Banking: Cautious, reliable and risk averse

Egyptians refer to those who are careful with their spending as people who “keep their money under the tile”. In recent years, Egypt’s banks seem to be developing a resemblance to those cautious people, after a series of bad loan scandals provoked an overhaul of the system, bringing in better regulation and more prudent management.

Regulatory reform, privatisation, and increased competition from foreign banks have driven a consolidation of the sector with the number of lenders declining from 57 to 39. In addition, since 2004, the central bank has covered 86 per cent of non-performing loans.

Cautious policies and an absence of complicated financial instruments have shielded banks from global financial crisis. “Our banking system was not plugged into the international system, so we didn’t see all of the mess that came out in banking abroad,” says Youssef Boutros Ghali, the finance minister.

“All this about toxic assets, lack of supervision, unsupervised derivatives and credit defaults is completely alien here. We barely have a forward market in foreign currency.”

The result is banks remain cash-rich with loan-to-deposit ratios at 60 per cent, down from 100 per cent in the late 1990s.

“The crisis hit while our banking sector is intact and solid, which is one of the main reasons this economy has not been affected as severely as others,’’ says Hassan Abdalla, vice-chairman and managing director of Arab African International Bank.

“In our case, the financial crisis affected our real economy, but the liquidity of our financial sector enabled us to help. We didn’t stop extending credit.”

Even so, there has been little growth in credit in the first 10 months of 2009, reinforcing an impression that the banks have become increasingly risk averse, preferring to focus their lending on the government and on local blue chips.

Critics note that small and medium-sized enterprises, which account for roughly 70 per cent of the country’s gross domestic product and more than 50 per cent of employment, have difficulty obtaining credit. A few weeks ago, the central bank announced measures to encourage lenders to extend credit to SMEs by waiving a 14 per cent provisioning requirement

“Small and medium-size companies are the riskiest sector, they are not rated by agencies,” says Elena Sanchez, banking analyst at EFG-Hermes, the regional investment bank.

“In Egypt, most small enterprises have no audited financial statements, so banks take more time to evaluate them.”

Both AAIB and Commercial International Bank, say they have taken steps to market themselves to smaller companies. CIB established a “mid cap” group with special credit analysts. AAIB is launching a E£500m ($91m) fund to invest in small companies in December and another for medium-sized business in January.

As a result of the global crisis, corporate appetite for borrowing has eased this year. “The crisis has instilled an element of fear of borrowing in the market which has begun to subside in the last few months,” says Hisham Ezz Al Arab, chairman and managing director of CIB. “[But] we have started witnessing a recovery in the market and companies and people are starting to regain their faith in the resilience of the economy.”

CIB reckons that private credit contracted by 3.5 per cent in the first eight months of the year.

Ms Sanches says that return on equity for big banks such as CIB, National Societe Generale Bank and Credit Agricole has been an average 25 per cent in the first nine months of 2009, compared with 30 per cent in 2008.

EFG-Hermes said in October that profits should not be significantly impaired by non-performing loans next year. EFG expects the banks will make an average 25 per cent return on equity in 2010.

With a population of 80m and a growing middle class, banks also see significant potential for growth in retail banking. There are about 8m bank accounts in Egypt, but this is still a cash society and many Egyptians prefer to keep their savings in gold and property.

Banks have only recently expanded into personal loans, credit cards and car loans. Still, interest rates of 20 per cent on credit cards put borrowing beyond the reach of smaller companies and individuals.

“The banks here have liquidity to lend and potential for asset growth,” says Angus Blair, head of research at Beltone Financial, the regional investment bank. “Consumer loans to GDP is only 9.1 per cent.”

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Bourse bounces back from buffeting

As with most of the markets in the region, the Egyptian bourse has had a rollercoaster ride over the past 18 months .

After losing two-thirds of its value at the lows, the EGX30 bounced back further than any of its neighbours, with year-to-date gains of 35 per cent.

Economic growth, led by increasing domestic consumption and government and private investment, has helped buoy the EGX. The government announced in the last fiscal year a stimulus package of E£15bn for infrastructure projects, focusing on roads, bridges and water access. It is spending a further E£18bn on infrastructure in 2009-2010.

After averaging 7 per cent growth for three years, the economy suffered the impact of the global downturn, but remained in positive territory, growing by 4.7 per cent in the financial year 2008-2009. Economists also report that Egyptian banks remain very liquid, with loan-to-deposit ratios of about 60 per cent.

Despite the rebound, the market remains volatile. On November 30, as news broke that troubled regional giant Dubai World had asked for a standstill on its debt obligations, the index plunged 8 per cent, its biggest one-day loss in 13 months. A day later, it bounced back with reports of strong buying from foreign funds.

Analysts say the bourse, with a capitalisation of about $90bn, is better positioned than other regional markets to maintain its strong performance.

Cheap assets, they argue, will attract foreign fund investors seeking a safe haven because of better transparency compared with other markets in the region.

They also say that relatively strong corporate earnings and better-than-expected growth continue to lure new investors.

The Egyptian market is trading at a historic price-to-earnings ratio of 11.6, compared with a north African average of 14.3, according to Zawya, a data provider.

The central bank reported minimal exposure to Dubai World debts, helping the quick rebound.

It says Egyptian banks’ exposure to the Dubai company does not exceed $20m.

Rachid Mohamed Rachid, the trade and industry minister, said on November 29 that the Dubai crisis would not affect UAE investments in Egypt, but warned that Egyptian companies investing there might feel the impact, particularly in the construction, legal and accounting fields.

“We do not expect that the crisis will have a negative impact on the amount of foreign direct investment or remittances generated in fiscal year 2009-2010,” Beltone Financial said in a note after the Dubai crisis.

“We continue to expect foreign direct investment of $8.5bn and remittances of $8.4bn for the fiscal year.”

Egyptian corporate leaders rushed to assure jittery investors of their limited Dubai exposure. The country’s largest company by market capitalisation, Orascom Construction Industries, OCI, said it had written off roughly $200m in projects in the UAE in early 2009. It also said its had plans to focus operations on Abu Dhabi, the oil-rich capital of the UAE, which avoided much of the highly geared projects in Dubai.

Analysts say Egyptian infrastructure companies remain strong operators in the Gulf and north Africa. The region has surging young populations and multi-billion dollar infrastructure plans.

Credit Suisse last month reiterated its overweight recommendation on Egyptian equities, saying the country had the strongest economic growth in “mainstream” Europe, the Middle East and Africa.