Oxford Business Group: banks in Egypt seen y-o-y profit rise on stable outlook

Oxford Business Group (OBG) released its monthly report about Egypt, suggesting that the banks in Egypt would see year-on-year profit growth amid a stable outlook.

The report stated that Egypt’s banks are seeing rising profits and robust capitalisation, as evidenced by a flurry of recent releases of financial year 2015/16 results from the country’s major banks.

Positive results

OBG stated that at the end of February, the National Bank of Egypt (NBE)—the country’s biggest bank by assets and market share—reported a net income of 12.5 billion Egyptian pounds ($687.4 million) after taxes for financial year 2015/16—up 145% from the previous year—while pre-tax profits rose 88% to 19.5 billion pounds ($1.1 billion).

The bank’s balance sheet grew by 35% to 703.3 billion pounds ($38.6 billion), and its loan portfolio increased by 49% to 231.3 billion pounds ($12.7 billion), with growth tilted towards major corporations.

The robust growth helped dilute the bank’s non-performing loan (NPL) ratio to 2.3% from 4.3% a year earlier. Despite pressure on incomes, NBE managed to increase its deposit base by 25% by opening new branches and taking on 1,100 new employees, the report read.

According to OBG, in March, local lender Banque Misr (BM) reported a net profit after tax of 5.5 billion pounds ($302.3 million) for financial year 2015/16—up 31.7% from the previous year—and a profit before tax of 10.2 billion pounds ($560.6 million)—up 30.7%. The bank’s loan portfolio doubled in value to 127.9 billion pounds ($7 billion), indicating a strong market appetite for credit despite subdued economic growth, helping push the NPL ratio down to 3.6% in June 2016 from 7.1% the previous year. The bank’s deposits rose to a record 341 billion pounds ($18.6 billion), up by a more modest 17.6%.

Banque Misr has played a leading role in syndicated loans in Egypt and across the region, participating in around 20 such deals in financial year 2015/16, worth 49.5 billion ($2.7 billion).  The lender is actively seeking further opportunities for syndicated loans, against a backdrop of significant infrastructure investments planned by the Egyptian government, such as the 36 billion pounds ($2 billion) National Project for Roads or the $2.5 billion Cairo Metro Line 5 Project.

Investment from overseas amid challenges

OBG stated that foreign-owned banks are also looking to expand in the Egyptian market.

According to the monthly report, in March, Lebanon’s Bank Audi and Abu Dhabi’s Union National Bank (UNB) both announced plans to increase their presence in Egypt, citing confidence in the country’s outlook. UNB is looking to increase both retail lending and project finance.

However, challenges remain following the decision by the Central Bank of Egypt (CBE) last November to float the Egyptian pound, causing the local currency to lose half its value against the dollar, reaching a low of 19.64 pounds per dollar on 20 December 2016. This pushed up inflation and the cost of imports, while also squeezing Egyptians’ ability to save money.

“In response to this, in early February, the CBE’s governor, Gamal Negm, said that while the bank will continue monitoring the effects of the currency flotation, he is satisfied with the banking sector’s resilience in the face of these difficulties,” according to the report.

In a later statement, Negm said that Egyptian banks had attracted $13.5 billion in inflows since the flotation and that there were no pending requests for US dollar imports. Notable in this regard is that one reason for the flotation was to alleviate a shortage of dollars.

Stable outlook

In early February, ratings agency Fitch said the outlook for the Egyptian banking sector was stable, and it expected them to maintain moderate asset quality in 2017, with local currency liquidity supported by substantial stocks of government securities.

Government bonds have made up a large share of bank’s assets in recent years, as the state has looked to finance its budget deficit by issuing debt in local currency.

There are positive signs for banks in this, though planned fiscal tightening could lead to a tapering of bond assets available in the medium term, prompting banks to look for new places to place capital. Egypt’s new three-year extended fund facility of $12bn with the IMF is conditional upon government support of tighter fiscal policy and structural reforms to reduce the deficit.

The report added that, according to government estimates, the budget shortfall is expected to come in at 10.5-10.7% in financial year 2016/17—ending June 10—compared to 12.2% the previous year. The draft 2017/18 budget—yet to be approved by the government—targets a deficit of 9.5%. In March, Fitch said that if the government remained on track, a “broader-based improvement in sovereign credit metrics” might take place in 2018, while the debt-to-GDP ratio could start to decline by the end of this year.

Source: Daily News Egypt