Moody's Investors Service says the outlook for the Egyptian banking sector is stable, reflecting the system's relative isolation from and resilience to the global crisis and the considerable progress of the banking sector reforms. However, downside risks remain, as the potential intensification of the economic slowdown and its impact on the banking sector is a major risk to our stable outlook.
Moody's stable outlook for the Egyptian banking system 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.
"The stable outlook for the direction of credit conditions in the Egyptian banking system reflects the considerable progress achieved in the Central Bank of Egypt (CBE) reform programme, which has led to sector consolidation. This reform has also helped banks address the issue of the high level of legacy non-performing loans (NPLs) and the ongoing financial and managerial restructuring of state-owned banks," says Constantinos Kypreos, a Moody's Vice President-Senior Analyst, and author of the report. The CBE's reform programme has now entered its second phase, and is aiming to enhance access to finance, implement Basel II, enforce implementation of corporate governance rules in the banking sector, and set profitability and efficiency benchmarks for the state-owned banks.
Given the Egyptian economy's indirect exposure to the global financial crisis and recession, the June 2009 real GDP growth is estimated to have slowed to approximately 3-4%, and even lower levels are projected for 2010. However, Moody's notes that, whilst Egyptian banks have been facing a challenging operating environment, the banking system has largely escaped the impact of the global financial crisis and is coping relatively well.
"The rating agency cites the main reasons for Egyptian banks' resilience as (i) the unsophisticated nature of the banks' product offering; (ii) the banks' strengthening balance sheets aided by the reforms; (iii) their minimal dependence on market funding; (iv) ample liquidity and conservative investment policies; (v) moderate credit growth; and (vi) strengthening bank supervision," adds Mr Kypreos.
Challenges faced by the Egyptian banking sector include the high lending concentrations, mismatches in the maturity profile of assets and liabilities, and the still weak financial fundamentals of state-owned banks. Moody's therefore believes that downside risks remain as regards the stable outlook.
The rating agency also observes that rated Egyptian banks comprise state-owned and privately owned banks, with the three state-owned commercial banks accounting for approximately 43% of the sector's total assets. These state-owned entities -- National Bank of Egypt, Banque Misr and Banque du Caire -- have high market shares and solid funding franchises, but still display generally weak financial fundamentals. This is primarily because of their historically high NPLs, low profitability and still low core capitalisation.
Whilst Moody's acknowledges that the implementation of financial and operational restructuring is improving financials, risk management, processes and systems of Egypt's rated state-owned banks, the rating agency cautions that it will take time to eradicate banking system bureaucracy. Nonetheless, the leading private sector banks, which are smaller in size, still have good franchises with good management and better systems/procedures than the state-owned banks; these factors translate into stronger financial fundamentals. Based on the above, Moody's expects to witness continued differentiation in ratings between private and state-owned banks.
