng C

ash*

1,12

7,86

7.0

1,38

5,28

3.6

2,16

3,61

3.7

2,34

1,46

8.3

2,23

6,85

7.0

2,38

9,72

6.9

2,63

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3.4

End

ing

Cas

h1,

385,

283.

62,

163,

613.

72,

341,

468.

32,

236,

857.

02,

389,

726.

92,

638,

293.

43,

007,

232.

3So

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: E

GB

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inan

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Bal

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pres

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with

the

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om b

anks

and

3-m

onth

s tr

easu

ry b

ills.



FA

CT

SH

EE

TE

gypt

ian

Gul

f B

ank

2005

A20

06 A

2007

A20

08 F

2009

F20

10 F

2011

FP

rofi

tabi

lity

Ret

urn

on A

vera

ge A

sset

s2.

2%2.

1%1.

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7%1.

7%R

etur

n on

Ave

rage

Equ

ity16

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14.3

%10

.7%

12.2

%14

.7%

15.7

%16

.9%

Net

Int

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t Inc

ome/

Ope

ratin

g In

com

e11

4.9%

149.

2%18

4.3%

148.

5%12

9.5%

126.

2%12

2.6%

Non

-Int

eres

t Inc

ome/

Ope

ratin

g In

com

e11

2.8%

81.0

%12

8.2%

98.7

%96

.3%

94.4

%91

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Mar

gins

Inte

rest

Exp

ense

to I

nter

est I

ncom

e59

.2%

56.7

%58

.3%

59.4

%60

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62.3

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Inte

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Inc

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to I

nter

est E

arni

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sset

s7.

1%7.

7%6.

8%7.

7%8.

0%8.

0%7.

9%In

tere

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xpen

se to

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ring

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ds4.

4%4.

8%4.

5%5.

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1%5.

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prea

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7%2.

8%2.

3%2.

7%2.

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9%3.

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ost t

o In

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28.8

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33.8

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32.2

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Liq

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ns to

Int

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ning

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45.7

%37

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49.2

%57

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59.2

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60.1

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ross

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ns to

Cus

tom

er D

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43.8

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Cus

tom

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its to

Equ

ity43

1.6%

603.

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2.7%

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1.5%

Due

fro

m B

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to D

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550.

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9.8%

607.

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Cre

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Qua

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NPL

s (‘

000L

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N/A

N/A

452,

644.

152

9,86

3.9

595,

561.

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3,10

8.9

733,

733.

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for

Loa

n L

osse

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000L

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375,

838.

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6,82

8.3

466,

223.

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6,87

0.0

615,

549.

268

6,40

1.8

760,

317.

9N

PLs

to G

ross

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nsN

/AN

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17.5

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Prov

isio

n fo

r L

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Los

ses

to G

ross

Loa

ns25

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25.8

%20

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19.3

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18.1

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NPL

s C

over

age

N/A

N/A

103.

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3.2%

103.

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al A

dequ

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Equ

ity to

Tot

al A

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12.4

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quity

to G

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20.1

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Con

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utio

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Tot

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tere

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Ope

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1.9%

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Fees

& C

omm

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me

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pera

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me

40.2

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42.2

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Export Development Bank of Egypt

Tickers:EXPA.CA (Reuters)EXPA EY (Bloomberg)


CMP:LE21.1 (September 7th, 2008)

Key Data


BVPS* (LE) 12.8 52 week Hi/Lo (LE) 36.5/ 19.0


P/BV* (x) 1.6 Target Price (LE) 20.6Source: Mubasher, Global Research, market prices as of September 7th, 2008.

* Estimated (2008/09)

BackgroundExport Development Bank of Egypt “EDBE” was established in 1983, in accordance with the law 95 of 1983. As a specialized bank, EDBE main role is somehow different than the other commercial banks in our coverage universe. The Bank’s main activities rely in developing and encouraging Egyptian exports, through building up an agricultural, industrial and commercial export sector. In addition, the Bank serves in other areas of commercial business and investment banking activities.

Products and Services Offered

Main Focus on Supporting Export Related Projects…The Bank’s main services are provided to projects that are related to exports, either those that are currently participating in the world trade or those that are in a developing stage targeting future contribution to the exports market.

The Bank supports exporting industries through many forms, including providing financial support needed for capital expenditures, which could be provided through short-term funding, as well as affording credit facilities and facilitating international correspondence. Aiming at enhancing the exports sector, the Bank also offers medium and long-term loans for investments in new projects that are expected to direct their future products to exports. The Bank also participates in syndicated loans for big corporations.

In addition, EDBE offers insurance services to the exporters to lessen their exposure to commercial and other risks associated with their exporting activities. These services are provided through the Bank’s affiliate “The Egyptian Company for Exports Insurance”.

Recommendation

HOLD



Other Banking Activities…The Bank operates in other areas related to commercial banking, including providing deposits and savings accounts and letters of credit. Also, EDBE provides investment banking services, including participating in bonds and stocks issuing, along with playing the role of an underwriter for these issuances.

