The outlook for
“Considerable progress is being made, with a number of the issues that have been problematic in past years currently being addressed,†said Constantinos Kypreos a Moody’s AVP/Analyst and author of the new report.
This is gradually leading to an overall strengthening of the banking sector. As part of the Central Bank of
— Banking sector consolidation has intensified, with the number of banks operating in the country down to 41 (September 2004: 57). State-owned banks have been selling their stakes in joint-venture banks (as well as other equity holdings) and in the process realising significant capital gains, which are used to build provision reserves, while weak and inadequately capitalised banks/branches of foreign banks have either merged with other banks or ceased operations.
— The financial and operational restructuring of the state-owned banks has allowed for experienced bankers from the private sector to be recruited; early retirement schemes have been introduced to reduce employee numbers, while the restructuring by outside consultants of the IT, human resources, and risk management functions is progressing well.
— A final agreement was reached with the Ministry of Investment relating to state-owned banks’ non-performing loan (NPL) exposures to public sector enterprises. On top of the EGP 6.9 bln already paid to Bank of Alexandria (BoA), EGP 19 bln will be allocated to the remaining state-owned banks; approximately half this amount has already been paid, in January 2007.
With regard to private sector NPLs, new legislation, procedures as well as a special unit within both the CBE and the banks were introduced, which has allowed for more than 50% of these NPLs to be rescheduled or settled. The government is also committed to recapitalising the state-owned banks from the proceeds of a policy loan from the World Bank and African Development Bank.
CBE’s banking supervision capabilities are being upgraded, although ongoing development of the regulatory and supervisory framework is required.
“With the above in mind, but also in light of an improving operating environment, we see limited downside risk to the bank financial strength ratings (BFSR) of the rated Egyptian banks,†said Kypreos. “However, any potential upgrades would be more of a medium-term proposition, as we believe it will take time for the (state-owned) banks to resolve their financial issues, address their bureaucratic habits and capitalise on the longer term potential offered by the underdeveloped retail and SME sectors,†the analyst adds.
Moody’s also expects the differentiation in ratings between private and state-owned banks to remain, as the leading private sector banks benefit from stronger management teams, better operating systems, better asset quality and higher levels of capital and earnings.
Egyptian banks’ global local currency deposit ratings are supported by their Baseline Credit Assessment, as well as by the rating of their underlying support provider, Egypt’s A3 local-currency deposit ceiling.
On average, the rated Egyptian banks receive a 3.4-notch uplift from their Baseline Credit Assessment (state-owned banks: four notches), based on strong imputed systemic support. Moody’s views
