Moody’s Investors Service (“Moody’s”) has today affirmed and changed to stable from negative the outlook on the long term local currency deposit ratings of five Egyptian banks — namely National Bank of Egypt SAE (Caa1), Banque Misr SAE (Caa1), Banque du Caire SAE (Caa1), Commercial International Bank (Egypt) SAE (Caa1) and Bank of Alexandria SAE (B3). The banks’ standalone bank financial strength ratings and their long term foreign-currency deposit ratings have also been affirmed, according to the agency’s website.
The rating actions follow Moody’s decision on 20 October to change Egypt’s rating outlook to stable from negative and affirm the government bond rating at Caa1.
The bank rating actions reflect: (1) the stabilisation of the government’s credit risk profile, which is a key driver of Egyptian banks’ creditworthiness given their substantial holdings of Egyptian government bonds; (2) the improvements in domestic operating conditions that will contribute towards stabilising the banks’ asset quality and profitability; and (3) the stabilisation in the government’s capacity to provide support in the case of the government-owned banks (National Bank of Egypt SAE, Banque Misr SAE, Banque Du Caire SAE).
The affirmation and outlook change on the five banks’ ratings primarily reflect Moody’s view of the stabilisation of the government’s credit risk profile and economic environment.
Moody’s notes the high inter-linkages between the five Egyptian banks and the government, reflecting their high exposure to government risk. The five banks maintain very high concentration to government securities, which Moody’s estimates range from 24% to 43% of assets based on the most recently published financial statements. This high concentration has been increasing in recent years, rendering the banks vulnerable to a sovereign credit event and impacting their capital buffers.
When the banks’ risk-weighted assets (which currently apply zero risk weighting to local currency Egyptian government bonds) are adjusted by Moody’s using a 150% risk weighting to reflect the Egyptian government’s high credit risk, capital buffers decline significantly. The adjusted Tier 1 ratios range from 3.2% to 5.6% for the government-owned banks, 7.3% for Commercial International Bank (Egypt) SAE and 9.1% for Bank of Alexandria SAE, based on the rating agency’s assumptions and the banks’ most recently published financial statements. The weaker capital levels of the government-owned banks are the main driver for differentiating their standalone baseline credit assesments (BCAs) at caa2, one notch lower than the caa1 BCA of the privately owned banks.
Moody’s notes that coinciding with Egypt’s stabilising domestic political and security situation, the government launched several fiscal and economic reforms over the past year. Real GDP growth has started to pick up and the country’s economic performance will likely improve, driven by strengthening investor confidence, government-led infrastructure projects and a recovery of the tourism sector. The rating agency expects these positive developments to stabilise the banks’ operating performance — mainly their asset quality and profitability.
Today’s rating actions also reflect the stabilisation of the government’s capacity to support the state-owned banks. The Caa1 deposit ratings of the three government-owned banks currently benefit from one notch of systemic support uplift from their caa2 BCAs, reflecting Moody’s view of the probability that support would be forthcoming for these banks given their 100% government ownership and systemic importance.
Moody’s affirmation of the Caa2 long-term foreign-currency deposit ratings of all five Egyptian banks reflects the affirmation of the sovereign ceiling for foreign-currency deposits, which is the highest rating that can be assigned to a foreign-currency deposit obligation of a domestic bank and captures foreign-currency transfer and convertibility risks.