Global Investment House: Egypt banking sector solid amid global crisis
The Egyptian banking sector proved to be standing on solid ground amid the financial crisis that hit international markets in late 2008. The sector in Egypt is characterized by abundant liquidity, as a result of the accelerated projects by various investors in booming business sectors over the last three years.
Over the 5-year period from 2002/03 to 2007/08, domestic liquidity (M2) grew at a CAGR of 14.8%, while narrow Money Supply (M1) rose by 29.9%, and Quasi Money moved up by 12.2%. As of November 2008, M2 reached LE784.8bn, representing an 11.4% incline, compared to the same period in the previous year.
Excess domestic liquidity enhanced assets and liabilities, where total liabilities grew at a CAGR of 13.4% over the 5-year period starting from 2002/03 and representing a Y-o-Y increase of 15.5%, compared to 2006/07. In addition, total liabilities November 2008, compared to November 2007, increased by 3.2%. This minimal change was principally a result of the decline of obligations to banks in Egypt.
Total deposits, constituting 69.0% of total liabilities in 2007/08, rose by 15.0% y-o-y. The household sector captures the lion’s share in terms of non-government deposits, as it constituted 73.4% of deposits denominated in local currency and 54.8% of deposits in foreign currency.
The increased sources of funds resulted in an acceleration of the aggregate assets of the banking system. Loans and discount balances moved up by 13.5% in 2007/08. On the other hand, total assets rose slightly by 3.2% in November 2008, compared to the same period in the previous year, as a result of the 44.0% reduction in balances with banks abroad, fearing of the implications of the global financial turmoil.
It is worthy to note that 29.0% of non-government loans in local currency went to the industrial sector in November 2008. The household and external sector followed, with 28.4% of the total balance. As for non-government loans denominated in foreign currency, the industrial sector contributed to 39.5% in November 2008, while the services sector came second, with a share of 30.4%.
Over the period from 2002/03 to 2007/08, total deposits grew at a rate higher than that of total loans and discount balances. This resulted in a decline of the loans/deposits ratio over the same period from 70.6% to 53.7%. This indicates that banks avoid extending great proportions of their funds in lending activities, fearing of the risk of default. In addition, having to abide by the minimum required liquidity ratio- as banks have to keep a minimum of 20% in liquid assets denominated in local currency and 25% in foreign currency- they are more inclined to treasury bills investments, as they are less risky and were previously tax exempted. Securities and investments in Treasury bills grew at a CAGR of 12.6% over the period from 2002/03 to 2007/08. It is worth mentioning that tax exemption on treasury bills and bonds was cancelled on May 2008.
Over the year 2007/08, interest rate spread witnessed a slight decrease, due to the decline in lending rate, which was not compensated by an appropriate reduction in the cost of funds. In October 2008, the cost of funds increased at higher rate than that of the lending rate of the previous year, which resulted also in a reduction of the spread. (Global Investment House - Egypt - Egypt Economic & Strategic Outlook – February 2009)