Institutional investors, research houses hold the line on CIB amid selling pressure from retail investors following Ezz Al Arab’s resignation. Four research houses have affirmed their ratings on CIB after Hisham Ezz Al Arab stepped down on Friday as chairman and managing director following a probe by the Central Bank of Egypt. Selling yesterday appeared largely confined to retail investors, a veteran market watcher suggests.

CIB shares fell as much as 10% at the start of the session before recovering ground, closing the day down 6.9%. The bank’s EGX-listed shares had been suspended from trading by the Financial Regulatory Authority on Thursday. Trading of global depositary receipts on the London Stock Exchange had continued on both Thursday and Friday. From Wednesday’s close of USD 4.23, the GDRs fell to USD 3.50 at the closing bell on Thursday and hit an intraday low of USD 1.77 on Friday before surging to end the week at USD 4.00 on unprecedentedly high volumes, according to LSE market data.

Four research houses have reaffirmed their ratings on CIB since a call on Friday night between CEO and Managing Director Hussein Abaza and more than 600 members of the investment community including fund and portfolio managers as well as research analysts. HSBC, Arqaam Capital and Arab African have all maintained “buy” ratings while our friends at Pharos are equal weight on CIB.

HSBC believes that “the market has overreacted to the sudden news of the chairman’s departure” and “continues to view CIB as a financially sound bank.” The central bank audit will likely lead to higher compliance and internal control costs in the medium term, analyst Aybek Islamov wrote, leaving his target price for CIB unchanged at EGP 86 per share, implying more than 40% upside to yesterday’s close.

Pharos’ Dalia Bonna advised clients yesterday that there was “no need to panic” and that Ezz Al Arab’s departure was “not a disaster,” while Prime Holdings Head of Research Amr Elalfy said in a note that investors “should not push the panic button indiscriminately.” Prime’s Shihab Helmy suggested that the impact on EGX-listed bank shares would likely be transient.

Shuaa Capital “doesn’t expect this event to actually blow out of proportion,” said analyst Aarthi Chandrasekaran in an interview with Bloomberg TV, adding that “investors, from now, will look forward to the complete audit report, which is still pending from the Central Bank of Egypt. But the way the news came out — the way it was handled the first two days — was a disappointment to the investor community.”

Other research heavyweights have yet to weigh in, including EFG Hermes, Goldman Sachs and JPMorgan, which a veteran market watcher suggested yesterday suggests that they don’t believe they need to update their models or change their recommendations on the share in the wake of Ezz Al Arab’s departure.

Selling pressure yesterday appeared to come largely from retail investors, the market veteran told us, calling the trades “small blocks” and suggesting that “institutional investors are sanguine about what’s happening — look for bargain hunters to enter the market on Monday. Sentiment on CIB is that it’s a strong bank and investors know and trust [CEO Hussein] Abaza.” Prime’s Elalfy agrees, telling Bloomberg he sees CIB shares “finding support around EGP 60 driven by institutional buyers ‘opting to get in at a 10% discount to [last] Wednesday’s price.’”

The drama at CIB was on nighttime talk show host Amr Adib’s mind yesterday. The host of El Hekaya expressed dismay at how the story unfolded, particularly as domestic shareholders and foreign investors alike were left in the dark on the details of the regulatory probe that led to Chairman Hisham Ezz Al Arab’s resignation (watch, runtime: 6:39). Nonetheless, Adib stressed that he isn’t losing a wink of sleep over the bank’s future, pointing to the institution’s strong fundamentals and investor confidence in the bank’s track record (watch, runtime: 1:47). Blom Bank Managing Director Mohamed Fathallah said much of the same, telling Adib that the bank’s shares would have fared worse on the EGX yesterday if it weren’t for its fundamentals (watch, runtime: 2:49).

Background: Hisham Ezz Al Arab stepped down last week after the central bank said it found “gross violations” of banking regulations during an audit of the bank. Ezz Al Arab has been succeeded by former regulator, consultant and entrepreneur Sherif Samy as the bank’s non-executive chairman, while Abaza becomes both CEO and managing director. The CBE has long sought to convince banks to separate the officers of chairman and managing director, saying best practice is to have non-executive chairs responsible for governance and oversight while managing directors run and build banks.

Foreign investors are piling into Egyptian debt: Foreign inflows into Egyptian bonds have surged to more than USD 20 bn just a few months after investors pulled USD bns during the global market panic in the spring caused by the coronavirus pandemic, Bloomberg reports. Investment in short-term Treasury bills and long-term bonds more than doubled to USD 21.1 bn as of mid-October from USD 10.4 bn in May, said Mohamed Hegazy, head of the Finance Ministry’s debt management unit.

The rush of hot money signals increased investor confidence in the Egyptian economy, Finance Minister Mohamed Maait told the Financial Times. “We see this in the reaction of investors when we go to international financial markets and in the way they receive issuances of Egyptian treasury bills,” he told the salmon-colored newspaper. The central bank has seen huge demand for EGP-denominated debt while investors lapped up the government’s eurobond and green bond issuance earlier this year. Hegazy said that the two FX-denominated sales, in addition to stable outlooks from the three major rating agencies, has only strengthened foreign inflows, which now account for 9.4% of total EGP holdings, up from 5.2% at the end of June.

