Capital Intelligence lowers foreign currency ratings of 10 Egyptian banks

31 October 2003

Following its downgrade of Egypt’s foreign currency ratings in October, Nicosia-based rating agency Capital Intelligence has lowered the long and short-term foreign currency ratings of 10 local banks, citing ‘growing public indebtedness and continuing concern as to whether the pace and depth of structural reforms will be sufficient to reverse the erosion of sovereign creditworthiness’ (MEED 3:10:03).

The performance of local banks continues to be sporadic, with increases in provisioning for non-performing loans affecting the balance sheets of many of the largest banks. The problem is not confined to the public sector. Commercial International Bank (CIB), Egypt’s largest private bank, has reported a 5.5 per cent year-on-year increase in net profits to £E 228.9 million ($37.2 million) for the nine months ending 30 September. Despite the modest rise in income, the bank’s performance was poorer than expected due to a 14 per cent increase in loan provisions to £E 274.5 million ($44.6 million).

Nearly 10 months after the Egyptian pound was floated in January, problems with the operation of the floating exchange rate system continue. Since August, the official rate offered by commercial banks has held steady at about $1=£E 6.15, but black market rates have dipped below $1=£E 7, indicating the exchange rate mechanism is failing to respond properly to market forces. Local bankers claim the government has pressured banks not to let the official rate slide, but Central Bank of Egypt governor Mahmoud Abul Eyoun in return says banks have withheld foreign currency from the market by using dollars from customer transactions to restructure their balance sheets.

The central bank is expected to issue before the end of the year guidelines for the creation of an interbank dollar market, which would oblige banks to sell dollars at the rates they quote. As part of the ongoing reform of the banking sector, the central bank is also preparing the sale of government stakes in a number of banks.

It is not yet known whether this list will include Egyptian American Bank (EAB), which in mid-October requested London-based rating agency Fitchto withdraw its ratings for the bank. Moody’s Investors Service on 14 October changed the D+ financial strength rating outlook for the bank to stable from negative. ‘EAB has strengthened its loan-loss provision reserves and refocused on its strategic plans, following a period of uncertainty during the unsuccessful attempt to find a strategic partner,’ explained the agency. In the last two years, a number of international banks have expressed an interest in acquiring a stake in the bank, which is 40 per cent owned by American Express Bank and 32 per cent by state-owned Bank of Alexandria.

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