Egypt’s banking sector, which was impacted by the instability of the past few years, is beginning to see increased momentum, with the formal launch of an Emirati-owned bank and modest upgrades in credit ratings for a pair of key players.
Fundamentals
Dubai’s biggest bank, Emirates NBD, formally launched its brand and new headquarters in Egypt in April, 10 months after completing the purchase of the Egyptian assets of French lender BNP Paribas for $500m.
The investment by Emirates NBD reflects the bank’s desire to diversify its activities to reduce its dependence on the crowded UAE market as well as to take advantage of the long-term potential that it sees in the Egyptian banking sector.
The acquisition of BNP Paribas’ assets came shortly after Qatar National Bank snapped up National Société Générale Bank (NSGB) from French banking group Société Générale with the deal finalized in early-2013.
The moves came at a time when the broader economy was grappling with slow growth and policy uncertainty, but were not surprising given the country’s sound fundamentals. A large and growing population and reasonably diversified economy, combined with low levels of financial intermediation and a banking penetration rate estimated at just 10%, suggesting significant room for growth.
Ratings revised
However, even as the sector’s long-term opportunities remain attractive, there has been a noticeable improvement in the banking industry’s short-term outlook as well, in large part thanks to a more stable sovereign balance sheet.
In January, ratings agency Fitch opted to change Egypt’s sovereign outlook from negative to stable. This was the first upgrade since the 2011 revolution, and was based in part on the $15bn in aid committed by Egypt’s Gulf Cooperation Council (GCC) neighbors, as well as a slowdown in political uncertainty.
The aid from Kuwait, Saudi Arabia and the UAE served to bolster Egypt’s foreign currency reserves, which had fallen dangerously after the revolution. Another factor was GDP growth, which Fitch expects to increase to 3.2% in Egypt’s 2013/14 fiscal year (ending June) and 3.8% in 2014/15, from 2.1% in 2012/13.
That same month, Fitch revised its outlook for CIB and National Bank of Egypt (NBE), the country’s largest bank by assets, which is fully state-owned, from negative to stable. The agency also affirmed its long-term foreign currency issuer default ratings (IDR) at B-.
The soundness of government finances is important due to the banking sector’s exposure to government securities, which ran at 5.7 times shareholder equity in September 2013, according to ratings agency Moody’s. As foreign investors have shied away from Egyptian debt, much has been piled onto Egyptian banks.
Fitch’s move came after Standard & Poor’s upgraded its long-term credit rating on NBE, CIB and Banque Misr to B- from CCC+ in November. Again, the change reflected the strengthening of the Egyptian sovereign.
The upgrades are welcome news for the banking industry and seem to indicate a shift in the financial sector’s short-term outlook, although there are still challenges. Aid from the GCC has helped stave off immediate fiscal disaster in Egypt, but there are structural issues that the government – under newly-elected President Abdel Fattah el-Sisi – will need to tackle.
In addition to the need for higher rates of growth and job creation, the public sector will also need to rein in spending, particularly in terms of the unwieldy subsidy regime. Banks’ vulnerability to another worsening in public finances is a considerable risk, given the budget deficit, which even the government expects to reach 14-14.5% of GDP in the 2014/15 financial year.
The concerns led Moody’s in February to keep Egypt’s broader banking sector on a negative outlook due to exposure to the government. Even after the May presidential elections, Fitch reported it would not change its rating as it expects the government will continue to “be cautious in addressing the large fiscal deficit”.
As is the case with many things in Egypt, 2014 seems to have heralded a gradual improvement in the short- and medium-term outlooks for a number of sectors, but the country is not yet out of the woods.
Oxford Business Group
22 June
