Egyptian Banks' Peer Review - Further Pressures on Credit Profiles from Covid-19 Still to Come - Roxhill
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Egyptian Banks’ Peer Review Further Pressures on Credit Profiles from Covid-19 Still to Come
Banks
Universal Commercial Banks
Egypt
Egyptian Banks’ Peer Review
Further Pressures on Credit Profiles from Covid-19 Still to Come
Weaker Economic Conditions
“2021 will remain challenging. We expect
The economic fallout of the pandemic is weakening Egypt’s growth
asset-quality deterioration and continued momentum. Fitch Ratings expects real GDP growth to slow to 3% in
pressure on profitability, but there will be the fiscal year to end-June 2021 (FY21) from 5.6% in FY19 given the
reasonable growth and revenue opportunities. negative impact on key sectors, including tourism, trade,
transportation and the Suez Canal, which represent around 23% of
FC liquidity is improving but remains GDP. However, less stringent lockdown measures than those in
vulnerable to external shocks. Capitalisation other jurisdictions as well as higher public investment and
remains a credit weakness.” infrastructure spending have underpinned growth. Support
measures were dominated by monetary policy, in particular the
Zeinab Abdalla, Director Central Bank of Egypt’s (CBE) slashing of interest rates by a
cumulative 400bp in 2020 to support lending.
Expected Deterioration in Credit Profiles
The sector average Stage 3 (S3) loans ratio was stable at 3.4% at
end-3Q20, supported by the CBE’s six-month credit extension and
forbearance measures. Fitch believes these measures are delaying
a deterioration in asset quality. We expect the sector average S3
loans ratio to increase to about 4% by end-2021 as support
measures wane. However, the key indicators of asset-quality
pressures will be a higher level of restructured exposures and an
expected migration of Stage 1 (S1) loans to Stage 2 (S2).
Banks’ profitability is highly dependent on yields on sovereign
securities, which have fallen since 2019. Fitch expects continued
pressure on operating profitability due to lower interest rates and a
further increase in loan impairment charges (LICs) as support
measures fade. However, we expect profitability metrics to remain
healthy and for pre-impairment operating profitability to prevent
higher LICs from reducing capital.
Banks’ capitalisation is a credit weakness in light of their substantial
Related Research
exposure to the sovereign and high loan book concentration by
Egyptian Banks' Foreign-Currency Liquidity Recovers on Inflows single obligor. Regulatory capital ratios are inflated by 0% risk-
(December 2020) weighting on local-currency (LC) sovereign debt. The pressure on
Fitch Ratings 2021 Outlook: Middle East Banks (December 2020) capital ratios from lower internal capital generation will be partially
Egypt (August 2020) offset by the CBE’s decision to prevent banks from paying
dividends.
Egyptian Banks' Foreign-Currency Liquidity Still Vulnerable
(July 2020) Improving Foreign-Currency Liquidity but
Coronavirus Poses Downside Risks to Egyptian Banks
(March 2020)
Still Vulnerable
The high carry trade on sovereign securities and stable exchange
rate have attracted back foreign investors after a wave of sell-offs
and large portfolio outflows in March and April 2020. However,
Analysts foreign-currency (FC) liquidity will remain vulnerable to foreign
Zeinab Abdalla investors’ confidence in emerging-market (EM) debt and exchange-
+971 4 424 1210 rate fluctuation risks. A sustainable improvement in FC liquidity
zeinab.abdalla@fitchratings.com would require the return of the country’s core FC receipts.
Ramy Habibi Alaoui
+971 4 424 1208
ramy.habibialaoui@fitchratings.com
Special Report │ 7 April 2021 fitchratings.com 2Banks
Universal Commercial Banks
Egypt
Different Ratings Drivers Operating Environment
Fitch rates three Egyptian banks – National Bank of Egypt (S.A.E.)
Macroeconomic Forecasts
(NBE; B+/Stable), Banque Misr (S.A.E.) (BM; B+/Stable), and
Commercial International Bank (Egypt) S.A.E (CIB; B+/Negative), as Fitch baseline assumptions FY19 FY20 FY21f FY22f
well as National Bank of Egypt (UK) Limited (NBEUK; B/Stable), the Real GDP growth (%) 5.6 3.6 3.0 6.0
UK subsidiary of NBE. Consumer prices (%) 13.4 5.3 5.0 7.0
NBE and BM’s Long-Term (LT) Issuer Default Ratings (IDRs) are USD/EGP 17.6 16.1 16.0 15.9
driven by Fitch’s view of a limited probability of support from the Current account deficit (%) -3.6 -3.1 -3.2 -3.2
Egyptian authorities in case of need. This is reflected by their
Source: Fitch Ratings
Support Ratings of ‘4’ and Support Rating Floors (SRFs) of ‘B+’,
which are equalised with the Egyptian sovereign rating. NBE’s and Weaker Economic Conditions
BM’s SRFs are one notch above Fitch’s domestic systemically
important bank SRF of ‘B’ mainly owing to their full state ownership The fallout of the pandemic and the negative impact on key sectors,
and record of government support. For example, in 2017, the including tourism, the Suez Canal, trade and transportation, which
authorities provided three public-sector banks (including NBE and represent about 23% of GDP, are weakening Egypt’s economy.