Also, the Bank has established a department, which main role is to fund projects related to SME’s. Funding is procured to enterprises having not less than three years of experience to avoid risky matters associated with this field. These projects are offered sources of funds needed for raising capital and acquiring capital equipment, along with other banking services.

Shareholders’ StructureThe majority of EDBE shares, represented by 75.4% are owned by local banks, as National Investment Bank, BM and NBE have stakes of 40.8%, 23.1% and 11.4% in the Bank, respectively. Insurance Companies and physical shares represent 1.3% of the Bank’s capital, while the rest of the shares constitute the free float. It is worth mentioning that the Bank shares’ trading is restricted to local investors.


National InvestmentBank 40.8%

BM 23.1%

NBE 11.4%

Free Float 23.3%

Other Public Banks 0.1%

Insurance Companies andPhysical Shares 1.3%

Source: EDBE, EGID, as of June 30th, 2008, Global Research

Minor Market Shares…EDBE is among the small caps banks, having relatively minimal market shares, compared to the large banks under coverage. As of June 2008, the Bank’s shares in the total assets, deposits and loans of the aggregate banking system represented 1.2%, 1.1% and 1.9%, respectively.

EDBE operates through a network composed of 10 branches, representing only 0.3% of the banking system branches, as the total number of branches reached 3,252 branches in March 2008.

Recent Developments…

Latest Capital Increase…The Bank has an authorized capital of LE2bn. In December 2007, its issued and paid-in capital was LE800mn, distributed over 80mn shares, at a par value of LE10. In February



2008, the Bank increased its issued and paid-in capital to LE1bn, through a 1:4 rights issue. This in turn shows the Bank’s intention to grow its loan portfolio, as legally any bank is limited by a 20% cap of its equity to be granted per single client.

The Bank’s current network is composed of 10 branches. Aiming at increasing its client base and its branch network, it plans to launch 3 new branches by 2010. These branches are expected to open in areas that are close to producers and exporters, to facilitate rendering banking services, with the aim of easing and enhancing exports activities.

Meanwhile, EDBE has developed an IT department, which main role is to provide and promote the internet banking system, which is now a common service offered in almost all banks.

2007/08 Financial Performance and Forecasted Assumptions

Balance Sheet

Primary Source of FundsEDBE was able to expand its primary source of funds in 2007/08 –the Bank’s Fiscal Year “FY” ends in June-, by increasing its deposits balances by 39.1%, reaching LE8.1bn, compared to LE5.8bn in 2006/07. Time deposits were the main contributor to the rise in deposits balances, as they grew by 52.2%, reaching LE4.3bn, compared to LE2.8bn in 2006/07. It is worthy to note that these deposits constituted 53.6% of total deposits in 2007/08. In addition, CD’s and saving deposits, constituting 26.2% of deposits balances in the same year, rose by 21.6% y-o-y, as they amounted to LE2.1bn, up from LE1.7bn the previous year.

Chart 02: Deposits by Type-2006/07 Chart 03: Deposits by Type-2007/08


CD’s & SavingsDeposits 30.0%Time Deposits

49.0%

Other Deposits 4.7%Demand Deposits 11.7%

CD’s & SavingsDeposits 26.2%Time Deposits

53.6%

Other Deposits 8.5%

Source: EDBE Financials, Global Research

On the other hand, the household sector captured the highest share of total deposits in 2007/08, representing 26.7%, down from 31.2% in 2006/07, followed by the industrial sector, which contributed to 22.8% of total deposits, down from 24.1% in the previous year.



Chart 04: Deposits by Sector-2006/07 Chart 05: Deposits by Sector-2007/08

Industrial 24.1%

Trade 10.0%

Household 31.2%

Others 20.7%

Services 13.5%

Agriculture 0.5%

Industrial 22.8%

Trade 6.7%

Household 26.7%

Others 25.3%

Services 18.2%

Agriculture 0.3%


Secondary Source of FundsThe Bank was able to collect funds to expand its operations through another source, represented by medium and long-term loans, extended from many international and local entities. It is worthy to note that this source of funds amounted to LE1.5bn in June 2008, constituting 11.1% of the Bank’s total equity and liabilities, whereas the deposits share was 60.2%.

Resulting Rise in Assets…The rise in deposits and other sources of funds in 2007/08 was followed by a rise in total assets, which grew in turn by 52.3%. The assets causing the jump in total assets were gross loans and interbank assets, which combined constituted around 80% of total assets.

Growing Gross loans…The acceleration experienced in the sources of funds in 2007/08 led to an increase in the available funds at the Bank, which enabled it to extend greater amounts of loans during the same year. Loans book witnessed a 17.5% y-o-y increase, reaching LE7.6bn, compared to LE6.5bn the previous year. The main reason behind this surge was the increase in loans to customers, constituting 94.4% of gross loans during the same year.


