The 76 per cent rise in profits at National Bank of Egypt (NBE) in 2009 is confirmation the country’s financial sector continues to reap the benefits of a resilient economy that barely felt the sting of the global financial crisis and has continued to record solid rates of growth.

The combination of a strong home market and a sustained drive to improve internal systems and risk management has allowed NBE to both expand and strengthen its balance sheet.

We expect to see loan growth of 15-20 per cent this year and deposit growth of about 15 per cent

Radwa el-Swaify, Beltone Financial

NBE is not alone in this. Other state-owned players have also grown stronger, although they still have some way to go before they can match the dynamism of the private and foreign-owned institutions, which cater mainly for Egypt’s fast-growing urban middle class.

Private sector banks have demonstrated the greatest vigour in developing new market opportunities

Banks such as Commercial International Bank (CIB), HSBC, National Societe Generale Bank (NSGB), Bank of Alexandria (owned by Italy’s Intesa SanPaolo), Credit Agricole Egypt and the Kuwaiti-owned Al-Watany remain the real pace-setters in terms of service innovation.

Bullish outlook

“We expect to see loan growth of 15-20 per cent this year and deposit growth of about 15 per cent in the private sector banks,” says Radwa el-Swaify, head of the financial institutions research team at Beltone Financial in Cairo. “Growth in deposits is coming from retail activity, while the majority of the lending is corporate.”

Given this bullish sentiment, last December’s downgrade of ratings by the US’ Moody’s Investors Services on several major Egyptian banks might seem odd. However, the explanation is a technical one that does not actually relate to the strength of the banks themselves.

Carrying out a worldwide review of the indicators for systemic support for banking systems, Moody’s changed the way it assessed the capacity of central banks to support local institutions. In the case of Egypt, this meant taking account of the fact that the country’s foreign exchange earnings from tourism, Suez canal receipts, remittances and inward investment had fallen amid the global economic downturn.

Global local currency deposit ratings for NBE, Banque du Caire and CIB were downgraded to reflect this revised capacity for potential central bank support. But after the adjustment, ratings for all the affected banks were left with a ‘stable’ outlook. Moreover, Moody’s takes a broadly positive view of the sector as a whole.

“The outlook for the Egyptian banking system is stable, reflecting its resilience to the global crisis and considerable progress made on the banking sector reform programme,” the agency says. It points to the progress that has been made in strengthening bank balance sheets through steps such as higher capitalisation and a narrowing of provisioning gaps. Supervision has been tightened, while, at the state banks, management and financial systems have been restructured.

Meanwhile, the level of non-performing loans (NPLs) has been reduced. Beltone’s El-Swaify says that exact figures are hard to calculate – because of differences in procedure at the various institutions – but in broad terms the NPL ratio has fallen from around 25 per cent in 2004 to 15 per cent or less today.

Risk factors

However, Moody’s says that there are still some risks to the sector. The Egyptian economy has seen its growth squeezed, to some extent, by the global crisis and the operating environment presents considerable challenges, both in economic terms and in more specific banking factors. Egypt has low average per capita gross domestic product (GDP), high unemployment and there is increased pressure on government finances.

The agency points to high lending concentrations, mismatches between the maturity profiles of assets and liabilities and the fact that, despite some improvement, the fundamentals of the state-owned banks remain weak. These publicly-owned institutions account for about 43 per cent of the total assets of the banking sector.

The Central Bank of Egypt has embarked on the second phase of its reform programme for the industry, which aims to enhance access to finance, implement the Basel II prudential framework and improve the enforcement of corporate governance rules. State banks are also being set benchmarks for profitability and efficiency.