BM) with 10-year interest-free loans to support their capital ratios Fitch expects GDP growth to fall to 3% in FY21 from 5.6% in FY19.
following the devaluation of the Egyptian pound. Nevertheless, Egypt is one of the few sovereigns where Fitch
expects positive real GDP growth in 2020-2021, due to less
The ratings of NBEUK are equalised with those of NBE as Fitch stringent lockdowns, resilient consumer consumption and public
believes NBE would have a strong willingness to support its investment.
subsidiary if needed. Nevertheless, NBE’s ability to provide support
is weak, as indicated by its LT IDR of ‘B+’. We expect growth to recover to 6% in FY22 and converge with pre-
pandemic levels assuming a gradual return in tourism, further
The Stable Outlooks on NBE’s and BM’s LT IDRs reflect that on the growth in the energy and manufacturing sectors, and a gradual
Egyptian sovereign rating. improvement in the business environment. Persisting restrictions
on international travel pose downside risks to growth forecasts in
CIB’s IDRs are driven by its Viability Rating (VR). The Negative
FY21-FY22 given the contribution of tourism and travel to the
Outlook on CIB’s ratings reflects our opinion that risks to the
country’s GDP (9.3% of GDP according to the World Travel and
operating environment will remain heightened over the medium
Tourism Council).
term, suggesting potential pressure on the bank’s financial metrics.
The Purchasing Managers’ Index (PMI) contracted in December
The National LT Ratings of NBE, BM and CIB are aligned at ‘AA(egy)’
2020 after three months of expansion as renewed lockdowns in
and reflect their creditworthiness relative to other issuers in Egypt.
European markets reduced export volumes and as domestic
NBE’s and BM’s National LT Ratings reflect our view of potential
demand was hit by another rise in Covid-19 cases. Before the global
support from the Egyptian authorities if needed. CIB’s National LT
pandemic, the PMI was mostly in contractionary territory as the
Ratings are driven by its standalone creditworthiness and benefit
high-interest-rate environment was depressing credit demand
from consistently stronger financial metrics through the cycles than
from corporates, particularly for capex financing.
peers.
Markit Purchasing Managers' Index
• Fitch rates three Egyptian banks as well as one UK 55
Expansion
subsidiary (see page 9). 50
45 Contraction
• Public-sector banks’ LT IDRs are driven by a limited 40
probability of support from the Egyptian sovereign and 35
have a Stable Outlook. CIB’s LT IDR is driven by its VR 30
and has a Negative Outlook. 25
20
• All banks have a VR of ‘b+’ reflecting the strong
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correlation between their credit profiles and that of the
sovereign given the banks’ significant exposures to the Not e: The 50 mark separat es cont ract ion from expansion
Egyptian sovereign through the holding of sovereign Source: Fit ch Rat ings, Bloomberg
securities and lending to public-sector companies.
Monetary Response Dominates Support Measures
The authorities mainly used monetary policy to limit the fallout of
the pandemic on the economy due to the country’s constrained
fiscal position; Fitch forecasts Egypt’s fiscal deficit to widen to 8.5%
in FY21 from 7% in FY20.
Special Report │ 7 April 2021 fitchratings.com 3Banks
Universal Commercial Banks
Egypt
To support lending, the CBE reduced interest rates by a cumulative The IMF Article IV report (February 2021) on Egypt quotes the CBE
400bp in 2020 (including an emergency 300bp rate cut in March) as saying that loan restructuring after the end of the six-month
bringing the overnight deposit rate to 8.25%. This represents a total moratorium has been limited. However, we believe that demand for
interest rate cut of 850bp since January 2019 as part of the CBE’s restructuring could increase, especially from smaller corporates
monetary easing. However, public-sector banks issued one-year given challenging business conditions in the non-oil sector as shown
higher-yielding LC certificate of deposits (CDs) at 15% to discourage by PMI figures and pressured cash-flow generation.
a wave of deposit dollarisation and pressures on FC reserves.