Loans and Advances (in LEmn) 2006/07 2007/08 y-o-y Growth


Loans to Customers 6,057.6 7,178.1 18.5%

Loans to Banks 344.5 284.5 -17.4%Gross Loans and Advances 6,471.9 7,603.4 17.5%

Provision for Doubtful Debts 1,564.5 841.1 -46.2%

Unearned Interest 0.3 - -100.0%Net Loans and Advances 4,907.0 6,762.3 37.8%Source: EDBE Financials, Global Research

It is worth mentioning that the industrial sector was extended the largest portion of the Bank’s loans portfolio, representing 63.7% in 2007/08. The remaining loans were distributed over the trade, services and other sectors.



Chart 06: Loans by Sector-2006/07 Chart 07: Loans by Sector-2007/08

Industrial 63.8%

Trade 14.5%

Household 0.7%

Financial 5.3%

Services 12.9%

Agriculture 2.8%

Industrial 63.7%

Trade 12.3%

Household 4.1%Financial 3.7%

Services 11.8%

Agriculture 4.4%


Revised Provisions to Cover NPLs…Provision for doubtful debts decreased by 46.2% in 2007/08. It is worthy to note that the CBE obliged the Bank to modify its annual financial results in 2006/07 to include higher provisions, as the Bank had a large amount of NPLs exceeding LE1.5bn.

Now that the Bank’s NPLs are almost fully covered, we assumed EDBE would use a provisioning policy that will bring the coverage ratio to around 103% by 2011/12, as a result of the accelerating loans balances and the NPLs that are expected to increase at declining rates.


0

200

400

600

800

1000

1200

1400

2007/08 2008/09 f 2009/10 f 2010/11 f 2011/12 f

LEmn

90%

95%

100%

105%

110%


Source: EDBE, Global Research

Huge Utilization of Main Source of Funds…The Bank has a great ability to extend loans, which is reflected by its extremely high loans/deposits ratio, reaching 94.4% in 2007/08. This ratio is the highest one among other banks in our coverage universe.

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.

Chart 09: Gross Loans, Deposits and Loans/Deposits Ratio

-

2,0004,0006,0008,000

10,00012,00014,00016,000

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

f

2009

/10

f

2010

/11

f

2011

/12

f

LEmn

45%55%65%75%85%95%105%115%125%



Boosted Interbank Assets…In response to the rise of the sources of funds, the interbank assets, constituting around 23% of total assets in 2007/08, rose by 43.1% y-o-y, reaching LE3.1bn, compared to LE2.2bn in 2006/07. Although the Bank has the highest loans/deposits ratio, compared to the other banks that we cover, it also realized a net lending position in 2007/08. Even though the Bank is directing great proportion of its funds in loans, it seems that the excess liquidity that was and still exists in the banking sector is also experienced by EDBE, as it directed its excess funds to lending other banks in the interbank market.


In LEmn 2003/04 2004/05 2005/06 2006/07 2007/08

Interbank Assets 1,225.2 1,166.5 682.1 2,181.1 3,121.2

Interbank Liabilities 380.4 231.2 314.3 89.3 675.1Net Balance 844.8 935.2 367.8 2,091.8 2,446.0

y-o-y Growth 39.0% 10.7% -60.7% 468.8% 16.9%Source: EDBE Financials, Global Research

Decelerating Capital Adequacy RatiosThe Bank’s equity inclined by 59.1% in 2007/08, resulting from the capital increase to LE1bn, up from LE800mn, the previous year. This rise exceeded the increases witnessed in total assets and loans, realizing higher capital adequacy ratios in the same year. This was shown by the increase of the equity/total assets to 10.3%, up from 9.8%, the previous year, as well as the rise of equity/gross loans to 18.1%, up from 13.4% in 2006/07.

Based on our projections for loans growth, we expect the Bank’s equity/total assets and equity/gross loans to decline slightly, reaching around 7% and 11%, respectively by 2011/12.

Other Balance Sheet ItemsIt is worthy to note that the Bank’s balances of treasury bills jumped by 284.6% in 2007/08, reaching LE982.6mn, up from LE255.5mn in 2006/07. We expect the Bank will not extend



great proportions of its funds in these investments in the coming few years, in response to the removal of tax exemption on treasury bills.

Income Statement AnalysisEDBE 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. It is worthy to note that other income includes gains from sale of financial investments, profits from foreign exchange operations, financial investments valuation differences and other items.

As for SG&A (excluding depreciation expense), they grew by 16.4%, reaching LE130.5mn, compared to LE112.1mn, a year before.

Cost and Income RelationshipThe results of the Bank in 2007/08 showed that non-interest expense, encompassing SG&A, depreciation and other expenses, grew at 22.6%, which was lower than the growth of gross revenues, encompassing net interest income and total non-interest income, as they grew by 24.0%. This resulted in a decline of the cost to income ratio, from 32.6% in 2006/07 to 32.2% in 2007/08.

