How far do fair values of banks’ stocks take into consideration their market price changes?

Fatma Salah
7 Min Read

The Commercial International Bank’s (CIB) stock price exceeded its fair value which was determined by investment banks during the past months, raising the question about the extent to which the fair value estimation of banks’ stocks take into consideration their price changes. The CIB has been the largest stock on the benchmark index of the Egyptian Exchange, controlling the trading trend in the last period.

What is the fair value of the stock? It is a subjective term calculated using the current financial statements, market position, and possible growth value from a set of metrics. In contrast, the market value is the current stock price at which the stock or asset is traded. Fair value is the most used term for valuing an asset, according to WallStreetMojo.

The CIB stock’s fair value was estimated at EGP 53-54, while the stock is currently trading at EGP 55.4, while the market value of the CIB amounted to EGP 166.3bn.

The stock price witnessed a significant growth of 42% during the past three months, rising from EGP 38.31 in December 2022 to EGP 54.09 in February 2023.

These rises coincided with the jump of the benchmark index EGX30 by 25% from 13,639 points in December 2022 to about 17,000 points currently, led by the performance of the CIB stock.

Dealers in the stock market believe that despite the challenges facing banks in 2023, there are opportunities represented in the profits of currency differences, and the revaluation of assets, which will compensate for the fair value differences for the sector’s stocks, stressing that the sector has a promising opportunity to flourish.

Arab African International Securities updated the fair value of the CIB stock last week, setting a new target price within 12 months of about EGP 60.4, with a recommendation to keep the stock.

Hani Amer, a financial analyst at the Arab African International Securities, said that updating the fair value of the CIB stock took into consideration raising the target price by 32.7% from EGP 45.5 to EGP 60.4, while changing the recommendation from buy to hold.

Amer expected, in a research note, that the CIB would record a net profit of EGP 19.6bn in 2023, with a growth of 21.8% on an annual basis, suggesting annual growth at a 6-year compound rate of 19% until 2028.

He attributed these expectations to the expected growth in investment premiums, fees, commissions, and loans, suggesting the growth of net interest income for the CIB by 19.4% by 2028, supported by the expected positive impact of the depreciation of the Egyptian pound on the CIB loan growth.

Hani Geneina, an economist and lecturer at the American University in Cairo, predicted that the banking sector will be negatively affected during 2023 despite the current promising investment opportunities, especially with the upcoming IPOs, specifying the main reason for the increase in provisions.

He pointed out that the year 2024 is the year of breakthrough, and the stocks of the banking sector will witness a great recovery, indicating that the recovery will extend to the non-banking sector, whether commercial or investment banks.

Geneina stressed that the private sector still relies on loans in order to increase capital, but after the expected economic breakthrough, the impact of which will appear by 2024, we will see loans offered for expansion, not only to increase capital.

He explained that the reflection of the value of assets, deposits, and dollar loans is not positively affected by all banks, on the contrary, it represents a burden on some banks as a result of their need to increase capital, meaning that it may affect the fair value, but it is not the biggest reason.

The CIB stock has recorded a growth rate of 24.5% since the last exchange rate liberalization on 4 January, to reach EGP 55.4 on 20 February.

Banks’ stocks witnessed trading values exceeding the EGP 1bn barrier, as they acquired up to 15.2% of the total trading since the last exchange rate liberalization in January. They accounted for about 22.1% of the total trading in the last trading week of January.

The trading value of banks’ stocks exceeded EGP 1.3bn during the past week, accounting for 15.7% of the total trading.

Amani Shaaban, a financial analyst at Prime Securities, suggested an increase in the fair values of bank stocks, especially since most of them achieved strong profits supported by high interest rates, profits from the revaluation of the currency, which gives it a greater value with growth, explaining that work is underway to update the values. To take into account upcoming bank offerings, coinciding with the expected economic breakthrough

Shaaban said that it is not possible to put all banks in the same basket because each bank is different from the other. When looking at the devaluation of the Egyptian pound, the effect varies according to the fact that the effect is positive for some banks, and vice versa.

He pointed out that the recent devaluation of the Egyptian pound and its positive impact on banks with a portfolio of dollar loans, which led to strong growth in assets in general, but on the other hand, the devaluation of the pound negatively affects revaluation losses in the event of a net financial position in foreign currency.

The CIB trades at an average of 11.43 P/E, while the Egyptian banking sector trades at an average of 6.6 P/E, according to stock market research.

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