To support the distressed tourism sector, which has been under
Despite successive rate cuts, yields on 90-days T-bills remained high pressure since the political turmoil in 2011, the CBE instructed
in 2020 at about 13% to attract back foreign portfolio investors after banks in December 2020 to restructure credit facilities extended to
the USD17 billion of portfolio outflows in March-April 2020. obligors in the sector for a maximum of three years and to extend
Inflation-adjusted returns on Egyptian sovereign debt are among the retail loans to employees in the tourism sector up to six months
highest in EM economies, supported by a steep drop in the inflation from their due date without accruing additional interest. These
rate to 4.3% in January 2021 from 5.4% in December 2020 and over forbearance measures could understate the real level of problem
30% in 2017. Fitch expects inflation to average 7% in 2021, which is (particularly S3) loans in the sector.
within the CBE’s inflation target of 7%, plus or minus 2pp. While there
may be room for further reduction in policy rates if inflation remains Credit Growth Inflated by Credit Deferrals
around its current level, we believe the CBE will seek to maintain real The CBE expanded its EGP100 billion lending programme at
positive interest rates to retain portfolio inflows given the subsidised rates of 5% to 8% (the CBE pays banks the difference
uncertainty of the recovery in current account receipts. between subsidised and policy rates or reduces their minimum
reserve requirements by the equivalent amount of their respective
Policy Rates vs. Yields on 90 Days T-Bills SME lending) to corporates in the manufacturing, agriculture and
Overnight deposit rat e Overnight lending rat e tourism sectors. Combined with the six months’ deferrals of loan
(%)
Yields on 90 days T-bills
repayments, this contributed to the 26% loan growth in 9M20, up
20 from only 4% in 2019.
15 The recently announced CBE circular requesting banks to increase
10 their SME lending to 25% of their loan portfolios from 20% may
support credit growth but could compromise banks’ underwriting
5 standards and increase their exposure to volatile sectors in a weaker
0 operating environment. We expect loan growth in the high single
digits in 2021, supported by a lower interest rate environment, but
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credit demand is likely to be driven by short-term working capital
Source: Fitch Ratings, Bloomberg facilities. Capex financing is expected to pick up in 2022 on the back
of recovering economic growth, potentially higher foreign
Inflation vs. Treasury-Bills (90 Days) Yields investment and reduced uncertainty regarding the pandemic.
Realª yields (RHS) Average yield (LHS) Headline inflat ion (LHS)
(%) (%) Improving FC Liquidity but Vulnerabilities Persist
35 15
30 10 A significant part of foreign investments in Egyptian sovereign LC
25
20
5 T-bills and bonds (portfolio inflow) is done through the banks,
15
0 notably public-sector banks. Typically, foreign investors would
-5
10
-10
provide FC to banks and banks would in turn buy government bonds
5
0 -15 in LC. Banks tend to park the largest part of this FC inflow in (liquid)
offshore inter-bank placements but some would also use a small
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portion to grant (less liquid) FC domestic lending. This inflates the
a Adjust edfor inflat ion banks’ FC liquidity ratios as the vast majority of the FC inflow is
Source: Fit ch Rat ings, Bloomberg, Cent ral Bank of Egypt invested in liquid assets. When foreign investors exit (i.e. portfolio
outflows), the positive impact on the banks’ FC liquidity ratios can
CBE’s Forbearance Measures Mask Underlying Asset-
reverse sharply and quickly.
Quality Problems
Support measures included six months’ deferrals of interest and The banking sector’s FC liquidity came under pressure in March and
principal payments for borrowers between March and September April 2020 due to USD17 billion portfolio outflows from Egypt as
2020. Unlike other jurisdictions, the CBE’s credit moratorium was foreign portfolio investors withdrew from LC government debt at
extended to all obligors unless they opted out of the scheme. the start of the pandemic. These withdrawals resulted in Egypt’s FC
Significant portions (up to 80%) of the loan books of some Fitch- reserves dropping by USD9.5 billion to USD36 billion between
rated banks were under the credit moratorium but some corporates February and end-May and in the depletion of banks’ net foreign
have started opting out due to high interest expense accruals. The assets (NFAs – foreign assets less foreign liabilities), especially in
impact on banks’ asset-quality metrics will not be fully visible before public-sector banks, as they drew down on their offshore FC
1Q21 as some exposures were restructured beyond the expiry of interbank placements to service these outflows.
the CBE’s credit extension in September due to borrowers’ still
constrained cash-flows and debt service capacity.