Egypt was hit badly by the sell-off in emerging markets in the spring: Bondholders sold more than 60% of their holdings of Egyptian debt between February and May as investors panic-sold risk assets in response to the escalating pandemic. In March alone, foreign holdings plummeted from USD 27.8 bn to USD 14.4 bn.

The carry trade to the rescue: Investors have been drawn to EGP-denominated assets by the high yields, the stable currency and signs from the government that it was committed to further economic reform, Mohamed Abu Basha, head of macroeconomic research at EFG Hermes, told the FT. Returns offered by Egypt’s local-currency bonds remain some of the highest among emerging markets, despite the central bank’s surprise 50-bps rate cut last month, while the EGP has remained steady at 15.654, gaining more than 3% since its nadir of 16.168 in June.

Debt diversification is gaining pace: The government is following through on its plan to issue more longer-term debt. By the end of September, Treasury bonds accounted for 71% of its net issuance, compared to just 20% three months earlier. As of the end of June, average maturities were 3.2 years, up from 1.3 years in the same month of 2013, Hegazy said. It is hoped that by issuing greater quantities of long-term bonds, which typically carry lower rates of interest, the government will lower its borrowing costs.

Egypt’s recent loan agreements with international lenders has also been a stabilizing factor. The two loans secured from the IMF — the USD 2.8 bn rapid-financing instrument and the USD 5.2 bn standby loan — helped to prevent the pandemic from inflicting serious scars on state finances, providing emergency support for health and social programs, and keeping the budget and balance of payments deficits in check.

…as has economic growth, which is likely to come in at 2.8-3.5% during the current fiscal year, Maait told the FT. Egypt has remained the only country in the region to avoid an economic contraction this year, despite suffering through a three-month lockdown and seeing its tourism industry brought to a standstill by the collapse in international travel. The World Bank now sees the economy growing at a 2.3% clip this fiscal year before expanding to 5.8% the following year. Earlier this month the IMF revised upwards its 2020 growth forecasts to 3.5% from the 2% it forecast in June.

And the budget deficit is narrowing slowly but surely, though the minister acknowledged covid-19 was slowing growth targets. “It is true corona is slowing us down in reaching our aim, but we continue to reduce the deficit … If I compare with others … their deficit has increased,” he said. The deficit has widened to 7.9% of GDP from 7.2% in FY2019-2020, and the IMF sees the trend continuing this year, reaching 8.1% by the end of FY2020-2021 before rapidly falling to 5.2% the year after.

Meanwhile, Egypt’s total stock of foreign debt rose 11% q-o-q in 4Q2019-2020 (April-June 2020) to USD 123.5 bn from USD 111.3 bn by the end of the previous quarter, and 13.6% y-o-y, from USD 108.7 mn in 4Q2018-2019, central bank data cited by Masrawy showed. The rebound came after external debt fell for the first time in nearly 5 years in 3Q19-20.

How Egypt dodged a recession: The shift in outlook is due to the government’s increased spending on infrastructure as well as central bank measures which include interest rate cuts. Abou Basha told the FT that the resumption of public spending after a pause in April was key, while Maait said the government would continue to boost the economy by extending its EGP 500 monthly stipend for informal workers till the end of the year, as well as disbursing export subsidies.

Going forward: In IMF and World Bank meetings last week, Maait outlined Egypt’s strategy of prioritizing investment in transport, renewable energy and oil and gas, and told the FT of plans to increase exports and fund new tourism initiatives. In the interview though, the minister acknowledged fears that a return to normality may be much further away than initially thought, echoing the refrain that “people will have to learn to coexist with the virus.”

LEGISLATION WATCH- Office space and snack tax? Amendments to the VAT Act that would impose VAT on non-residential property and some snack foods are now with the House of Representatives after going through Cabinet, the local press reports. The changes would apply a 14% VAT to the rent and purchase of commercial and administrative properties, while the 5% schedule tax on crackers and sweet pastries would be replaced by the standard VAT rate. The amendments, which were signed off by the cabinet’s economic committee in June, would also subject most commercial advertising to the tax but scrap the 20% stamp tax on ads, and allow tourists to claim VAT rebates.

Real estate developers have pushed back against plans to end the VAT exemption for non-residential properties, suggesting that businesses already struggling through the coronavirus pandemic will not be able to cope with the additional costs. The government argues that the changes are necessary to close loopholes in the legislation, which impose VAT on some commercial properties — such as stores located in malls — but not others.

