Not in the mood
A recent analysis by a leading investor services company outlines the problems weighing down the Egyptian banking sector. Sherine Abdel-Razek and Niveen Wahish report
State ownership, weak management and outdated technology are only some of the recurring problems Egypt's banking sector has faced during the past two decades. As if these were not enough, the last three years have witnessed the further deterioration of Egyptian banks. They came out of 2002 limping from the non-performing loans crisis and were dealt a harsh blow in 2003 with the unexpected government decision to float the pound. That decree, while aimed at containing the foreign exchange shortage, predictably led to a sharp drop in the value of the Egyptian pound.
These problems were brought into focus by the recent Banking System Outlook for Egypt issued by Moody's Investors Service, which stated that "persistent low economic growth, coupled with the currency devaluation and continued lack of public confidence in the Egyptian pound, hurts the performance and prospects for most Egyptian banks."
According to Pacinthe Fahmy, general manager with Misr International Bank, banks are hurting because of the general recessionary environment globally, and more so locally because of instability in the region. Things were made worse for banks by the depreciation in the value of the pound and the issuing of non-performing loans. As the Moody report puts it, "amplified provisioning requirements and devaluation-related accounting losses have depressed many banks' earnings."
Joseph Iskandar, investment analyst with Prime Securities, explained that banks had previously classified loans as non-performing if the creditor failed to meet interest rate payments for three consecutive months. Now banks are required to start provisioning for the loan only one month after a client's failure to meet his or her obligations. As a result, the increase in provisions, being a hidden form of expenditure, has lowered the net profits of banks and thus negatively affected their dividends. On average, provisions increased by 25-50 per cent.
As one financial analyst who asked to remain anonymous observed, "banks' financial statements are no longer in the black." According to a policy paper issued by the Egyptian Centre for Economic Studies, the sector's net profits to assets ratio declined from 0.9 per cent in 2000 to 0.7 in 2002 and 0.5 in 2003. Most banks have reported very little, if any, profit. Moreover, the financial analyst said, "The CBE is being very strict in making sure that banks provision sufficiently to the point that some banks decided to put aside all their profits as extra provisions." For example, the Watani Bank of Egypt and the Export Development Bank were both asked by the Central Bank of Egypt not to distribute any dividends.
Iskandar pointed out that the percentage of these two banks' non-performing loans to their overall loan portfolio was as high as 20 per cent and 12 per cent respectively. Overall, bad loans in the banking sector have been estimated to reach around 15 per cent of the loan portfolio. However, a report issued by Fitch Ratings late last year indicated that this figure may be "understated given less conservative recognition criteria among banks".
The effect of the non-performing loans was described by the Moody's Banking Outlook report as nearly crippling, leading banks into "curbing fresh lending activity". The anonymous analyst confirmed that banks have become very conservative in their lending activity, preferring direct deposits into minimum risk assets such as treasury bills and bonds, instead of financing entrepreneurial activity.
Exacerbating the situation, the value of dollar- denominated defaulted loans is on the rise due to the steep decline in the value of the pound. The pound lost over 35 per cent of its value since the floatation early last year.
The September 2003 comment on the banking sector by Fitch Ratings echoed a similar view. It pointed out that with a sizeable portion of the banking system's loans in foreign currency (around 20 per cent), with some of these extended to clients that may not have sufficient foreign currency earnings, the banks' clients are exposed to exchange rate risk.
But despite its failings, the Egyptian banking sector remains somewhat attractive to foreign investors. Recently, Barclays expressed interest in buying out Banque du Caire's share in Cairo Barclays Bank. However, the anonymous analyst believes that the uncertainty about the Egyptian market due to the hard currency situation is keeping interest at bay. Once that issue is resolved, he forecasts "a wave of acquisitions".