Based on our projections for the future performance of the Bank, we the cost to income ratio is to stabilize at a lower rate over our projection period, reaching around 27% by 2011/12.




-

50

100

150

200

250

300

350

400

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

f

2009

/10

f

2010

/11

f

2011

/12

f

LEmn

20%

25%

30%

35%

40%

45%



Interest Rate SpreadThe Bank’s interest rate spread jumped to 2.1% in 2007/08, up from 1.6% in the previous year. This was due to the Bank’s ability to realize higher income from interest earning assets than the expense incurred from interest bearing funds. As mentioned earlier, the Bank’s rise in interest expense and the decline in income from treasury bills and bonds were compensated by an increase in income from loans and advances.

We expect the spread to widen in 2008/09, in response to the latest decisions concerning the increase of the corridor range, then to decline afterwards, as the competition among local players intensifies. Thus, we expect the interest spread to hover at 2.3% by 2011/12.


0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

f

2009

/10

f

2010

/11

f

2011

/12

f

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Interest Income / AVG Earning Assets Interest Expense / AVG Interest-Bearing Funds

Interest Spread (right scale)


Net IncomeBased 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. It is worthy to note that net income is adjusted for non-appropriation items.




(170) (70) 30 130 230 330

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09 f

2009/10 f

2010/11 f

2011/12 f

LEmn


Profitability RatiosThe 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, respectively.

Chart 13: ROAA-ROAE

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

ROAE

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

ROAA

ROAE ROAA

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

f

2009

/10

f

2010

/11

f

2011

/12

f


Assumed Payout RatioDue to the losses experienced in 2005/06-which were due to the large amount of added provisions as required by the CBE- and the relatively small net income realized the following year, the Bank was not able to make any dividend distributions. Assuming the higher net income that should be realized each year during the forecast period, we projected a stable payout ratio of 65% in our DDM method for valuation.

Valuation AssumptionsFor arriving at the fair value of the Banks under review, we have used two valuation methods:




Dividend Discounting Model - DDMThe DDM is based on a 4-year forecast of dividends as cash flows (2008/09-2011/12), as EDBE’s fiscal year ends in June. The dividends for the forecast period and the terminal value are then discounted back at the cost of equity to arrive at the total net present value (NPV) of the company. In our calculations, we have made the following assumptions in order to arrive at the equity value of individual banks:


• Risk free rate of 8.8% (YTM of 2012 government bonds).• Market risk premium of 7.8%.• Beta of 5 years monthly figures. If the actual beta of the bank is less than 1 or if the




(‘000LE) 2008/09F 2009/10F 2010/11F 2011/12F Terminal

ValueDividends Expected 210,722.7 210,056.7 216,182.1 230,884.6 2,576,084.6

NPV of dividends expected 614,848.6


NPV of the Firm 2,051,112.4No. of Outstanding Shares (‘000)

100,000.0

DDM Value per share (LE) 20.5Source: Global Research

Sensitivity - DDMWe have also prepared a sensitivity analysis for the estimated fair price based on various terminal growth rates and COE.



6.0% 6.5% 7.0% 7.5% 8.0% 8.5%

Cos

t of

Equ

ity

14.6% 23.3 24.5 25.8 27.2 28.9 30.915.6% 21.0 21.8 22.8 23.9 25.2 26.616.6% 19.0 19.7 20.5 21.4 22.3 23.417.6% 17.4 18.0 18.6 19.3 20.1 20.918.6% 16.1 16.6 17.1 17.6 18.2 18.919.6% 14.9 15.3 15.8 16.2 16.7 17.3





P/BV = (ROE - g) / (COE - g)

This P/BV is then multiplied with the BVPS of the Bank at the next full year, in our case the BVPS at June 30th, 2008/09 to arrive at the fair value of the Bank over a medium term investment horizon.


- Sustainable ROE calculated as the average ROAE of the forecasted 4 years, which represented 22.7%.





COE 16.6%


2008/09: P/BV target multiple (x) 1.6

2008/09: BV/share (LE) 12.8GGM Value per share (LE) 20.8Source: Global Research

Sensitivity – GGM

We have also prepared a sensitivity analysis for the estimated fair price based on various terminal growth rates and COE.



6.0% 6.5% 7.0% 7.5% 8.0% 8.5%

Cos

t of

Equ

ity

14.6% 24.8 25.5 26.3 27.3 28.4 29.715.6% 22.2 22.7 23.3 23.9 24.7 25.516.6% 20.1 20.4 20.8 21.3 21.8 22.317.6% 18.3 18.6 18.9 19.2 19.5 19.918.6% 16.9 17.1 17.2 17.5 17.7 17.919.6% 15.6 15.8 15.9 16.0 16.1 16.3






ROE

20.7% 21.7% 22.7% 23.7% 24.7% 25.7%C

ost

of E

quit

y14.6% 23.0 24.7 26.3 28.0 29.7 31.4

15.6% 20.3 21.8 23.3 24.8 26.2 27.7

16.6% 18.2 19.5 20.8 22.2 23.5 24.8

17.6% 16.5 17.7 18.9 20.1 21.3 22.5

18.6% 15.0 16.1 17.2 18.3 19.5 20.6

19.6% 13.9 14.9 15.9 16.9 17.9 18.9


ValuationBased on the current market price of LE21.1/share, as of September 7th, 2008, EDBE is trading at 2008/09E P/E and P/BV multiple of 7.2x and 1.6x, respectively.

