Balancing risk and upside

Egyptian banks under our coverage have fallen about 50% from their highs in
January, suggesting major potential upside. We believe previous risks to returns
were misjudged, and the current declines reflect that, as well as increased
political risk. We do, however, believe NSGB's valuation discounts that risk.

Egyptian revolution has meant banks have been heavily discounted

CIB’s (Commercial International Bank) stock price has declined 53% from its peak in
January, while NSGB’s (National Société Générale Bank) has fallen 56%, both more than halving. We see two main reasons for the sharp decline. First, pre-revolution valuations in the equity market did not sufficiently reflect the risk priced into the bond market. Second, the risk of twin deficits damaging the treasury’s ability to pay or the central bank’s ability to defend the currency has risen sharply.

Risks still low, but rising

We still see limited risk of default. Sovereign debt is high, especially vs revenues. While the government intends to raise taxes, the budget deficit hinders aggressive reform. Meanwhile, the current account deficit weighs on the central bank’s ability to rebuild foreign currency reserves that have fallen by a third since the revolution began. The longer the political uncertainty, the greater the danger, and we don’t yet see a clear path to political stability.

Valuations now low enough to price in the political risk

Although relatively cautious about the political situation, we are wary of taking too negative a position. Long-term dynamics are still compelling, offering significant upside if shorter-term risks are resolved. We believe NSGB offers the right mix of risk and reward. We initiate coverage of NSGB with a Buy and of CIB with a Hold.

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