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Egypt Bad-Loan Levels Signal Lenders Defy Slowdown: Arab Credit

Egypt Bad-Loan Levels Signal Lenders Defy Slowdown
Egypt is home to 39 banks, of which the government owns the biggest three by total assets, National Bank of Egypt, Banque Misr SAE and Banque Du Caire SAE, seen here. Photographer: Shawn Baldwin/Bloomberg

Egypt’s banks are withstanding the nation’s worst political crisis in three decades after the central bank eased rules on provisions and kept interest rates at a five-year low.

The National Bank of Egypt, the country’s biggest lender by assets, didn’t book any non-performing loans in the first half of this year, Chairman Tarek Amer said. The ratio of non-performing loans to gross loans at the country’s three biggest publicly traded lenders --Commercial International Bank Egypt SAE, National Societe Generale Bank and Credit Agricole Egypt SAE -- declined or remained unchanged in the second quarter, beating analyst forecasts, according to AlembicHC Securities and Naeem Holding.

“The increase in non-performing loans is less than we expected and the quality of the loan book is deteriorating less quickly than we anticipated,” Jaap Meijer, head of the bank team at Dubai-based AlembicHC, said in a telephone interview Aug. 21. “It’s pretty resilient. Probably the impact on the corporate clients is less than expected.”

Banks in the most-populous Arab nation have resisted deterioration in asset quality even as the economy shrank at an annual rate of 4.2 percent in the first quarter amid the popular uprising that ousted President Hosni Mubarak. The Central Bank of Egypt, which eased provisioning requirements in April, will keep its benchmark interest rate at the lowest level since 2006 tomorrow, according to the forecasts of five economists surveyed by Bloomberg News.

Extending NPL Period

Credit rating companies such as Fitch Ratings have said the outlook of Egypt’s credit and banking industry depends on the outcome of parliamentary elections, set to be held at the end of this year. Fitch lowered Egypt’s credit worthiness in February by one level to BB, two levels below investment grade.

The yield on Egypt’s 5.75 percent dollar bond maturing in 2020 tumbled 152 basis points, or 1.52 percentage points, since peaking at 7.07 percent on Jan. 31 at the height of the anti-Mubarak protests. The average yield on Middle East sovereign bonds dropped 63 basis points in the period to 4.69 percent yesterday, according to the HSBC/Nasdaq Dubai Middle East Conventional Sovereign US Dollar Bond Index.

The central bank extended in April the period to classify a retail loan as non-performing to 90 days from 30 days. It also asked banks to give companies in the tourism industry a grace period of up to a six-month ending in June to make payments on outstanding loans without penalty.

“Extending the period for NPLs helped banks particularly with loans to the hospitality sector, where a lot of operators were operating at less than half of their capacities due to the unrest,” Ryan Ayache, a Dubai-based banking analyst at Deutsche Bank AG, said yesterday in a telephone interview.

Tourism Slows

Tourist arrivals fell 39 percent in the first seven months of the year, interim Tourism Minister Mounir Fakhry Abdel Nour said in an interview on Aug. 17. Tourism employed 12.6 percent of Egypt’s workforce before the revolt, according to government figures last year.

Egypt is home to 39 banks, the biggest three of which are state-owned. National Bank of Egypt had its long-term issuer default rating of “BB” affirmed by Fitch Ratings on Aug. 10.

The bank has “deferred payments for a number of borrowers in certain sectors that were hit such as tourism,” Amer said in a telephone interview late yesterday. “But they have a long track record with us and we have experienced these things before and they always recover. They are also backed by significant collateral.”

Shares Decline

The ratio of non-performing loans at Cairo-based Commercial International Bank, the country’s largest publicly traded lender, was little changed at 2.9 percent in the second-quarter compared with the end of 2010. Credit Agricole saw its NPLs drop 0.2 percent to 2.2 percent of loans in the same period, beating the 2.6 percent estimate of Cairo-based investment bank Naeem Holding. The rate at NSGB recovered to 3.25 percent from 3.4 percent at the end of the year.

Egyptian banks were forced to shut down twice and the country’s stock market halted trading for almost two months amid the revolt that started in January. Underscoring investors’ concerns about the prospects of lenders, shares of the three banks have underperformed the benchmark EGX 30 stock index since trading resumed on March 23.

The shares of CIB have declined 25 percent, while NSGB tumbled 31 percent and and Credit Agricole retreated 33 percent. That compares with a drop of 17 percent for the benchmark EGX30 stock index. The MSCI Emerging Markets Index slid 14 percent and and the MSCI Emerging Markets/Financials slumped 15 percent in the same period.

Risk Management

The central bank has maintained its benchmark deposit interest rate at 8.25 percent after lowering it by 3.25 percentage points in 2009 to shield the nation from the global financial crisis. Economic growth may slow to 1.6 percent in the fiscal year that started in July, according to a Bloomberg survey last month, from an estimated 2.6 percent expansion in the previous year.

The ratio of NPLs to gross loans may increase to 3.5 percent for CIB and 4.9 percent for NSGB, the country’s second-biggest publicly traded lender by assets, according to Ayache.

“Broadly speaking, performance has been good but in this environment the emphasis is really on stability, transparency, provision coverage and capital levels,” said Ayache. “We really don’t need banks to outperform on the top line given low expectations. But we need them to show consistency in risk management. That’s the key.”

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