Moody's : Egyptian banks benefit from reforms, but operating environment remains challenging
Considerable success in implementing reforms has resulted in a more resilient Egyptian banking system that is better positioned to withstand pressures, says Moody's Investors Service in its latest 'Banking System Outlook' report for Egypt. Strong economic growth is also having a beneficial impact on banks' loan growth and business generation. These strengths are, however, counterbalanced by a challenging operating environment and the potential risks from the global economic slowdown, which has had a limited impact on Egyptian banks to date.
Moody's credit outlook for the Egyptian banking system is stable, albeit with risks on the downside. This outlook expresses the rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.
In addition to the Banking System Outlook, which focuses on performance measures and forward-looking rating drivers for the Egyptian banking system, Moody's has also published a 'Banking System Profile' report for Egypt. The Profile forms part of a new series of reports on banking systems throughout the world, which are designed to complement Moody's Banking System Outlook reports by serving as descriptive reference guides to key structural factors that are reflected in Moody's bank credit ratings.
"Significant progress has been achieved on the banking sector reform programme being implemented by the Central Bank of Egypt (CBE) -- including sector consolidation, upgrading the CBE's supervisory and monitoring capabilities, the financial and managerial restructuring of the state-owned banks, and addressing the problem of their high non-performing loans," says Constantinos Kypreos, a Moody's Vice-President/Senior Analyst and author of the reports.
However, in Moody's view, the operating environment for Egyptian banks remains challenging, characterised by low per-capita GDP, high unemployment and soaring consumer price inflation. In addition, although the global financial crisis and economic slowdown has had a limited impact on the Egyptian economy so far, if this changes, it could pose challenges for the country's banks. Such a scenario could, in particular, delay the completion of certain aspects of the banking sector reform programme, including the repayment of all public sector non-performing loans and the recapitalisation of the state-owned banks with core (Tier 1) capital. The CBE also needs to lengthen its track record of successful enforcement of the relatively new regulations, as well as implement additional regulations -- and specifically Basel II.
The Egyptian banking system continues to be dominated by the large state-owned banks. "The Moody's-rated state-owned banks have high market shares and solid funding franchises, but still generally display weak financial fundamentals, primarily because of the high non-performing loans. Implementation of their financial and operational restructuring is improving financials, risk management, processes and systems, but the shedding of their bureaucratic habits will take some time," adds Mr Kypreos.
The leading private-sector banks are smaller in size, but still have good franchises with good management and better systems/procedures than the state-owned banks; these factors translate into stronger financial fundamentals, although excessive loan concentrations are a key weakness for most rated banks.
Moody's views the Egyptian banking system as enjoying a high-support environment, with the country's authorities having historically demonstrated both their willingness and their ability to intervene and prevent a banking default by any of the Egyptian banks, irrespective of their size or relative importance to the system.