Table 8: Valuation


DDM 20.5 80% 16.4


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 potential of 2.2% on the closing price of LE21.1/ share (as of September 7th, 2008); we therefore recommend a Hold on the stock.

OutlookBeing a specialized bank, EDBE has a particular position. It directs most of its operations to the corporations serving the export market, 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, as it will be able to accelerate its operations and investments, relying on the higher equity realized.



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1,51

6.5

10,2

20,8

24.4

11,2

58,5

30.5

Net

Fix

ed A

sset

s95

,214

.610

7,02

8.3

105,

531.

510

0,58

4.3

96,3

47.1

93,0

50.2

89,6

54.4

Oth

er A

sset

s86

,407

.820

2,13

9.0

513,

218.

453

8,87

9.4

565,

823.

359

4,11

4.5

623,

820.

2

Tot

al A

sset

s7,

339,

403.

98,

782,

866.

213

,376

,119

.514

,361

,777

.515

,567

,330

.817

,181

,936

.619

,210

,059

.4

Cus

tom

er D

epos

its4,

768,

164.

15,

790,

331.

08,

053,

835.

79,

217,

353.

010

,537

,541

.111

,975

,310

.413

,570

,095

.0

Due

to C

entr

al B

ank

& O

ther

Ban

ks31

4,31

4.1

89,2

71.7

2,27

5,04

1.9

2,44

6,55

8.7

2,68

1,62

8.2

3,04

4,99

6.4

3,53

5,93

7.5

Oth

er L

iabi

litie

s59

,669

.211

7,19

2.0

126,

178.

713

2,48

7.6

139,

112.

014

6,06

7.6

153,

371.

0

Oth

er P

rovi

sion

s11

7,79

3.9

123,

441.

563

,231

.463

,863

.764

,502

.365

,147

.465

,798

.8

Med

ium

and

Lon

g -T

erm

Loa

ns1,

318,

257.

51,

798,

043.

61,

482,

545.

51,

224,

983.

283

7,35

5.3

610,

720.

450

9,08

0.9

Bon

ds11

2,59

4.0

--

--

--

Tot

al L

iabi

litie

s6,

690,

792.

87,

918,

279.

712

,000

,833

.213

,085

,246

.114

,260

,139

.015

,842

,242

.217

,834

,283

.2

Paid

-in

Cap

ital

600,

000.

080

0,00

0.0

1,00

0,00

0.0

1,00

0,00

0.0

1,00

0,00

0.0

1,00

0,00

0.0

1,00

0,00

0.0

Res

erve

s20

2,20

3.6

211,

693.

621

1,69

3.6

242,

559.

027

3,17

6.8

304,

734.

833

8,50

7.6

Ret

aine

d E

arni

ngs

(153

,592

.5)

(147

,107

.2)

163,

592.

633

,972

.434

,015

.034

,959

.537

,268

.7

Tot

al E

quit

y64

8,61

1.1

864,

586.

51,

375,

286.

21,

276,

531.

41,

307,

191.

81,

339,

694.

41,

375,

776.

2

Tot

al E

quit

y &

Lia

bilit

ies

7,33

9,40

3.9

8,78

2,86

6.2

13,3

76,1

19.5

14,3

61,7

77.5

15,5

67,3

30.8

17,1

81,9

36.6

19,2

10,0

59.4

Sour

ce:

ED

BE

, Glo

bal R

esea

rch



INC

OM

E S

TA

TE

ME

NT

Exp

ort

Dev

elop

men

t B

ank

of E

gypt

(‘00

0LE

)Ju

n-06

-AJu

n-07

-AJu

n-08

-AJu

n-09

-FJu

n-10

-FJu

n-11

-FJu

n-12

-F

Inte

rest

Inc

ome

506,

328.

959

8,24

2.6

834,

599.

91,

085,

964.

91,

160,

022.

71,

258,

508.

51,

388,

888.

2

Inte

rest

Exp

ense

341,

874.

239

1,38

5.3

566,

499.

372

8,65

9.4

821,

835.

392

0,31

4.1

1,03

8,94

1.9

Net

Int

eres

t In

com

e16

4,45

4.7

206,

857.

326

8,10

0.6

357,

305.

533

8,18

7.4

338,

194.

434

9,94

6.3

Prov

isio

ns

387,

912.

624

2,22

0.4

266.

