EFG Hermes, an Egyptian financial services company, has doubled its buy rating for CRDB Bank (EHR: CRDB) thanks to the improving macroeconomic history of the country.
The company before President Samia Suluhu Hassan came to power said the target purchase price was around 220/- but returned to 453/- a share on improving profitability.
The company said in its “Enter Chairman Samia, It’s Time to Rethink” report that other reasons for the rise in the buy target price were due to lower risk loads and attractive dividend yields of 9.3%.
“We are updating our CRDB models and rolling our estimates back to 2025 estimates,” the company said in the report which also analyzed and compared CRDB and NMB Bank. “We maintain our buy rating on CRDB, but raise our price target to 453/- from 220/- previously. [since] engaging post-Covid-19 recovery game.
Currently, the share of CRDB, one of the largest banks in the country, was trading Wednesday at 260/-. The recently published report indicates that the significant increases in profits are explained by lower risk loads and the cost of risk of 1.9% this year against 2.8% last year while improving cost efficiency (CIR) of 57.9% against 60% last year.
Additionally, the report showed that the target price was achieved after valuing CRDB at 1.0x its 2021 price-to-book (P/B) ratio, while it trades at 0.6x its P/B. of 2021, which implies an attractive valuation.
Finally, with a coverage rate of 77.6% in the first half of this year and an NPL rate of 4.6%: “we expect earnings growth – over 19.5% year-on-year this year – will come from high-quality profitability drivers,” the EFG Hermes report states.
Over the past three years, the report says, the CRDB achieved a significant milestone by reducing the non-performing loan (NPL) ratio to 4.6% at the end of the second quarter of this year, from 13.4% in 2017.
“This was driven by higher loan penetration in low-risk salaried worker loans and an improved loan management process,” the report said. The report forecast this year an annual depreciation of 75 billion / -, which translates into a cost of risk of 1.9% against 2.3% last year.
EFG Hermes said President Samia is off to a good start in her first 100 days after enacting policies to improve investor protections, create a more investor-friendly tax environment and lead the country out of the isolation and adopt a multilateral approach towards its previously distant neighbours.
“Furthermore,” the report says, “his presidency is looking promising with an economy that looks poised for growth.” The budget deficit projected for this year is only 1.3% compared to 1.0% last year and the IMF also expects the current account deficit to narrow to 3.1% by 2025 thanks to the increase in gold exports. “The macroeconomic outlook under President Samia’s first term appears encouraging,” the report said.
In addition, the country’s relatively lower gross debt levels, as last year the public debt-to-GDP ratio was 38%, leaves scope for tapping into international capital markets.