The 2010s was a difficult decade for the Egyptian economy. Yet the country’s banking sector, while not immune from the malaise affecting the wider economy, in many ways proved to be a stabilising influence, all the while recording impressive overall growth figures given the circumstances.
As the new decade begins, amid a more secure operating environment and predictions of strong economic progress over the next few years, Egypt’s banks look set to push forward, targeting areas such as lending to small and medium-sized enterprises (SMEs) and penetrating the country’s significant unbanked population.
“The health of the banking sector is definitely very strong. Capitalisation is sufficient to withstand any shocks and support potential growth,” says Monsef Morsy, the head of financial analysis at CI Capital in Cairo.
Positive outlook
Egypt’s economic reform programme, launched in 2016, has seen the country’s economy grow significantly in recent years, with further growth forecast. In its most recent growth predictions – made before the global coronavirus outbreak – the International Monetary Fund predicted 5.9% growth for the country’s economy for 2020, one of the highest figures across the Middle East and north Africa.
The Egyptian banking sector is one of the likely beneficiaries of this economic trajectory. In a report published in late January, Moody’s Investors Service predicted that the outlook for Egypt’s banking system would remain stable over the next 12 to 18 months, with robust economic growth encouraging business.
Moody’s expects banks’ profitability to improve “bolstered by strong balance sheet growth – with a projected acceleration in credit growth by 12% to 15%”. This would be supported by declining interest rates, as well as the government funding initiatives in the industrial, tourism and mortgage sectors, “and by a recovery in net interest margins as high-yielding certificates of deposits offered by state-owned banks mature”.
Even so, profits would be squeezed by an increase in the effective tax rate, a double-digit rise in costs, and lower interest rates, it said.
Egyptian banks continue to have access to stable, deposit-based funding; total deposits in the banking system hit E£4235bn ($274bn) in December 2019, according to the Central Bank of Egypt, up from E£3820bn one year earlier, with the household sector accounting for 81.3% of total deposits. Local currency deposits represented 81.82% of the total.
Loan growth
Bank loans in Egypt grew by 13.6% year on year in fiscal year 2018/19, while overall deposits grew by 12.3% over that period. The three years to June 2019 saw a 41% increase in non-governmental loans, according to central bank data.
Elena Sanchez-Cabezudo, head of financials and equity research at EFG Hermes, a financial services group headquartered in Cairo, says credit quality for Egyptian banks remained resilient in 2019. “The system non-performing loan [NPL] ratio was only marginally up, to 4.5%, in 2019, compared to 4.1% in 2018, and part of that slight increase has to do with a change in the definition of NPLs for the retail sector by the central bank, after the implementation of IFRS 9 in January 2019,” she adds.
The implementation of the standard by local lenders, in line with their global peers, is a net positive for the sector, Ms Sanchez-Cabezudo believes, as it improves transparency and credit quality reporting.
”Solvency at the system level has [also] improved during 2019; the Tier 1 ratio rose to 15.5% in 2019 from 12.7% in 2018,” she says. “The banking system is well capitalised and can finance an increase in lending demand in 2020.”
In December 2019, the central bank eased restrictions on personal loans by raising the level of monthly income that could be allocated for consumer loans to 50% from 35% previously, with the limit for mortgages remaining at 40%. The move is expected to increase retail banking activity, and comes at a time of falling interest rates.
“The key theme in 2020 is the central bank’s anticipated extension of monetary policy normalisation and the increasing purchasing power of the retail consumer segment,” says Khaled El Salawy, chief executive and managing director of Al Ahli Bank of Kuwait – Egypt.
With interest rates slashed by 450 basis points during 2019, “continued monetary easing will help bring about a revival in credit growth that will be further supported by the central bank’s latest initiatives”, Mr El Salawy adds. Lower interest rates are also expected to incentivise investment and increase capital expenditure, which will help to drive growth.
Sovereign exposure
Nevertheless, Egyptian banks remain heavily invested in government securities, with sovereign debt held by Egyptian lenders accounting for one-third of banking sector assets as of October 2019. Industry insiders, however, say lending trends are beginning to change.
“I would look at 2019 as the start of the turning point for Egyptian banks, because they have been focusing mainly on investing in government securities since 2011,” says CI Capital’s Mr Morsy. “That was the main focus, benefiting from the high interest-rate environment and the high yields on government treasuries, which crowded out private credit activity.”
A key point came in late 2018, he notes, with a change in the tax treatment for government treasuries that increased the tax burden coming from investing in such securities. “What started to happen in 2019 was sort of a catalyst for Egyptian banks to start considering and looking into other classes, loans definitely and also interbank assets,” adds Mr Morsy.
The Egyptian government continues to prioritise lending to SMEs as a means of driving the country’s long-term economic growth. In early 2016 the Central Bank of Egypt mandated that all banks were required to allocate 20% of their loan portfolios to SMEs by 2020, and to establish dedicated SME units.
In December 2019 the central bank launched a new initiative with incentives in place for credit to medium-sized companies in the manufacturing sector. “This should continue to drive an increase in SME lending, after significant growth during 2017 to 2019,” says Ms Sanchez-Cabezudo, who adds that most banks failed to meet their 20% target for loans going to SMEs by the end of 2019, despite a strong focus on increasing lending to this sector.
Acquisition potential
Egypt currently has 38 registered lenders, and the growth potential for the sector makes it an enticing prospect for those looking to expand into new markets. “The Egyptian banking sector and the market in Egypt has one of the strongest potentials in the region, and maybe one of the strongest globally,” says Mr Morsy.