Nonetheless, the strong results from NBE are an encouraging sign, given the major role this institution plays in the Egyptian economy, accounting for 23.7 per cent of assets and 27 per cent of deposits in the entire banking system, as of June 2009. It also has about 40 per cent of the market for credit and debit cards, and by the middle of 2009 had built up a portfolio of equity stakes in more than 200 projects, across a range of sectors. NBE reported a net profit of £E1.13bn ($198m) for the first half of the fiscal year 2009/10, some £E438m higher than the year earlier period. Return on equity doubled to 22.1 per cent, while net interest income rose by £E856m, to reach £E2.2bn. Operating income grew at a similar rate, reaching £E3.4bn. The bank’s total assets were also up, but by a smaller 5 per cent. The rise in fees and commission revenues – particularly important because fees are a source of revenue that does not necessarily entail extra risk exposure – grew by 13 per cent.

Strong performance

Overall, Egypt’s leading bank is continuing to achieve strong business growth. But the improvement of its risk position is a slower process. NBE continues to play an important role in supporting government economic strategy. The bank provides finance to the state by purchasing bonds and treasury bills. It helps to maintain a stable foreign exchange market by pooling funds to meet the needs of its customers – many of which are large state companies – and it has created a range of mutual funds that are seen as both providing a service to clients and actively supporting the development of the capital market.

Another public sector bank that enjoyed a clear improvement in its financial position is Banque du Caire. Despite being selected for privatisation, the bank has been kept under state control after failing to attract sufficiently high bids from potential investors, but in preparation for the sale, its balance sheet was cleaned up.

When a new management team was installed after the privatisation had been abandoned, they inherited a cash-rich institution with a much improved capital base and asset book. In December 2009, Moody’s revised the outlook for the bank from ‘stable’ to ‘positive’. While the improvement in the health of state banks has been significant, it is the private sector institutions that have demonstrated the greatest vigour in developing new market opportunities and raising service standards.

CIB boosted its post-tax profits to £E1.71bn in 2009, a rise of 25.2 per cent on the previous year. Even on a consolidated basis, excluding exceptional factors, profits rose by 10 per cent. The growth in lending was small at 3.93 per cent. But CIB’s real strength is highlighted by the low level of non-performing loans, at just 2.9 per cent of total loans. And the bank has managed to keep a lid on costs, adding only a few branches to its network – which at 155 outlets is already the biggest in the private sector – while expanding its market coverage through automated teller machines.

NSGB reported a similar performance for 2009, albeit on a smaller scale, with total assets up 15 per cent. The loan book grew by 5.4 per cent, deposits were up 19 per cent, net banking income rose 11 per cent and the non-performing loan ratio was trimmed to 4.8 per cent. Commission income fell by a tenth, as the bank felt the impact of the slowdown in trade and investment activity. But this was offset by a 12 per cent rise in revenues from service commission payments. The overall result was a 4 per cent rise in the bank’s total net income to £E1.18bn

The last major foreign investor to move into the Egyptian banking sector was National Bank of Kuwait, which secured a controlling stake in Al-Watany Bank in 2007 for $522m. The lender too has been performing well; it notched up net earnings of £E118.7m for the first three months of this year, some 14 per cent up on January-March 2009.

The key driver for the strong performance at private sector banks is retail business, growing from an admittedly small base by 30-40 per cent a year, according to El-Swaify. This is a reflection of recent changes in both business practices and Egyptian society.

Domestic demand

“Traditionally, in Egyptian society, there was an aversion to debt. Also, banks were not doing a good job marketing their products,” El-Swaify says. “Now there is a rise in awareness and access to credit. People feel that access to credit will provide them with a better standard of living. The banks are also making a much better marketing pitch to personal customers, and small and medium enterprises. They are expanding their branch networks and offering diversified products – although the biggest growth is actually coming from traditional products such as auto loans.”

Banks have also improved their systems for managing consumer lending risk, importing foreign technology and experienced personnel.

The larger suburbs of Greater Cairo and Alexandria are fuelling this demand growth, with private sector banks focusing their retail business on the upper middle class.

But this narrow social segment still encompasses a fairly broad range of incomes and borrowing power in Egypt, according to Beltone, including all households with monthly incomes above £E2,000.

With a total population of 84 million, the opportunity for further growth is immense, and it is this potential demand that makes the outlook for Egypt’s banking sector so attractive.