Special Report │ 7 April 2021 fitchratings.com 4Banks
Universal Commercial Banks
Egypt
The banking sector’s FC liquidity improved in 3Q20, with NFAs FC Reserves vs. USD/ EGP Exchange Rate
building up from September and reaching USD3.8 billion at end- FC reserves (LHS) USD/EGP (RHS)
(USDbn) (USD/EGP)
December 2020, up from USD -5.3 billion at end-April 2020. 50 18.5
This improvement in FC liquidity was driven by portfolio inflows 40
encouraged by an attractive positive carry trade and a stable 30
17.0
exchange rate. According to the Ministry of Finance, foreign
holdings of Egyptian Treasury bills were USD28.5 billion at end- 20
15.5
February 2021, up from USD13.4 billion at end-August and USD7 10
billion in May. 0 14.0
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FC liquidity was also supported by the sovereign’s FC debt raising
in 2H20, including a one-year USD2 billion syndicated loan from
Source: Fitch Ratings, Bloomberg
international banks and a USD750 million green bond issued in
September, which was almost 5x subscribed. This helped reduce the
pressure on the USD/EGP exchange rate, which remained fairly Company Profile
stable in 2020, and allowed FC reserves to recover to USD40 billion Concentrated Banking Sector
at end-2020 (still below the pre-pandemic level of about USD45
billion). We expect the USD3.8 billion Eurobond issuance in Market Shares at End-1H19
February 2021 to sustain the improvement in banks’ NFAs and FC (%)
Tot al asset s Tot al cust omer deposit s Tot al loans
reserves. 35
30
In response to FC outflows, banks boosted their borrowings from 25
multilateral development banks and international commercial 20
15
banks with a focus on longer tenors to lengthen their maturity 10
profile. The sector’s foreign assets (primarily FC placements with 5
offshore banks) reached USD22 billion at end-2020, almost in line 0
CAE
NBE
Alexandria
CIB
QNBAA
Banque du
BM
NBD Egypt
with the level in February. However, banks’ NFAs (USD3.8 billion at
AAIB
Emirates
Bank of
Caire
end-2020) remained below pre-pandemic levels (USD7.3 billion at
end-February) due to a 16% increase in foreign liabilities (FC term
loans and interbank short-term debt from foreign banks) in 2020. Source: Fit ch Rat ings, Bloomberg, Banks
This poses some repayment risks as banks’ debt-servicing capacity
The Egyptian banking sector comprises 38 banks, but there is some
could be pressured in the event of another sell-off by foreign
sector concentration with the three largest public-sector banks
investors that results in banks drawing down again on their foreign
(NBE, BM and Banque Du Caire (BdC)) representing more than half
assets. However, about 70% of banks’ external debt is long-term,
of total sector assets. NBE is the largest public-sector bank. It has a
which reduces short-term refinancing risks.
dominant retail franchise and accounts for 29% of total banking
FC liquidity remains vulnerable to investor risk appetite to EM debt system assets and deposits.
and exchange-rate fluctuation risks. A sustainable improvement
CIB is the leading private-sector bank with a 7% market share of
would require the return of core FC revenue from tourism, Suez
total system assets, followed by QNB Al Ahli (QNBAA; a subsidiary
Canal receipts and remittances, which remain dependent on
of Qatar National Bank) and Arab African International bank
external developments
(AAIB). These three banks have well-established corporate
Banks' NFAs vs. Non-Resident Holdings of T-bills franchises focusing on the domestic market. Some banks started
Foreign liabilities (LHS)
expanding regionally, particularly in east Africa, to capture the
NFAs (LHS) growing trade flows between Egypt and east African countries
Foreign assets (LHS)
Non-resident holding of T-bills (RHS)
supported by the Common Market for Eastern and Southern Africa
(EGPbn) (USDbn)
400 25 free trade agreement. For this reason, CIB acquired 51% of Kenya’s
290 20 Mayfair Bank in 1H20 for EGP560 million. Nevertheless, this
180 15 represents less than 1% of CIB’s total assets. Regional expansion
70 10
-40 5 will help diversify banks’ businesses and grow their trade finance
-150 0 activities but we believe international operations will not exceed
5% of banks’ balance sheets in the short to medium term.
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Banking Sector Could See Further Consolidation
Source: Fitch Ratings, Central Bank of Egypt The remaining domestic banks (excluding subsidiaries of
international banks) have very fragmented market shares and weak
franchises. Accordingly, we expect to see further mergers and
acquisitions (M&A) in the banking sector. There is a strong appetite
from Gulf Cooperation Council (GCC) banks to expand in Egypt
given the sector’s attractive profitability even for those with small
market shares (average return on equity of 23% in 9M20), its large
Special Report │ 7 April 2021 fitchratings.com 5Banks
Universal Commercial Banks
Egypt
retail segment and low banking penetration rate, which is in banks start growing their loan books on the back of subsidised rates
contrast to the GCC’s overbanked system. to selected sectors, the CBE’s recent circular requiring banks to
increase their SMEs exposure to 25% of their loan book, and a pick-
In 2021, the Egyptian subsidiaries of Lebanese banks Audi and Blom
up in capex financing in 2022 as the operating environment
were acquired by Arab Banking Corporation B.S.C. of Bahrain
improves. QNBAA has a higher portion of lending than the sector
(BB+/Stable) and First Abu Dhabi Bank P.J.S.C. (AA-/Stable),
average (56% of total assets at end-3Q20) as it is more active in
respectively, given the tough economic environment in Lebanon
SME lending than peers.
