banque du caire

Despite a difficult operating environment, Egypt’s banks have shown resilience and new regulations could encourage further mergers and acquisitions. 

Like their equivalents around the world, Egyptian banks have been required to play an even more active role in supporting the economy over the past year, in the face of the global coronavirus pandemic, and the accompanying restrictions and their economic impacts. This is despite the fact that Egypt was one of the few countries in the world that experienced positive economic growth in 2020, growing by an estimated 1.5% year-on-year.

Banks in Egypt entered the pandemic in relatively good shape, and maintained their strong liquidity throughout 2020 while also continuing to see impressive credit growth. According to the Central Bank of Egypt (CBE), banks operating in Egypt saw their capital reach E£174.7bn ($11.1bn) in September 2020, while reserves stood at E£313bn.

Covid impact

Even so, “2020 was a remarkably difficult year,” says Shaikha Al-Bahar, deputy group chief executive of National Bank of Kuwait (NBK) and chairperson of NBK Egypt. “It witnessed the harshest operating conditions and unprecedented challenges due to the Covid-19 pandemic,” she says.

“Nonetheless, the banking sector successfully proved its resilience and ability to overcome these conditions thanks to the high quality of its assets, healthy capitalisation and strong liquidity,” she adds.

Ms Al-Bahar points out that banks operating in Egypt maintained a capital adequacy ratio exceeding regulatory requirements, averaging 19.8%, while credit growth accelerated and was up 23% year-on-year at the end of December 2020, supported by lower interest rates and other measures introduced to support the economy. The loan-to-deposit ratio also exceeded 47% at the end of September, up from less than 45% at the end of 2019, further supporting banks’ profitability.

Meanwhile, banks were able to maintain asset quality, despite the crisis, with the non-performing loan (NPL) ratio dropping to 3.4% at the end of September 2020, down from more than 4% in 2019, with the NPL coverage ratio standing at 96%.

Egyptian banks’ profits will come under pressure this year, as declining net interest margins will hit bottom-line profit

Constantinos Kypreos, Moody’s

“Despite the challenges, NPL containment measures enabled the authorities to carry on with the implementation of the infrastructure projects, as part of a well-adjusted policy that balanced imposing the necessary measures to contain the spread of the virus and mitigating economic implications,” says Ms Al-Bahar.

Total deposits in the system also rose steadily, increasing by more than 12% in the six months to end-September, when they stood at more than E£5tn.

In January, ratings agency Moody’s predicted a stable outlook for the Egyptian banking sector, with fiscal reforms and strong sector liquidity — deposits accounted for 73% of total assets as of July 2020 — offsetting the likely increase in problematic loans caused by the pandemic.

“Egyptian banks’ profits will come under pressure this year, as declining net interest margins will hit bottom-line profit, following an accumulative four percentage-point interest rate cut during 2020, though Egyptian banks’ profitability will continue to compare well against their peers,” Constantinos Kypreos, senior vice-president at Moody’s Investors Service, said at the time.

Central bank response

Like many central banks around the world, the CBE announced a package of measures in March 2020 aimed at supporting the domestic economy and Egyptian businesses in the face of the global pandemic.

These measure included the deferral of bank loan payments for individuals and corporations for a period of six months, with no additional interest or fines charged on late payments, as well as waiving fees on certain bank transactions and increasing credit limits for corporations in order to help fund operating expenses.

The central bank also guaranteed E£100bn worth of lending by banks to targeted sectors, at an annual interest rate of 8%, while cutting interest rates by a combined 4% in 2020, including a sizeable 3% rate cut in March.

Meanwhile, in January it announced that it was banning banks from distributing profits to shareholders, as part of efforts to protect capital amid the pandemic.

While the 4% interest rate cuts in 2020 lowered the cost of funding, especially for short-term liabilities, which had a positive impact on bank margins, they also reduced yields on bank assets. “The overall impact has been neutral to negative, depending on each bank’s balance sheet,” says Khaled El Salawy, chief executive and managing director of Al Ahli Bank of Kuwait — Egypt.

At the same time, he says the cuts were coupled with initiatives that kept the cost of borrowing for companies below market rates, which was an important step in supporting businesses and encouraging investment in capital.

In December, as part of a review of Egypt’s economic reform programme, International Monetary Fund deputy managing director, Antoinette Sayeh, said that the central bank’s data-driven approach to monetary policy has been instrumental to anchoring inflation expectations and achieving low and stable inflation. Inflation dropped to 5% in 2020 — its lowest level in 15 years.

“The banking system has been resilient thus far,” she added, “having entered the crisis well-capitalised and with ample liquidity. The CBE’s initiatives have helped ensure continued access to credit through the crisis; ongoing financial sector supervision will be critical to maintain the resilience of the banking sector as crisis initiatives begin to expire.”

New banking regulations

One key development over the past year when it comes to financial services in Egypt was the passage of new banking sector regulations, replacing existing laws that had been in place for more than 17 years.

The new regulations require, among other things, that local banks maintain E£5bn in capital, up from the E£500m required under the previous legislation. The bill was also the first time Egypt has addressed in legislation aspects like cashless payments, digital banks, e-money and cryptocurrency.

Mohamed Abu Basha

Mohamed Abu Basha, EFG Hermes

Some believe that the new regulations could lead to an uptick in mergers and acquisitions in the banking sector, with some banks unable to meet the new requirements or choosing this moment to strengthen through strategic mergers.

The new regulations also aim to make these kinds of deals easier, while outlining the requirements needed to safeguard the interest of employees and customers when mergers take place.

