Monday 20, November 2017 by Matthew AmlĂ´t

CI: Export Development Bank of Egypt’s ratings affirmed

Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed Export Development Bank of Egypt’s (EBE) Long- and Short-Term Foreign Currency Ratings (FCRs) both at ‘B’, with a ‘Stable’ Outlook.

CI Ratings had recently upgraded the Bank’s Long-Term FCR to ‘B’ from ‘B-’ in line with the increase in Egypt’s Sovereign Long-Term FCR to ‘B’. The Bank’s FCRs, which are set at the same level as the ratings assigned to the sovereign (‘B’/‘B’/‘Stable’), denote significant credit risk, as EBE’s capacity for timely fulfillment of financial obligations is very vulnerable to adverse changes in internal or external circumstances. All Egyptian banks’ FCRs remain highly correlated with the sovereign’s creditworthiness. EBE’s Support Rating is affirmed at ‘3’, reflecting CI’s continuing assessment of a high likelihood of shareholder support. In case of need, official liquidity support would also be available from the Central Bank of Egypt (CBE).

At the same time, the Bank’s Financial Strength Rating (FSR) is affirmed at ‘BB-’, with a ‘Stable’ Outlook. The rating reflects EBE’s satisfactory loan asset quality, comfortable liquidity (subject to systemic risk) and growing customer deposit base, and good profitability at all levels. The forthcoming capital injection along with past demonstrated capital support from largely state-owned institutional shareholders is also a supporting factor. The FSR is constrained by high sovereign and political risks, a challenging operating environment and elevated credit risk in the economy, ongoing customer concentrations in both loans and deposits, as well as a declining capital adequacy ratio (CAR) and a low free capital to total capital ratio.

Egypt succeeded in meeting the IMF’s preconditions to qualify for much needed financial assistance to support economic reforms and ease pressure on foreign exchange reserves and foreign currency liquidity in the local market. Indeed, the flotation of the Egyptian Pound (EGP) in November 2016 has increased foreign currency inflows into the Egyptian banking system and alleviated acute foreign currency shortage. It has also ended the parallel market and improved official foreign exchange reserves. That said, CI considers implementation risk of many of the planned reforms to be high given their depth and socially-sensitive nature.

Although the EGP devaluation itself has so far had a minor impact on EBE’s risk profile, the credit risk of corporate borrowers reliant on imported materials and equipment could rise as they face higher import costs and this, in turn, may push up the Bank’s non-performing loans (NPLs). EBE would be particularly affected if economic conditions deteriorate given its high borrower concentration. So far, the noted increase in NPLs seen in FY17 mainly related to the translation of foreign currency (mostly $) denominated impaired credits, and to a lesser extent newly classified accounts. This pattern was seen across most Egyptian banks subsequent to the EGP flotation and devaluation. More positively, EBE maintained more than full loan-loss reserve cover for NPLs.

Having broadened its scope of activities over the years to include commercial and retail banking services, EBE has moved beyond exclusively being Egypt’s export finance bank. In tandem, the Bank has strengthened its funding mix and customer deposit base, supported by an expanding branch network. Customer deposits are the principal source of funding, with the share of cheap current accounts increasing further. Notwithstanding the recent marginal decline in the liquid asset ratio, EBE’s liquidity has steadily improved over the last few years as a result of these initiatives – with the bulk of surplus funds invested in local government securities and CBE balances.

The Bank’s securities investments are, however, concentrated in government bonds and T-bills – a phenomenon seen at other Egyptian banks. Given Egypt’s still fragile external liquidity position, the liquidity of local banks remains vulnerable to systemic risks in the event of an adverse sovereign and political event. This is particularly the case with respect to foreign currency liquidity.

EBE’s CAR declined again mainly as a result of a considerable increase in total risk weighted assets. The latter reflected the significantly inflated EGP value of foreign currency loans and contingent accounts relative to the growth of regulatory capital. On a positive note, management informs CI that the forthcoming capital injection in December by way of a rights issue is expected to restore CAR to a satisfactory level. Although EBE’s ratio of total capital to total assets was generally better than the sector weighted average, free capital represented about one-half of total capital, reflecting the significant amount of capital invested in the equity of subsidiaries and affiliates.

Profitability at both the operating and net levels improved, lifted by significantly higher net interest income. EBE has consistently been profitable thanks to good gross income generation and sound net interest margin. The ongoing expansion of cheap demand accounts bodes well for the Bank’s funding cost. Operating profitability, which also reflects effective cost control, bestows ample risk absorption capacity and underpinned a strong increase in net profit in FY17. Although there remains an element of volatility in non-interest income (NII), this is largely related to investments. Fee and commission income, however, registered a strong increase and continued to dominate NII.

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