and the parent banks’ need to raise capital. The recent increase in
the minimum paid-in capital requirements for banks to EGP5 billion Lending to the government and public-sector entities forms around
could trigger further consolidation across smaller banks that have a third of total sector credit and adds to banks’ concentration to the
weak internal capital generation and no access to parental support. sovereign. Some of these exposures are against a Ministry of
Finance guarantee; however, the guarantee is usually in LC
Egypt’s privatisation programme (including the potential IPO of
irrespective of the currency of the facility. Banks’ exposures to the
BdC) and the lack of issuance of new banking licences by the CBE is
sovereign as a percentage of their equity can be substantial (almost
likely to increase the wave of M&A and inorganic growth by
9x at NBE and 6x at BM), which poses significant concentration
international banks to access the Egyptian banking sector. Although
risks.
the economic fallout from the pandemic has pushed back BdC’s IPO,
which was planned for 1Q20, we believe the prospects for the IPO Banks’ loans books are heavily skewed towards public- and private-
will be strong when market conditions improve given the bank’s sector corporates, with retail lending representing only 20% of total
healthy profitability and the expected strong appetite from foreign sector credit as a large portion of the population is unbanked.
investors.
Asset-Quality Deterioration Expected
Market Shares vs. Performance
(X Axis: Market Share of Total Assets (End-1H19)/Y Axis: Average Operating Egyptian banks’ asset quality is highly correlated with the operating
Profit/Average Total Assets(2016-2019)) environment and the sovereign given their substantial exposure to
(%) the sovereign through. The sector average S3 loans ratio remained
8
7 CAE stable at 3.4% at end-3Q20.
6
5 Bank of
QNB AA The CBE’s six-month credit extension, which expired in September
CIB
4 Alexandria 2020, and forbearance measures delayed deterioration in banks’
NBE
3 ENBD AAIB BM asset-quality metrics. We expect the sector average S3 loans ratio
2 Egypt BDC
1 to increase to about 4% but the key indicators of asset-quality
0 pressures would be the level of restructured exposures and the
0 5 10 15 20 25 30 expected migration of loans to S2 from S1.
(%)
Source: Fitch Ratings
The CBE’s recent initiative requiring banks to write off impaired
High Sovereign Concentration Risks loans for borrowers with credit facilities below EGP10 million and
Banks' Concentration to the Sovereign who partially settled their outstanding debt will clean banks’
balance sheets from legacy non-performing loans. However, this
End-2020a Government and public-sector loans/total loans (LHS) poses downside risk to borrowers’ credit behaviour and reduces
Goverment securities +CBE balances/total assets (LHS)
(%) (x) banks’ recovery rates. This could also increase banks’ cost of risk
Total government exposure/total equity (RHS)
90 10 (LICs/average gross loans), particularly for those with higher
8 exposure to the SMEs and retail segments.
60 6
30 4 Problem Loans (Stage 2 + Stage 3 Loans)/ Total Loans
2 End-2020a
0 0 (%) St age 2 loans rat io St age 3 loans rat io
CIB CAE QNB Al NBE BM BDC AAIB 40
Ahli 35
30
a NBE and BM data at end-June 2019, BDC data at end-3Q20 and AAIB at end-2019 25
20
Source: Fitch Ratings, Banks 15
10
Banks’ business models are highly concentrated to the sovereign as 5
banks park their excess liquidity in sovereign securities and short- 0
CIB CAE QNB Al Ahli BM BDC AAIB
term placements with the CBE due to the low banking penetration
rate and limited demand for loans from good credit quality a BDC dat a at end-3Q20 for BM dat a end June-2019, for AAIB dat a at end-2019
corporates. The limited availability of credit-worthy corporates Source: Fit ch Rat ings, Banks
also results in high loan book concentration by single obligor.
Egyptian banks are the primary buyers of sovereign LC debt. At
end-3Q20, investments in T-bills and bonds accounted for 40% of
total banking system assets and lending was only a third of total
assets. However, we expect the share of securities to decline as
Special Report │ 7 April 2021 fitchratings.com 6Banks
Universal Commercial Banks
Egypt
Coverage by Specific Provisions measures fade. We nonetheless expect profitability metrics to
End-2020a remain healthy.
