Egypt government capital for public banks welcome but more needed
Fitch Ratings views the recent injection of new capital by the Egyptian government into six public sector banks as a positive move, but still views the banking system as under capitalized.
To meet the tightening regulatory capital requirements set by the Central Bank of Egypt (CBE), the Egyptian government has injected new capital into six public sector banks. The CBE raised the minimum capital adequacy requirement to 10 percent from eight percent at the end of March.
Accordingly the Ministry of Finance increased the capital of the six public sector banks by four billion Egyptian pounds ($693 million) to meet these new requirements. This was the first capital increase for these banks since 1985 and was financed by a 10-year government bond issue in which the banks were required to subscribe.
Fitch views this as a positive move at a time when the banking system is under considerable pressure given the economic climate within Egypt and the problems faced by the banks. However, the agency believes the banking system remains under capitalized and that the new capital is insufficient to deal with the inherent problems within the system, let alone future growth.
As a consequence, Fitch expects that further resources will be needed in the future. While most publicly and privately owned Egyptian banks now meet the 10 percent minimum requirement, with the exception of a few very small banks, Fitch believes many of these remain under capitalized by international standards.
As referred to in its recently released comment on the Egyptian Banking Sector, the agency believes that banks should be targeting to maintain a buffer between the regulatory minimum capital and their own internal capital positions.
In Fitch's opinion the asset quality position within many banks is generally understated. If a more conservative approach were taken regarding asset quality and loan loss reserve coverage levels improved, then the bank's capital adequacy positions, particularly those in the public sector, would fall below the minimum regulatory requirement.
Given the challenges faced by banks in Egypt within a difficult operating environment, the existence of unrecognized and unreserved problem loans, pressured profitability and concentrations risks, Fitch is of the opinion that Egyptian banks need capital ratios meaningfully above the minimum standards to absorb these risks.
Another area of concern is the low level of internal capital generation within banks. With profitability under pressure, the action of many shareholders and boards of directors should be questioned.
Given the present difficult conditions, questions should be asked regarding the level of prudence shown by those banks continuing to pay out very high levels of dividends at a time when they are in need of higher retaining earnings to strengthen capital. It is understood that the authorities have had to restrict the payment of dividends from some banks. — (menareport.com)
© 2003 Mena Report (www.menareport.com)