In other VAT news, FinMin renews agreement with Lawyers Syndicate on VAT: Attorneys will keep paying a flat VAT rate on their services under a renewed agreement (pdf) between the Finance Ministry, the Lawyers Syndicate, and the Justice Ministry. The agreement sets VAT on legal services and court proceedings undertaken by law firms. VAT for proceedings in the Court of First Instance was unchanged at EGP 40 and those in the Court of Appeals at EGP 60. Lawsuits filed in the courts of cassation, administrative, constitutional, and international arbitration will also incur the same VAT of EGP 200. The agreement was last renewed in September 2018 after it was initially inked in April 2017. Lawyers had been opposed to the initial agreement and further increases.

BP has started gas production from its Qattameya gas field in the North Damietta offshore concession through its Pharaonic Petroleum Company JV, the company said in a statement (pdf) yesterday. The field, discovered in 2017, is expected to produce up to 50 mn cubic feet of gas per day, and is tied to the Ha’py and Tuart fields via a 50 km pipeline. BP holds 100% equity in the concession in the East Nile Delta, and directs gas production to Egypt’s national grid.

Staying the course paid off, regional boss says: Karim Alaa, BP’s North Africa regional president, called the operation “a great example of resilient hydrocarbons development. We are proud to have brought this project safely onstream through an extremely challenging period. Our team continues to work to support Egypt realise the potential of its energy resources, adding to our track-record of delivery and enabled by our established partnerships with the Egyptian petroleum sector.”

M&A WATCH- Struggling producer Dana Gas offloads Egypt assets to IPR Energy: Dana Gas has agreed to sell most of its Egypt assets to IPR Wastani Petroleum for as much as USD 236 mn, allowing the company to double down on its operations in Iraqi Kurdistan, the company said in a statement yesterday. The Emirati firm, which began talks with several prospective buyers in 2Q2019, is selling its entire concessions in El Manzala, West El Manzala, West El Qantara and North El Salhiya but will hold onto its interests in exploration concessions El Matariya (Block 3) and North El Arish (Block 6), the statement said. Watani has agreed to pay a base price of USD 153 mn as well as USD 83 mn contingent on Brent prices and production between 2020-2023.

Wastani who? IPR Wastani Petroleum is part of the Texas-based energy group IPR Energy, which conducts exploration and production operations in nine concessions in Egypt.

The acquisition isn’t done yet: The agreement will be completed by early 2021, pending the approval of the Oil Ministry, the company said.

A sale fit for a pandemic: The sale price represents a serious climbdown from the USD 500 mn valuation Dana had originally attached to its portfolio. While the company hasn’t offloaded all of its assets, the USD 153 mn base price represents a marked discount given the blocks it is keeping hold of (El Matariya and North El Arish) are yet to make commercial discoveries after years of exploration.

Background: Dana Gas has been looking to offload its Egypt assets since September of last year. Talks with IPR Energy were reported last month, ahead of a USD 379.6 mn debt repayment in outstanding Islamic bonds, or sukuk, due at the end of this month.

M&A WATCH- Raya Contact Center has submitted a non-binding offer to purchase an unnamed call center company based in the Gulf, the company said in an EGX filing (pdf) yesterday. The company is currently conducting due diligence but didn’t provide any additional information.

Separately, Raya’s board of directors will start discussions on how to unwind the EGP 10.4 mn of share buybacks the company authorized following the onset of the coronavirus pandemic, the disclosure said. Raya was among more than 20 EGX-listed companies that lined up for share buybacks after the pandemic fueled a sell-off in capital markets earlier this year. The Financial Regulatory Authority eased regulations on buybacks in early March, opening the floodgates as companies rushed to prop up their share prices. We took a closer look at the buyback boom in July.

The private sector is getting involved in the government’s move to locally produce railcars: Orascom Construction, Samcrete and Hassan Allam will hold stakes in the National Company for Railways Industries, a newly-established company that will produce, repair and renovate railway cars at the Suez Canal Economic Zone (SCZone), Al Mal reports, citing an unnamed government official familiar with the matter. The firms will invest in the company alongside the Sovereign Fund of Egypt and the SCZone. Share allocation is currently being discussed and will be announced soon, the official added. The company will invest USD 240 mn in two factories in the East Port Said Industrial Zone: one for producing railcars and another for manufacturing components.

State-owned Telecom Egypt (TE) plans to bring Egypt’s largest international data center online in 2021, local press reported. The data center will be connected to TE’s 10 Mediterranean and Red Sea subsea landing stations, connecting with more than 60 countries worldwide and allowing Egypt to make use of its unique position as a subsea internet cable hub. TE announced last year that it would be building four to five data centers in the coming two years in the new administrative capital, Alexandria, Smart Village and Suez. The company currently runs six data centers in Cairo and Alexandria.

KUDOS: GAFI has been acknowledged as the investment promotion agency that attracted the best investment project in the Middle East and North Africa in 2019 at the UAE’s Annual Investment Meeting, according to a statement. The authority received the award for Lekela Power’s 250-MW West Bakr wind farm in the Gulf of Suez.

There are common issues that impact service providers, including attracting and retaining talent, micromanagement, and creating corporate structure. We unpack the similarities and challenges of the service industry with Bahaa Alieldean, managing partner at ALC Alieldean, Weshahi & Partners, in this week’s episode of Making It.

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