Specific Stage 2 coverage Specific Stage 3 coverage
(%)
Profitability is highly dependent on yields on sovereign securities,
100
which represent about two-thirds of interest income. Accordingly,
80
profitability could be highly variable over different interest rate
60
cycles given banks’ undiversified business models and high reliance
40
on interest income. Non-interest income represents less than 20%
20
of operating income for most banks and came under pressure in
0
2020 with the CBE’s instructions to waive transactions fees and
CIB CAE QNB Al Ahli BM BDC AAIB
commissions. The cost base is well managed given the banks’
a BDC data at end-3Q20 for BM data end June-2019 and AAIB at end-2019
domestic focus, with an average cost/income ratio of about 30% for
Source: Fit ch Rat ings, Banks the sector.
Banks’ loan classification policies and ECL provisioning as a result of Net Interest Income/ Average Earning Assets
the pandemic varied significantly. Some banks, such as CIB, front- (%) FY-2017 FY-2018 FY-2019 FY-2020ᵃ
loaded their provisions and proactively classified some of their 8
performing exposures (particularly in the distressed tourism and 7
contracting sectors) as S2 despite the CBE’s forbearance measures. 6
This explains the significant variation in the portion of S2 loans 5
across banks, which ranges from less than 5% to more than 30% of 4
3
loan books. In our opinion, the higher portion of S2 loans for some 2
banks (CIB: 33%) is an indication of more conservative loan 1
classification policies rather than weaker underlying asset quality. 0
This also explains CIB’s higher cost of risk than peers due to its NBE BM CIB QNBA AAIB BDC CAE Weight ed
Average
conservative provisioning policies.
a End-3Q20 for AAIB and BDC
for Banks
Source: Fit ch Rat ings, Banks
Loan Impairment Charges/ Average Gross Loans Despite the interest rate cuts in 2020, banks maintained their
(%) FY-2017 FY-2018 FY-2019 FY-2020ᵃ healthy net interest margins (NIMs) in 9M20. This is because banks’
4
margins benefited from lower cost of funding while the yields on T-
3 bills fell less than policy rates. Banks with negative short-term
2
interest rate gaps, such as CIB, saw their funding reprice more
quickly than their assets, which boosted their margins. CIB’s above
1
sector average NIM is also supported by a large pool of low-cost
0 CASA deposits (60% of total deposits). Similarly, Credit Agricole
-1
Egypt’s (CAE) NIM benefits from a large portion of CASA deposits
NBE BM CIB QNBA AAIB BDC CAE Weight ed and high-margin retail lending representing a third of its loan book.
Average
for Banks
AAIB’s NIM (3.2% in 9M20) is one of the lowest among private
a End-3Q20 for AAIB and BDC banks due to its minimal retail lending and a higher portion of lower-
Source: Fitch Ratings, Banks
yielding FC assets (as a mean of deploying the bank’s US dollar
The sector average total reserve coverage was maintained at 96% equity). NBE’s and BM’s NIMs are lower than peers due to higher
at end-3Q20 and S3 loans are adequately covered by specific funding costs as these public-sector banks are regularly mandated
provisions for most banks. Some banks’ holding of adequate to issue high-yielding CDs.
collateral against their impaired exposures is also credit positive.
We expect banks’ NIMs to come under pressure in 2021 if yields on
However, the current operating environment poses downside risks
treasuries start to drop and banks increase loans as a proportion of
to collateral valuation. total assets. However, this will be subject to each bank’s pricing
Coverage of S2 loans by specific provisions across banks ranges power and funding structure. We also expect the NIM of public-
from 15% to 25%. QNBAA’s coverage of S2 loans (27% at end- sector banks to come under pressure in FY21 due to the issuance of
2020) is higher than the peer average due to its low portion of S2 15% yielding CDs in March 2020 as a means by the government to
loans (8% at end-2020). As we anticipate higher restructuring and discourage a wave of deposit dollarisation.
migration of loans from S1 to S2, we expect banks with low S2 loans
coverage to book additional LICs in 2021.
Profitability Will Come Under Pressure but Remain
Healthy
Egyptian banks have healthy profitability metrics underpinned by
high yields on T-bills and a favourable cost base. We expect
profitability metrics to stay under pressure in 2021 given the lower
interest rate environment and expected increase in LICs as support
Special Report │ 7 April 2021 fitchratings.com 7Banks
Universal Commercial Banks
Egypt
Loans and Securities Impairment Charges/ Pre-Impairment Banks’ capital ratios are comfortably above the minimum
Operating Profit regulatory requirement of 8.5% and 12.5%, respectively, for Tier 1
FY-2017 FY-2018 FY-2019 FY-2020ª and total capital adequacy ratios (CAR) including a 2.5% capital
50%
conservation buffer. However, capitalisation is a rating weakness
40%
30% for Egyptian banks in light of their significant exposure to the
20% sovereign and high loan book concentration by single obligor. The
10% sector average CET1 ratio was 12.8% at end-3Q20 while the
0%
leverage ratio was significantly lower at 7.4% as regulatory capital
-10%
-20% ratios benefit from 0% risk-weight on LC sovereign debt. RWAs
NBE BM CIB QNBA AAIB BDC CAE equal only 50%-60% of banks' total assets. Public-sector banks'
Weight ed leverage ratios trail lower than private-sector peers due to their
a End-3Q20 for AAIB and BDC Average
for Banks
weaker internal capital generation.
