Economic Update

Published 31 Mar 2017

Egypt’s banks are seeing rising profits and robust capitalisation, as evidenced by a flurry of recent releases of FY 2015/16 results from the country’s major banks.

Positive results

At the end of February the National Bank of Egypt (NBE) – the country’s biggest bank by assets and market share – reported net income after taxes of LE12.5bn ($687.4m) for FY 2015/16, up 145% on the previous year, while pre-tax profits rose 88% to LE19.5bn ($1.1bn). The bank’s balance sheet grew by 35% to LE703.3bn ($38.6bn), and its loan portfolio increased by 49% to LE231.3bn ($12.7bn), with growth tilted towards major corporations.

The robust growth helped dilute the bank’s non-performing loan (NPL) ratio to 2.3% from 4.3% a year earlier. Despite pressure on incomes, NBE managed to increase its deposit base by 25% by opening new branches and taking on 1100 new employees.

In March local lender Banque Misr (BM) reported a net profit after tax of LE5.5bn ($302.3m) for FY 2015/16, up 31.7% on the previous year, and a profit before tax of LE10.2bn ($560.6m), up 30.7%. The bank’s loan portfolio doubled in value to LE127.9bn ($7bn), indicating strong market appetite for credit despite subdued economic growth, helping push the NPL ratio down to 3.6% in June 2016 from 7.1% the previous year. The bank’s deposits rose to a record LE341bn ($18.6bn), up by a more modest 17.6%.

Banque Misr has played a leading role in syndicated loans in Egypt and across the region, participating in around 20 such deals in FY 2015/16 worth LE49.5bn ($2.7bn). The lender is actively seeking further opportunities for syndicated loans, against a backdrop of significant infrastructure investments planned by the Egyptian government, such as the LE36bn ($2bn) National Project for Roads or the $2.5bn Cairo Metro Line 5 Project.

Investment from overseas amid challenges

Foreign-owned banks are also looking to expand in the Egyptian market. In March Lebanon’s Bank Audi and Abu Dhabi’s Union National Bank (UNB) both announced plans to increase their presence in Egypt, citing confidence in the country’s outlook. UNB is looking to increase both retail lending and project finance.

However, challenges remain following the decision by the Central Bank of Egypt (CBE) last November to float the Egyptian pound, causing the local currency to lose half its value against the dollar, reaching a low of LE19.64:$1 on December 20. This pushed up inflation and the cost of imports, while also squeezing Egyptians’ ability to save money.

In response to this, in early February the CBE’s governor, Gamal Negm, said that while the bank will continue monitoring the effects of the currency floatation, he is satisfied with the banking sector’s resilience in the face of these difficulties.

In a later statement, Negm said that Egyptian banks had attracted $13.5bn in inflows since the floatation, and that there were no pending requests for US dollar imports. (One reason for the float was to alleviate a shortage of dollars.)

Stable outlook

In early February ratings agency Fitch said the outlook for the Egyptian banking sector was stable, and expected them to maintain moderate asset quality in 2017, with local currency liquidity supported by substantial stocks of government securities.

Government bonds have made up a large share of bank’s assets in recent years, as the state has looked to finance its budget deficit by issuing debt in local currency.

There are positive signs for banks in this, though planned fiscal tightening could lead to a tapering of bond assets available in the medium term, prompting banks to look for new places to park capital. Egypt’s new three-year extended fund facility of $12bn with the IMF is conditional upon government support of tighter fiscal policy and structural reforms to reduce the deficit.

According to government estimates, the budget shortfall is expected to come in at 10.5-10.7% in FY 2016/17 ending June 10, compared to 12.2% the previous year. The draft 2017/18 budget – which has yet to be approved by the government – targets a deficit of 9.5%. In March Fitch said that if the government remained on track, a “broader-based improvement in sovereign credit metrics” might take place in 2018, while the debt-to-GDP ratio could start to decline by the end of this year.