Moody’s downgrades five Egyptian banks; further downgrade possible

Moody's Investors Service has downgraded the ratings of five Egyptian banks – National Bank of Egypt, Banque Misr, Banque du Caire, Commercial International Bank and Bank of Alexandria, which remain under review for possible further downgrade.
At the end of June 2010, National Bank of Egypt had posted total assets of EGP 298.6 bln (US$ 53.7 bln), Banque Misr reported total assets of EGP 178.9 bln (US$ 30.5 bln), and Banque du Caire had total assets of EGP 44.2 bln (US$ 7.6 bln). At the end of September 2010, Commercial International Bank (Egypt) reported total assets of EGP 71.2 bln (US$ 12.3 bln), while Bank of Alexandria had total assets of EGP 34.1 bln (US$ 5.9 bln) at the end of June 2010. All are headquartered in Cairo.
The lowering of the ratings was prompted by Moody's reassessment of the country's capacity to support its banking system, following the rating agency's decision on Monday to lower the sovereign rating of Egypt to Ba2 (negative outlook) from Ba1 (stable outlook).
This reassessment has a negative impact on the supported bank deposit ratings. The review for potential further downgrade reflects concerns that the current political and social unrest will negatively impact the economy and, ultimately, the financial health of the banks.
As a result of the sovereign downgrade and greater uncertainty in the country's capacity to orchestrate and finance systemic support for its banking system, Egypt's systemic support indicator (SSI) has been lowered to Ba1 from Baa2, which is one notch above the new government rating (Ba2)..
Egyptian banks' standalone bank financial strength ratings (BFSRs) and local currency (LC) deposit ratings have been placed under review for possible further downgrade to assess the potential impact of political and social instability on the banks' finances given the likely corresponding deterioration in the country's economic conditions.
Moody's said it is concerned that, if not resolved quickly, the current period of political uncertainty could negatively impact foreign direct investment flows into the country and disrupt economic activity, thereby weakening the performance of the main economic sectors such as tourism, exports, textiles and real estate/construction.
Moody's noted that the performance of the banks' credit portfolios, which are essentially domestic and concentrated, would likely deteriorate in a weakening macroeconomic environment. Moreover, asset quality deterioration would force banks to raise loan loss provisioning, thereby further weighing on their economic capital position and damaging their profitability.
Moody's review will also assess the possible impact of changes in the political landscape on the business franchise of banks with significant government-related lending, as well as any possible deposit flows outside the banking system.