Source: Fit ch Rat ings, Banks
Capitalisation came under pressure in 2016 following the
Banks have heathy pre-impairment operating profits of about 12%
devaluation of the pound, which led to a sharp increase in FC RWAs.
of average gross loans, which provides a solid cushion against an
As a result, public sector banks received a 10-year interest-free
increase in LICs without hurting their capital. LICs absorbed up to a
term loan from the government (BM: EGP35 billion; NBE: EGP43
third of some banks’ pre-impairment operating profit in 2020 due
billion; BdC: EGP2 billion) to strengthen their capitalisation (Tier 1
to the front-loading of provisions by a few banks. We expect banks
capital benefits from the difference between the face value and the
that have not booked adequate collective provisions to see
present value of the loan, which qualifies as Tier 2 capital). In return,
profitability pressures in 2021 if asset-quality deterioration
banks bought 10-year T-bills equivalent to their respective loan
materialises. nominal values. In May 2020, BM received an additional EGP18
Operating Profit/ Risk-W eighted Assets billion 10-year subordinated debt to boost it capitalisation further.
FY-2017 FY-2018 FY-2019 FY-2020ª The 17.3% sector average Tier 1 capital ratio at end-3Q20 was
12%
450bp higher than the CET1 ratio.
10% Banks do not have access to capital markets and rely primarily on
8% internal capital generation or long-term borrowings from
6% multilateral development banks that qualify as Tier 2 capital. In
4% 2020 CIB raised a USD100 million 10-year subordinated loan from
2%
CDC Group (in addition to a USD200 million subordinated loans
0%
NBE BM CIB QNBA AAIB BDC CAE
from the European Bank for Reconstruction and Development and
the International Finance Corporation in 2017) to boost its FC
Weight ed
a End-3Q20 for BDC Average liquidity and capital ratios. The US dollar Tier 2 debt also acts as a
Source: Fit ch Rat ings, Banks
for Banks hedge to capital ratios against any adverse FX movements.
Accordingly, CIB’s CAR jumped to 31% at end-2020 from its
Egyptian banks’ operating return on average risk-weighted assets historical average of about 18% and is now well above peers.
(RWAs) is higher than regional peers but is inflated by 0% risk
weighting on government securities and government guaranteed Banks’ capital ratios can come under pressure if problem loans
lending. Despite CAE’s lower exposure to sovereign securities (23% generation exceeds internal capital generation, particularly for
of total assets at end-3Q20) than peers, its profitability ratios are weakly provisioned banks. We believe the CBE’s decision to restrict
above peers owing to its strong interest margins and above average banks from paying dividends for FY20 partially offsets pressures on
fee income generation, which represented 23% of operating income capital from potential asset-quality deterioration.
in 9M20. CAE’s operating returns to average RWAs came under
Capitalisation is also supported by unrealised gains on sovereign
pressure in 9M20 due to higher LICs. NBE’s and BM’s weaker
securities held at fair value through other comprehensive income,
profitability than peers is attributable to their weaker NIMs.
which poses downside risks to capital ratios in case of renewed
Capitalisation Is a Key Rating Weakness market volatility and downward pressure on securities pricing. A
devaluation of the pound to the US dollar would also inflate FC
Capital Ratios at End-2020a RWAs and put capital ratios under renewed pressure, although this
(%) Leverage Tier 1 Total CAR is not our base-case scenario.