However, given that the Central Bank of Egypt is not currently issuing new banking licences, lenders wanting to enter the Egyptian market must do so via strategic acquisitions.
First Abu Dhabi Bank (FAB), the United Arab Emirates' largest lender, is currently in talks to acquire the local operations of Lebanon’s Bank Audi, which is struggling in its home country due to the challenging economic situation there. Bank Audi Egypt has grown from three branches in 2005 to 50 branches today, with total assets of $4.4bn as of September 2019. A senior FAB executive told Reuters in late February it expected to conclude due diligence on Bank Audi Egypt by the end of June.
State-owned lender United Bank is another potential target for sale, though additional mergers and acquisitions could take place following the implementation of new banking regulations working their way through parliament, which have increased paid up capital requirements.
The Egyptian government also plans to sell a minority stake in state-owned Banque du Caire in the first half of 2020, with the initial public offering expected to bring in about $500m, for a stake in the lender of about 30%. Banque du Caire, which is one of the largest banks in the country, had assets of E£183.4bn at the end of 2019.
Regulatory changes
A new banking bill, requested by president Abdel Fattah el-Sisi and aimed at enhancing banking and monetary stability, is working its way through the various channels and has been referred to Egypt’s House of Representatives for debate and assent. Among other things, the draft bill requires banks to increase their paid-up capital to E£5bn, with a three-year window to conform.
Many in the banking sector see the new regulations as an important development.
“The new banking law, which is currently under approval in parliament, is going to be like a new milestone. We cannot discuss the full details of it until it is fully approved by the cabinet and the parliament, but we believe it’s going be a positive development,” says Mohamed Aly, chief executive and managing director of Abu Dhabi Islamic Bank–Egypt (ADIB-Egypt).
Another positive development is the reappointment of Tarek Amer, the central bank governor who is seen as a steadying influence on the banking sector and economy, to a second four-year term in November 2019.
Meanwhile, authorities are also discussing regulations regarding sovereign sukuk issuance, according to ADIB-Egypt’s Mr Aly. “This is going to complement the sharia-compliant ecosystem in Egypt. The Islamic finance market in the rest of the world is substantial, we’re talking about $2500bn. For Egypt this is an untapped market. Once we [have] introduced the sovereign sukuk law, the system in Egypt will be fully implemented and we will be open to integrate with the Islamic finance market in the rest of the world.”
Islamic finance currently represents about 7% to 8% of the Egyptian banking sector, with three fully fledged Islamic banks and a number of windows for Islamic banking.
Reaching the unbanked
The third most populous country in Africa, Egypt remains heavily underbanked, with only about one-third of the adult population having a bank account. Yet the country has made significant progress in recent years, according to Al Ahli Bank’s Mr El Salawy. The percentage of Egyptians with a bank account was just 8% to 12% three years ago, and has since surged thanks to economic growth and several national-level initiatives.
“One-third of the population is more than half the bankable population by age, and this reflects very solid progress,” says Mr El Salawy. “Over the past few years, financial inclusion has been brought to the forefront of Egypt’s national agenda as a means for financial sector growth due to its impact on different aspects that include supporting SMEs, attracting the informal sector, increasing job creation, achieving sustainable growth, and realising a higher level of financial stability.”
The total number of debit and credit cards in use in Egypt has nearly doubled since 2010. In 2018 the government launched its Meeza payment card, available in prepaid and debit form, as part of efforts to boost financial inclusion and reduce the reliance on cash. As of late 2019, 4 million Meeza cards had been issued, with the government ultimately targeting 20 million cards, which can be used to conduct e-commerce transactions as well as receive pensions and subsidy payments.
However, those in the sector say more work needs to be done to reduce the number of unbanked people in the country.
“We believe the biggest impact on financial inclusion will be the changes on the regulatory front where current regulations are still limited to allow complete digital onboarding for financial services,” says Hisham Ezz Al-Arab, chairman of Commercial International Bank, Egypt’s largest private lender. “Once this happens, it will unlock the doors for access to financial services.”
In January 2020, the central bank launched a pilot project that would enable bank accounts to be opened electronically, without the customer needing to visit a bank branch. The central bank is also expected to issue instructions in relation to internet banking services in the near future.
“Digital banking is just getting started in Egypt, with 75% of the banks in the market offering internet banking services, representing 1.4 million registered accounts,” says Mr Ezz Al-Arab. “This provides a tremendous opportunity for growth in this sector, taking into consideration all the other digital tools utilised by the banking sectors.”
Commercial International Bank launched its own ‘Smart Wallet’ in 2016, which targeted both the banked and unbanked populations, allowing users to pay for items using their mobile phones. The bank claims to hold almost a 25% market share for both internet and mobile banking service in Egypt.
Fintech solutions
Embracing technological solutions is seen as a way to further reshape the financial landscape in Egypt, and extend the overall reach of financial services. In 2019 the Egyptian central bank launched its fintech strategy, with the aim of positioning the country as a globally recognised fintech hub for the Middle East and Africa. The bank has also established a support fund of E£1bn to encourage start-ups, as well as a regulatory sandbox to act as a live testing ground for early-stage fintech business models.
“On fintech, after the two revolutions we were a bit behind the global markets, even the regional markets. Now we’re catching up, and there is a good potential on that front,” says ADIB-Egypt’s Mr Aly.
While Egyptian banks continue to face challenges in the operating environment, and the geopolitical situation remains a concern, bankers in Egypt seem ready to embrace what the next decade has to offer.
