Egyptian banks prepare for the impact of the pandemic

Bank of Cairo, one of Egypt’s state-owned banks, was days away from announcing its long-awaited IPO in March. Then the coronavirus scuttled the plan to list up to a quarter of its shares on the Egyptian stock exchange.

Tarek Fayed, chairman of the bank, which has undergone extensive restructuring in recent years, said a new date would depend on improving markets: “I hope it will be in 2021.”

The pandemic may have delayed the IPO which was intended to raise some $ 500 million, but Mr Fayed remains optimistic about the bank’s performance, despite the downturn in the economy due to Covid-19.

“Our net operating income increased 24 and 25 percent in the first six months of the year, which gives us reassurance that we are able to meet our targets, but of course we had to be careful and put aside [extra] provisions, ”he said.

Cairo restaurants are resuming operations, but at 20% capacity © Ziad Ahmed / NurPhoto via Getty Images

Analysts and bankers say Egyptian lenders, who are typically cash-rich with low loan-to-deposit ratios, could see their profits fall and bad debts rise.

But they expect banks to remain financially stable.

“We expect banks to increase their provisions and their earnings to come under pressure, but we expect them to remain profitable,” said Constantinos Kypreos, chief analyst for Egyptian banks at Moody’s Investors Service, the rating agency.

“Banks entered this crisis in relatively good shape following a multi-year restructuring, especially public banks, which have good liquidity, especially in local currency.”

Graph showing Egyptian bank profits before provisions

A study released in September by EFG Hermes, the Cairo-based regional investment bank, indicates that the seven listed banks it covers reported “strong and better-than-expected income and pre-provision earnings” in the second quarter of 2020.

Elena Sanchez, managing director and head of banking research at EFG Hermes, said bank profits fell 14% in the second quarter year-on-year, but it was a “very decent performance.” She attributes the decline to higher provisions and a tax change introduced last year.

Elena Sanchez, Managing Director and Head of Banking Research at EFG Hermes

Elena Sanchez of EFG Hermès

Unlike most of the region’s economies, which are expected to contract in 2020, the Egyptian economy has grown, albeit at a slower pace than expected before the pandemic. GDP grew 3.5% in the fiscal year ending in June – below the 5.8% forecast before the pandemic, the government said in September.

Mohamed Maait, the finance minister, says he expects growth of between 2.8 and 3.5 percent for the current fiscal year.

The Central Bank of Egypt launched a package of measures to support businesses in March. These include a 3% cut in interest rates and the six-month postponement of loan repayments to businesses and individuals.

A logo sits in front of the headquarters of the National Bank of Egypt in Cairo, Egypt on Tuesday, January 24, 2012.

The Bank of Egypt cut interest rates by 3% in March © Shawn Baldwin / Bloomberg

The CBE also removed fees on certain banking transactions and increased credit limits for businesses to fund their operating expenses. He cut rates again twice later in the year by a total of 100 basis points.

Bankers and analysts say deferred repayments make it difficult to estimate the size of non-performing loans.

“We have taken a cautious approach to provisions,” said Hussein Abaza, managing director of Commercial International Bank, a listed lender and the largest private sector bank in Egypt.

Hussein Abaza of the International Commercial Bank

“The last thing you want is to realize you’ve underfunded for non-performing loans. I can say with confidence that we have not had any customer defaults due to the debt termination. “

After running models with probable scenarios of the pandemic’s impact on various sectors, CIB nearly quadrupled its supplies, Abaza said. “We want to be ready for anything. We will not be able to say whether we have supplied too much or not enough until the middle of next year.

“Most banks took very cautious provisions during the first half of the year in anticipation of a potential strain on credit quality after loan deferrals, which ended in mid-September,” explains Mrs. Sanchez.

“The most important consideration is that they have enough capital to absorb higher provisions and continue to provide credit to the economy; most banks are well capitalized.

She points out that despite the reduction in interest rates, Egyptian banks are making a nice profit by lending to the government. “It remains an attractive rate and entails neither credit risk nor capital consumption,” says Ms. Sanchez.

According to a Moody’s report in May, 36 percent of banking sector loans were in government securities. The pandemic has brought the Egyptian tourism industry, which accounts for nearly 5% of GDP, to a virtual standstill.

Industries that depend on exports, such as textiles, have also been damaged by the pandemic, bankers say. Private sector borrowing has been low and most has been for operating expenses rather than capital spending, they say. Nevertheless, some sectors have benefited, argues Mr. Fayed. “Pharmaceutical, food and technology companies have done well,” he says.

“We have not stopped financing our clients, but we have been very careful when granting new loans. We have supported clients in sectors that have not been impacted by the Covid. “

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