35
30 Stable Funding and Healthy LC Liquidity
25
20 Egyptian banks have limited reliance on wholesale funding, with
15 customer deposits representing more than 80% of non-equity
10 funding. Banks’ deposit bases are far more granular than GCC
5
0 peers’ due to a high portion of retail deposits, which formed 83% of
NBE BM CIB QNB Al AAIB BDC CAE total deposits in the sector at end-3Q20 and have been stable
a End-2020 Ahli and BM data at end-June 2019, BDC
for CIB, QNB Al Ahli and CAE, NBE during periods of political and economic turmoil. NBE has the
data at end-3Q20 and AAIB data at end-2019 highest portion of retail deposits (77% at end-June 2019), which is
Source: Fitch Ratings, Banks supported by its strong domestic franchise; however, its cost of
Special Report │ 7 April 2021 fitchratings.com 8Banks
Universal Commercial Banks
Egypt
funding is inflated by the issuance of high-yielding CDs in 2018 and NBE’s FC loans/deposits ratio (112% at end-June 2019) is well
2020. above the sector average as NBE is a major financer to the
government and public-sector entities in FC. FC liquid assets
Loans/ Customer Deposits (comprising mainly interbank placements and FC treasuries)
(%) End-2017 End-2018 End-2019 End-2020ᵃ covered 40% of total FC liabilities at end-June 2019. However, we
90 believe liquidity buffers weakened significantly in 1H20 due to
portfolio outflows. In our opinion, NBE’s FC liquidity will remain
60 vulnerable to any renewed erosion in system-wide FC liquidity.
Customer deposits dollarisation declined to 15% at end-3Q20 from
30 close to 20% with the issuance of high LC CDs and a stable exchange
rate. Retail deposits represent about 70% of the sector FC deposits
and provide some stability to banks’ FC funding. After the large
0
NBE BM CIB QNBA AAIB BDC CAE Weight ed portfolio outflows, banks increased their offshore FC borrowings to
a End-3Q20 for AAIB and BDC
Average boost their FC liquidity. Foreign liabilities went up by 16%, which
for Banks
Source: Fit ch Rat ings, Banks could pose repayment risks if there was another wave of portfolio
outflows. However, reliance on foreign funding remains low (less
The sector average loans/deposits ratio was only 47% at end-3Q20 than 5% of total sector funding) compared with GCC peers. NFAs
but we expect this to increase as banks start growing their loan covered only 8% of FC deposits at end-3Q20, leaving banks with
books rather than subscribe for sovereign securities. QNBAA small buffers against FC deposit outflows. However, we believe
operates with a higher loans/deposits ratio (74% at end-2020) than NFAs will continue to increase gradually with the improvement in
peers as lending represents about 55% of its total assets against a FC liquidity, particularly after the USD3.8 billion Eurobond
sector average of 34% at end-3Q20; nevertheless, its liquidity issuance in February 2021.
remains adequate.
Egyptian banks are highly liquid in LC as they deploy 30%-40% of Customer Deposits Evolution by Currency
100 = January 2018
their total assets in LC sovereign securities. The sector average LC
liquidity coverage ratio and the net stable funding ratio were 998% Local currency Foreign currency Tot al cust omer deposit s
and 260%, respectively, at end-3Q20, comfortably above the 100% 200
regulatory requirements. 150
100
Banks' Foreign-Currency Liquidity 50
Foreign-currency liabilities/total liabilities
0
(%) Foreign-currency loans/customer deposits
Jul 18
Jul 19
Jul 20
Sep 18
Mar 18
Mar 19
Sep 19
Mar 20
Sep 20
Jan 21
Jan 18
Jan 19
Jan 20
May 18
May 19
May 20
Nov 18
Nov 19
Nov 20
150
100 Source: Fit ch Rat ings, Bloomberg, CBE
50
0
CIB QNB Al Ahli CAE NBE AAIB BDC
a Data at end-June 2019 for NBE, data at end-3Q20 for BDC and end-2019 for AAIB
Source: Fitch Ratings, Banks
The FC loans/deposits ratio was an adequate 70% at end-3Q20. FC
lending represents about a quarter of Egyptian banks’ total lending
but is concentrated in the industry, trade and services sectors,
which are particularly exposed to supply-chain disruption and
economic pressures. FC lending is usually against FC proceeds and
lower FC receipts could constrain FC borrowers’ debt service
capacity. This could lead to increased loan restructuring and
pressure on banks’ FC cash flows and liquidity.
Special Report │ 7 April 2021 fitchratings.com 9Banks
Universal Commercial Banks
Egypt
Fitch-Rated Egyptian Banks
Long-Term Short-Term Support Rating Viability Latest rating
Name Short name IDR/Outlook IDR Floor Rating Latest rating action report
National Bank of Egypt NBE B+/Stable B B+ b+ 16 September 2020 October 2020
(S.A.E.)
Banque Misr (S.A.E) BM B+/Stable B B+ b+ 3 December 2020 -
Commercial CIB B+/Negative B B b+ 16 September 2020 October 2020
International Bank
(Egypt) S.A. E
National Bank of Egypt NBEUK B+/Stable B - - 16 September 2020 October 2020
(UK) Limited
Source: Fitch Ratings
Special Report │ 7 April 2021 fitchratings.com 10Banks
Universal Commercial Banks
Egypt
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