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Dailynewsegypt > Blog > Business > Banking > How does raising interest rates affect stocks of banking sector?
Banking

How does raising interest rates affect stocks of banking sector?

Daily News Egypt
Last updated: 2023/08/06 at 10:49 PM
By Daily News Egypt 5 Min Read
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How does raising interest rates affect stocks of banking sector?
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In an unexpected move, the Central Bank of Egypt (CBE) raised interest rates by 1% in its last meeting. The Egyptian Exchange (EGX) is usually affected by such decisions as the liquidity transfers from the stock market to bank certificates. However, investors are realizing that the sharp rises in interest rates does not compensate for inflation, which peaked to 41% in June 2023, compared to 40.3% in May 2023.

This boosted the splendor of investing in the Egyptian Exchange, especially the banking sector stocks that benefit from raising interest rates directly. The evaluation is based on comparing the banks’ assets with their liabilities, which are loans and deposits, and therefore the high interest rates are in the interest of Bank stock valuations

Hany Geneina, chief investment strategy analyst at Thndr Securities Brokerage, believes that stocks will remain an attractive investment vessel after individuals realize the real gap between core inflation and interest returns.

According to a report issued by Ostoul Securities Brokerage, in which it monitored the development of banks’ performance from March 2014 to March 2023, a significant development in the sector’s performance was observed. The most prominent aspect was the rise in deposits to EGP 9.216trn in March of this year, after being EGP 1.361trn in March 2014. 

Domestic liquidity increased to EGP 7.966trn in March 2023 compared to EGP 1.438trn in March 2014. Domestic credit increased from EGP 1.517trn in March 2014 to EGP 8.349trn in the same comparison period.

The report indicated that these numbers reflect customers’ confidence in banks, as well as the ability of banks to fulfill their obligations. The increase in deposits directly affects liquidity in banks and their ability to grant loans. However, the banking sector witnessed a deficit in foreign assets amounting to EGP 27.65bn in March 2023, after a surplus of EGP 4.128bn in March 2014.

Mohamed Abdel Hakim, head of the research department at Ostoul Securities Brokerage, said that raising interest is a profit for the banking sector. The growth of the non-banking financial sector also represents an integration in bridging the credit gap in the Egyptian market.

Amani Shaaban, Equity Research Analyst at Prime Holding, said that the rise in interest means more profits in favor of bank shares. She added that financial markets do not wait for the impact to occur, but rather begin to move according to the news. Shabaan noted that the non-banking financial sector is based on its financing on bank loans, which means a negative impact on the non-banking sector, and a positive one on the banking one.

Shaaban indicated that with the banks’ attention to the concept of digital banks, the valuations of the banking sector shares will undoubtedly change.

The banking sector stocks are traded at an estimated profitability multiplier of 4.93 times, less than the profitability multiplier of the main traded index at 6.6 times, according to EGX data.

Mostafa Shafea, head of research at Arabeya Online, said that the increase in the interest rate is positive for banks, leading to depositors bearing the interest rate themselves at that time. He explained that with an increase in the interest rate that is higher than normal, the depositors increase and lenders decline.

He explained that if interest rates increase further, a negative impact will undoubtedly be observed in bank’s business results, which, in turn, would re-evaluate the shares of the sector as a whole.

He noted that the interest hike is one of the requirements of the review of the International Monetary Fund (IMF), whose date is approaching. Among its requirements is the liberalization of the exchange rate, which means a decline in the price of the currency and the rise in inflation and then an increase in interest rates.

He believes that a greater devaluation of the currency will take place, according to the expectations of international investment banks and global banks.  

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