066

,632

.876

,110

.487

,324

.891

,145

.4

Net

Int

eres

t In

com

e af

ter

Pro

visi

ons

(223

,457

.9)

(35,

363.

1)26

7,83

4.6

290,

672.

726

2,07

7.0

250,

869.

625

8,80

0.9

Fees

& C

omm

issi

ons

Inco

me

106,

592.

310

5,52

5.6

119,

441.

214

5,67

1.4

168,

822.

719

2,43

8.8

214,

089.

7

Div

iden

d In

com

e3,

294.

06,

851.

819

,055

.827

,955

.531

,350

.133

,730

.635

,772

.0

Gai

ns f

rom

For

eign

Exc

hang

e T

rans

actio

ns11

,561

.613

,389

.433

,156

.133

,289

.133

,423

.533

,559

.333

,696

.4

Gai

n O

n Sa

le o

f T

radi

ng I

nves

tmen

ts28

,169

.211

,329

.519

,043

.320

,947

.622

,414

.023

,983

.025

,661

.8

Tra

ding

Inv

estm

ents

Val

uatio

n D

iffe

renc

es3,

266.

123

,116

.510

,967

.411

,186

.811

,410

.511

,638

.711

,871

.5

Oth

er O

pera

ting

Inco

me

9,70

8.8

11,8

66.9

14,1

65.7

14,4

49.0

14,7

38.0

15,0

32.7

15,3

33.4

Ava

ilabl

e fo

r Sa

le I

nves

tmen

ts V

alua

tion

Dif

fere

nces

(6,2

86.5

)(8

,971

.4)

(22,

890.

8)(1

7,16

8.1)

(15,

451.

3)(1

3,90

6.1)

(12,

515.

5)

Inve

stm

ents

in A

ffili

ates

Val

uatio

n D

iffe

renc

es8,

819.

9-

(2,3

82.5

)(2

,263

.4)

(2,1

50.2

)(2

,042

.7)

(1,9

40.6

)

Tot

al N

on-I

nter

est

Inco

me

165,

125.

316

3,10

8.5

190,

556.

223

4,06

7.9

264,

557.

329

4,43

4.2

321,

968.

7

Gen

eral

& A

dmin

istr

ativ

e E

xpen

ses

91,5

46.6

112,

117.

013

0,50

6.1

146,

166.

915

3,47

5.2

161,

149.

016

9,20

6.4

Dep

reci

atio

n8,

120.

87,

736.

210

,534

.110

,894

.910

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.29,

606.

79,

894.

9

Oth

er O

pera

ting

Exp

ense

s*-

654.

16,

650.

81,

280.

41,

306.

01,

332.

11,

358.

8

Tot

al N

on-I

nter

est

Exp

ense

99,6

67.4

120,

507.

314

7,69

1.1

158,

342.

216

5,14

4.5

172,

087.

818

0,46

0.1

Net

Ope

rati

ng I

ncom

e(1

58,0

00.0

)7,

238.

231

0,69

9.8

366,

398.

436

1,48

9.8

373,

215.

940

0,30

9.4

Tax

es-

--

73,2

79.7

72,2

98.0

74,6

43.2

80,0

61.9

NP

AT

(1

58,0

00.0

)7,

238.

231

0,69

9.8

293,

118.

828

9,19

1.8

298,

572.

732

0,24

7.5

Non

-App

ropr

iatio

n It

ems*

*-

(290

.5)

--

--

-

Net

Inc

ome

(158

,000

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7,52

8.7

310,

699.

829

3,11

8.8

289,

191.

829

8,57

2.7

320,

247.

5So

urce

: E

DB

E, G

loba

l Res

earc

h *

Oth

er o

pera

ting

expe

nses

in J

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2008

incl

ude

11.1

mn,

rep

rese

ntin

g di

ffere

nces

in v

alua

tion

of a

sset

s as

sign

ed to

the

Ban

k.**

Non

-app

ropr

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n ite

ms

repr

esen

t gai

n on

sal

e of

fixe

d as

sets

.



CA

SH F

LO

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TA

TE

ME

NT

Exp

ort

Dev

elop

men

t B

ank

of E

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(‘00

0LE

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n-06

-AJu

n-07

-AJu

n-08

-AJu

n-09

-FJu

n-10

-FJu

n-11

-FJu

n-12

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et I

ncom

e A

fter

Tax

(158

,000

.0)

7,52

8.7

310,

699.

829

3,11

8.8

289,

191.

829

8,57

2.7

320,

247.

5

Dep

reci

atio

n8,

120.

87,

736.

210

,534

.110

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606.

79,

894.

9

Prov

isio

ns38

7,91

2.6

242,

220.

426

6.0

66,6

32.8

76,1

10.4

87,3

24.8

91,1

45.4

Ava

ilabl

e fo

r Sa

le I

nves

tmen

ts V

alua

tion

Dif

fere

nces

6,28

6.5

8,97

1.4

22,8

90.8

17,1

68.1

15,4

51.3

13,9

06.1

12,5

15.5

Inve

stm

ents

in A

ffili

ates

Val

uatio

n D

iffe

renc

es(8

,819

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-2,

382.

