Fitch affirms National Bank of Egypt’s B+ rating with a stable outlook

Global credit rating agency Fitch Ratings affirmed the National Bank of Egypt‘s (NBE) long-term (LT) issuer default rating (IDR) at B+ with a stable outlook.

Fitch has also affirmed National Bank of Egypt (UK) Ltd’s (NBEUK) long-term IDR at ‘B+’ with stable outlook and support rating at ‘4’. NBEUK is a wholly owned subsidiary of the NBE.

Fitch said in earlier report that it believes that pressures on the domestic operating environment have eased since the end of the third quarter of 2020, moderating downside risks to Egyptian banks’ credit profiles. “This reflects improving foreign-currency (FC) liquidity, with the banking sector’s net foreign assets (NFAs) reaching $3.5 billion at end-April 2021 from a net foreign liability position of $5.3 billion at end-April 2020. This was supported by a strong increase in foreign holdings of Egyptian treasuries, sovereign Eurobond issuance and resilient remittances.”

NBE’s IDRs are driven by the standalone strength of the bank as expressed in its ‘b+’ viability rating (VR), Fitch added in its latest statement. They are also underpinned by potential support from the Egyptian authorities, in case of need.

“The VR reflects the strong correlation between NBE’s credit profile and that of the sovereign (‘B+’/Stable) given the bank’s sizeable holdings of Egyptian government debt (40% of total assets at end-December 2020) and significant lending to public-sector companies (around 37% of total assets), equivalent to more than 16x the bank’s common equity Tier 1 (CET1).”

“The VR also factors in weak core capital ratios and volatile profitability through the cycles. Rating strength is a solid franchise (as reflected by more than 30% of sector assets and loans at end-2020), strong funding as well as healthy asset-quality metrics.

NBE’s stage 3 loans (including interest in suspense) ratio fell to 1.6 percent at end-2020 from 1.9 percent at end-June 2020, backed by strong lending growth of 20 percent.

Loans more than 90 days past due not classified as stage 3 made up an additional 0.7 percent, which together with stage 3 loans were at 2.6 percent of gross loans, remaining one of the lowest ratios among domestic-rated peers.

Stage 2 loans were a further 4.8 percent of gross loans at end-2020, up from 3.5 percent at end-June 2020 as economic conditions deteriorated.

“The bank’s high exposure to the government (estimated at above 75 percent of total assets) and availability of government guarantees on some exposures make NBE’s asset quality among the most resilient in the sector.”

Fitch further said it expects the bank’s stage 3 loans ratio to slightly fall in 2021-2022 as continuing strong lending growth will mitigate higher inflows of stage 3 loans.

Total reserve coverage of stage 3 loans recorded 273 percent at end-2020, comparing favourably with domestic-rated peers.

“Profitability metrics are more volatile than domestic peers’ given NBE’s high dependence on yields on the bank’s government debt portfolio and regular issuance of high-yielding certificate of deposits (CDs).”

Fitch’s core profitability metric, operating profit/risk-weighted assets (RWAs) ratio fell to 3.8 percent in FY20 (June-20) from 4.7 percent in FY19 as the issuance of one-year CDs yielding 15 percent in March 2020 weighed on revenues, with annualised interest expenses up about 22 percent at end-2020 compared with end-June 2019.

“We expect our calculated core profitability metric to recover in 2021-2022, supported by expanding net interest income as a result of strong lending growth and lower cost of funding as the bank’s 15 percent CDs mature.

“Declining loan impairment charges (LICs) as a result of improving economic conditions and existing strong provisioning buffers will support a recovery in operating profitability.”

Fitch further said that NBE’s weak CET1 ratio of 8.7 percent at end-2020 compared with domestic peers’ weighs on its assessment of the bank’s capitalisation.

The bank’s tier 1 regulatory capital ratio and total capital ratio stood at 14.5 percent and 16.6 percent, respectively, at end-2020, providing good buffers over minimum regulatory requirements. They are supported by a10-year interest-free term loan worth 43 billion Egyptian pounds provided by the Central Bank of Egypt in 2017.

NBE’s capital ratios also benefit from the low weights of sovereign securities, resulting in very low risk-weighted assets density of 37.1 percent at-2020, while the bank’s equity-to-assets ratio was weak at 5.7 percent.

“NBE’s FC liquidity buffers improved at end- 2020 on the back of improving FC liquidity conditions in Egypt, due to rebounding demand from foreign investors. Coverage of FC liabilities by FC liquid assets stood at a sound 48 percent at end-2020 while we estimate NFAs to have likely turned positive in 1H21, in line with the sector’s trend.”

NBE has a strong funding profile, supported by its dominant franchise and deposit market share, in particular in the retail segment (83 percent of total customer deposits at end- 2020), Fitch added.

“The overall balance sheet is liquid, with a loans-to-customer deposits ratio of 47 percent while liquidity buffers in local currency are underpinned by large holdings of sovereign securities.”

Support Rating (SR) and Support Rating Floor (SRF)

NBE’s SRF is one notch above Fitch’s Domestic-Systemically Important Bank (D-SIB) SRF of ‘B’ owing to its full state ownership and record of support received from the government, the statement read.

In 2017, the authorities in Egypt provided NBE and other public-sector banks with 10-year interest-free loans to support their capital ratios following the devaluation of the Egyptian pound. This also reflect NBE’s high systemic importance as the country’s largest state-owned bank and role in the implementation of the authorities’ macroeconomic and social policies, Fitch noted.