“I don’t think Egypt’s banking sector needed a lot of regulatory changes as much as maybe a bit of consolidation to be a bit more efficient. The digital part was the most important aspect [of the new regulation],” says Mohamed Abu Basha, head of microeconomics at EFG Hermes, a financial services group headquartered in Cairo.

Digital banking

The pandemic has cemented the roll that digital banking can play in financial services around the world, as well as the rising importance of fintech and digital-first banking solutions.

“The year 2020 has been great for financial inclusion, speeding up the adoption of digital banking in an unprecedented way,” says Al Ahli Bank’s Mr El Salawy, who adds that for the first time, banks in Egypt were able to onboard customers to online banking platforms without the need for a physical presence or wet signature.

At the same time, digital registration and the activation of mobile wallets have surged, as well as the adoption of pre-paid cards and the activation of tap-and-go payment technologies. Mobile payment users surpassed 19 million in 2020, up 41% year-on-year, with the value of monthly transactions reaching roughly E£9.6bn. Egypt’s total population is around 100 million.

This growth built on earlier efforts to adopt digital banking. In 2018, the government launched its Meeza payment card, available in prepaid and debit form, as part of efforts to boost financial inclusion while also reducing the reliance on physical cash. Millions of cards have been issued to date. In February, the government announced that 1.2 million state-employee payroll cards would be replaced by Meeza cards over the coming months, as a further move towards cashless transactions.

This came just a few months after it was also announced that governmental fees exceeding E£1000 could no longer be paid in cash.

Meanwhile, in August 2020 Egypt welcomed its first tech ‘unicorn’ — a company with a market capitalisation of more than $1bn. E-payment platform Fawry, which was founded back in 2008, claims to process more than 30 million daily payments. Six months after becoming a unicorn, the company hit a $2bn market cap, pointing to its position as one of the bigger beneficiaries of the acceleration of digital payments.

Acquisition wave

Egypt has 38 registered lenders, and the central bank has shown little interest in increasing that number. As such, those looking to enter the market need to acquire the local operations of another banking group.

The past year has seen the steady decline of Lebanese lenders operating in Egypt, often replaced by banks from the Gulf states. In January, First Abu Dhabi Bank finalised an agreement to acquire 100% of Lebanon’s Bank Audi operations in Egypt, which will make it one of the biggest foreign banks operating in Egypt, with assets of more than $8bn. The bank currently has 17 branches across the country, which will increase by 53 when the deal is complete.

That same month, Bahrain’s Bank ABC completed its purchase of the Egyptian subsidiary of Lebanon’s Blom Bank for $480m, subject to regulatory approval. Blom Bank Egypt had assets of $2.88bn as of September 2020, and saw net profits of E£205.6m for the third quarter of 2020, down from E£229.5m a year earlier.

“Blom Bank is the best strategic fit and the acquisition of this transformational target will strengthen our position in the Egyptian market, as well as complementing our existing footprint in Egypt,” says Sael Al Waary, deputy chief executive of Bank ABC.

Meanwhile, plans to sell a minority stake in state-owned Banque du Caire via an initial public offering, in what would have been Egypt’s biggest sale of state assets since 2006, were put on hold last year due to the pandemic. The bank, which has been owned by Egypt’s second largest lender, Banque Misr, since the mid 2000s, had been looking to raise roughly $500m for a stake of up to 30%. Banque du Caire is currently the third-largest state-owned bank in Egypt.

Even so, the sale is likely to go forward in the near future, with Tarek Fayed, chairman of Banque du Caire, telling the Financial Times in December that the new date will depend on improvements in the markets. “Hopefully it can be in 2021,” he added.

Targeted lending

Egyptian banks remain heavily invested in government securities, with sovereign debt held by Egyptian lenders accounting for 39% of banking sector assets as of July 2020. This has crowded out private credit activity in the past and, despite efforts, the number has remained stubbornly stable for the past few years.

Even so, the Egyptian government continues to push for further lending to small and medium-sized enterprises (SMEs). In early 2016, the central bank mandated that all banks allocate 20% of their loan portfolios to SMEs by 2020, while also establishing dedicated SME units. Most banks failed to meet the target, but lending to SMEs has still grown strongly.

The opportunity here is to truly simplify banking to cater to a larger segment of both individuals and businesses with offerings that actually match their needs

Khaled El Salawy, Al Ahli Bank of Kuwait

According to Mr El Salawy, the central bank recently issued new directives requiring a larger portion of loan portfolios to be allocated towards microenterprises and SMEs, while pushing banks towards more flexibility in their lending policy when dealing with these types of clients.

“The opportunity here is to truly simplify banking to cater to a larger segment of both individuals and businesses with offerings that actually match their needs,” he adds.

Meanwhile, about two-thirds of Egypt’s population still remain unbanked, although this is dropping steadily. “This provides a great opportunity for future growth, especially in light of the initiatives rolled out by the government and central bank to increase financial inclusion,” says NKB Egypt’s Ms Al-Bahar.

Future resilience

It is likely that 2021 will continue to be a challenging year for the Egyptian banking sector, with a potential rise in NPLs linked to the pandemic coupled with efforts by banks to meet the requirements of the new banking regulations.

Ms Al-Bahar suggests that banks’ margins may also face pressures, this year and next, as a result of lower interest rates and further easing of the monetary policy, “especially as inflation continues to trend below its target levels, with most banks’ credit portfolios continuing to depend on financing government debt instruments, exceeding E£2.7tn in government Treasury bill investments,” she adds.

Still, banks operating in Egypt have shown their resilience over the past year, and with the economy predicted to continue to grow, and hopefully pick up speed with the rollout of the various coronavirus vaccines, there are plenty of positives signs for the Egyptian banking sector.


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