52,

263.

42,

150.

22,

042.

71,

940.

6

Tra

ding

Inv

estm

ents

Val

uatio

n D

iffe

renc

es(3

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(23,

116.

5)(1

0,96

7.4)

(11,

186.

8)(1

1,41

0.5)

(11,

638.

7)(1

1,87

1.5)

Non

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ropr

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n It

ems

-(2

90.5

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--

--

Prov

isio

n fo

r In

com

e T

ax-

--

73,2

79.7

72,2

98.0

74,6

43.2

80,0

61.9

Net

Inc

ome

Aft

er A

djus

tmen

ts23

2,23

3.9

243,

049.

633

5,80

5.7

452,

170.

845

4,15

4.4

474,

457.

550

3,93

5.3

Tre

asur

y B

ills

740,

906.

745

0,58

5.6

(725

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198,

290.

110

1,99

7.3

55,6

94.2

30,9

95.7

Gov

ernm

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ecur

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(7

87,3

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4,81

3.7

232,

195.

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201.

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4,37

7.7)

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947.

8)

Tra

ding

Inv

estm

ents

12

1,10

8.5

(48,

333.

4)(3

2,92

9.3)

(9,2

58.7

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1,78

8.0)

(13,

625.

9)(1

6,15

2.3)

Ava

ilabl

e fo

r Sa

le I

nves

tmen

ts(9

0,18

6.0)

253,

131.

9(8

21,3

10.0

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88,3

45.2

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14,3

04.5

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9,46

7.1)

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854.

6)

Net

Loa

ns a

nd A

dvan

ces

(281

,690

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(951

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(1,8

55,2

47.7

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,133

,269

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(1,2

15,9

84.2

)(1

,109

,307

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(1,0

37,7

06.1

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Oth

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sset

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,079

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660.

9)(2

6,94

4.0)

(28,

291.

2)(2

9,70

5.7)

Cus

tom

er D

epos

its56

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022,

166.

92,

263,

504.

71,

163,

517.

31,

320,

188.

11,

437,

769.

31,

594,

784.

5

Due

to C

entr

al B

ank

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ther

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42.5

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185,

770.

217

1,51

6.7

235,

069.

636

3,36

8.1

490,

941.

1

Tax

es P

ayab

le-

--

(73,

279.

7)(7

2,29

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643.

2)(8

0,06

1.9)

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isio

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67,8

81.3

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36,5

72.8

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0,47

6.1)

(66,

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5)(7

5,47

1.8)

(86,

679.

8)(9

0,49

4.0)

Oth

er L

iabi

litie

s(2

5,31

4.7)

57,5

22.8

8,98

6.7

6,30

8.9

6,62

4.4

6,95

5.6

7,30

3.4

Cas

h F

low

fro

m O

pera

tion

s(3

21,5

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043,

815.

61,

219,

315.

940

3,81

5.9

588,

041.

592

1,85

2.0

1,26

6,03

7.7

Inve

stm

ents

Hel

d to

Mat

urity

& in

Inv

estm

ents

in A

ffili

ates

0.0

(69,

748.

9)(9

,743

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(9,9

35.5

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,825

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(5,9

39.7

)(5

,915

.5)

Cha

nge

in F

ixed

Ass

ets

(2,1

59.8

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9,54

9.9)

(9,0

37.3

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,947

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(6,1

26.0

)(6

,309

.8)

(6,4

99.1

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Non

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-29

0.5

--

--

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ng A

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8,78

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883.

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3,95

1.5)

(12,

249.

5)(1

2,41

4.6)

Div

iden

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0,80

0.0)

8,44

6.7

(0.0

)(3

91,8

73.6

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58,5

31.4

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66,0

70.2

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84,1

65.6

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Med

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Ter

m L

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479,

786.

1(3

15,4

98.1

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57,5

62.4

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87,6

27.9

)(2

26,6

34.9

)(1

01,6

39.5

)

Bon

ds-

(112

,594

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--

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Cha

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in C

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l-

200,

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0,00

0.0

--

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Cas

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m F

inan

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Act

ivit

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(332

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575,

638.

8(1

15,4

98.1

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49,4

36.0

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46,1

59.2

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92,7

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85,8

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Cha

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in C

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(656

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1,53

0,44

6.0

1,08

5,03

7.1

(261

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069.

3)41

6,89

7.4

867,

817.

9

Beg

inni

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1,55

8,98

2.3

902,

843.

82,

433,

289.

83,

518,

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93,

256,

823.

83,

184,

754.

53,

601,

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902,

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82,

433,

289.

83,

518,

326.

93,

256,

823.

83,

184,

754.

53,

601,

651.

94,

469,

469.

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: E

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loba

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Cas

h ba

lanc

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h an

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ith th

e C

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ban

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ths

trea

sury

bill

s.



FA

CT

SH

EE

TE

xpor

t D

evel

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Ban

k of

Egy

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n-06

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n-07

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n-08

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n-09

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Ret

urn

on A

vera

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0.1%

2.8%

2.1%

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1.8%

1.8%

Ret

urn

on A

vera

ge E

quity

-21.

7%1.

0%27

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22.1

%22

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22.6

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Net

Int

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t Inc

ome/

Ope

ratin

g In

com

e-1

04.1

%28

57.9

%86

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97.5

%93

.6%

90.6

%87

.4%

Non

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eres

t Inc

ome/

Ope

ratin

g In

com

e-1

04.5

%22

53.4

%61

.3%

63.9

%73

.2%

78.9

%80

.4%

Mar

gins

Inte

rest

Exp

ense

to I

nter

est I

ncom

e67

.5%

65.4

%67

.9%

67.1

%70

.8%

73.1

%74

.8%

Inte

rest

Inc

ome

to I

nter

est E

arni

ng A

sset

s6.

7%7.

1%7.

9%8.

9%8.

8%8.

7%8.

5%In

tere

st E

xpen

se to

Int

eres

t Bea

ring

Fun

ds5.

2%5.

5%5.

8%5.

9%6.

1%6.

2%6.

3%N

et S

prea

d1.

5%1.

6%2.

1%3.

0%2.

7%2.

5%2.

3%N

et I

nter

est M

argi

n2.

2%2.

5%2.

5%2.

9%2.

6%2.

3%2.

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008

This material was produced by Global Investment House KSCC (‘Global’),a firm regulated by the Central Bank ofKuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy anysecurities. Global may, from time to time,to the extent permitted by law, participate or invest in other financingtransactions with the issuers of the securities (‘securities’), perform services for or solicit business from such issuer,and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permittedby applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before thismaterial is published to recipients.Information and opinions contained herein have been compiled or arrived by Global from sources believed tobe reliable, but Global has not independently verified the contents of this document. Accordingly, no representationor warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy,completeness or correctness of the information and opinions contained in this document. Global accepts no liabilityfor any loss arising from the use of this document or its contents or otherwise arising in connection therewith.This document is not to be relied upon or used in substitution for the exercise of independent judgement. Globalshall have no responsibility or liability whatsoever in respect of any inac curacy in or ommission from this orany other document prepared by Global for, or sent by Global to any person and any such person shall beresponsible for conducting his own investigation and analysis of the information contained or referred to in thisdocument and of evaluating the merits and risks involved in the securities forming the subject matter of this orother such document.Opinions and estimates constitute our judgment and are subject to change without prior notice.Past performanceis not indicative of future results. This document does not constitute an offer or invitation to subscribe for orpurchase any securities, and neither this document nor anything contained herein shall form the basis of anycontract or commitment what so ever. It is being furnished to you solely for your information and may not bereproduced or redistributed to any other person.Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distributionmay be restricted by law. Persons who receive this report should make themselves aware of and adhere to anysuch restrictions. By accepting this report you agree to be bound by the foregoing limitations.

Company

Commercial International BankNational Societe Generale BankCredit Agricole-EgyptThe Egyptian Gulf BankExport Development Bank of Egypt

Recommendation

Hold

Buy

Buy

Sell

Hold

Ticker

COMI.CA

NSGB.CA

CIEB.CA

EGBE.CA

EXPA.CA

Price

LE46.9

LE30.0

LE15.2

US$2.6

LE21.1

Disclosure

1,10

1,10

1,10

1,10

1,10

Disclosure Checklist

1. Global Investment House did not receive and will not receive any compensation from the companyor anyone else for the preparation of this report.

2. The company being researched holds more than 5% stake in Global Investment House.3. Global Investment House makes a market in securities issued by this company.4. Global Investment House acts as a corporate broker or sponsor to this company.5. The author of or an individual who assisted in the preparation of this report (or a member of his/her

household) has a direct ownership position in securities issued by this company.6. An employee of Global Investment House serves on the board of directors of this company.7. Within the past year , Global Investment House has managed or co-managed a public offering for

this company, for which it received fees.8. Global Investment House has received compensation from this company for the provision of

investment banking or financial advisory services within the past year.9. Global Investment House expects to receive or intends to seek compensation for investment banking

services from this company in the next three months.10. Please see special footnote below for other relevant disclosures.

The following is a comprehensive list of disclosures which may or may not apply to all our researches.

Only the relevant disclosures which apply to this particular research has been mentioned in the table

below under the heading of disclosure.

Global Rating

Buy

Global Research: Equity Ratings Definitions

HoldReduceSell

Definition

Fair value of the stock is >10% from the current market priceFair value of the stock is between +10% and -10% from the current market priceFair value of the stock is between -10% and -20% from the current market priceFair value of the stock is < -20% from the current market price

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