(MENAFN- Capital Intelligence (Cyprus) Ltd) 12th February 2019
Banque du Caire’s Ratings Affirmed with a Stable Outlook
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed Banque du Caire’s (BdC) Financial Strength Rating (FSR) at ‘BB-’. The rating is supported by the Tier 2 capital increase and improved capital adequacy ratio (CAR), good liquidity (though still subject to receding systemic risk), and the rebound in both operating and net profitability in Q1-Q3 2018. The factors constraining the FSR are ongoing high sovereign risk and challenging operating conditions, concentration in government securities (although reduced), and the decline in total capital to total assets ratio. Also constraining the FSR are customer concentrations in both loans and deposits. The Outlook for the FSR remains Stable. The Bank’s Long- and Short-Term Foreign Currency Ratings (FCRs) are affirmed at ‘B+’ and ‘B’, respectively, with a Stable Outlook. These ratings are constrained by CI Ratings’ Sovereign Ratings for Egypt (‘B+’/‘B’/Stable), and therefore remain correlated with Egypt’s creditworthiness. The ratings denote significant credit risk as the Bank’s capacity for timely fulfilment of financial obligations is vulnerable to adverse changes in internal or external circumstances. BdC’s Support Rating is maintained at ‘3’, reflecting the high likelihood of official support from the authorities in case of need, as well as from its ultimate parent, government-owned Banque Misr (BM).
The Egyptian government’s external vulnerabilities have receded after the authorities succeeded in meeting all of the IMF’s preconditions to qualify for much needed financial assistance (in November 2016). The funds disbursed support ongoing economic reforms and have significantly eased pressure on foreign reserves and foreign currency liquidity in the local market. That said, CI considers implementation risk to be high given the depth and socially-sensitive nature of many of the planned reforms. Credit risk in the broader economy also remains high even though sovereign risk has stabilized − and even improved in some aspects.
Liquidity conditions in the economy have recovered after official restrictions on the withdrawal and transfer of foreign currency deposits by individuals and corporates for the import of strategic commodities were removed after the devaluation. The surplus liquidity generated by BdC since the political events in 2011 continues to be deployed into local currency government paper, although to a lesser degree in recent periods amid falling yields. However, issuer concentration risk remains high, with government securities representing a multiple of the Bank’s total capital as is the case with other (but not all) Egyptian banks. In common with other Egyptian banks, BdC’s principal source of funding is customer deposits and in particular retail funds. Having peaked in 2017, the Bank’s liquidity as measured by key indicators reduced moderately at end Q3 2018 to still strong levels. Although diminishing, there remain systemic risks to liquidity in the event of an adverse sovereign or political risk event − notwithstanding the IMF support. This is particularly the case with respect to foreign currency liquidity.
Although BdC’s credit portfolio had grown swiftly following the political events of 2011, this was from a relatively low base, with most of the expansion driven by high-margin retail lending to employees of public sector entities. That said, following EGP devaluation in 2016, the share of corporate loans in the credit portfolio expanded due to the inflated value in local currency terms of existing USD-denominated corporate loans. In Q1-Q3 2018, corporate and SME lending grew at a significantly faster pace than retail loans. Along with the larger share of corporate loans, borrower concentrations remain high. Credit risk continues to be high in Egypt’s economy, despite the Bank’s still satisfactory loan asset quality metrics. The moderate non-performing loans (NPLs) growth rate continued to reduce after significant loan write-offs in Q1-Q3 2018, with the bulk of new NPLs related to corporate delinquencies, and to lesser extent retail borrowers. Although NPLs grew slightly in the first nine months of 2018, the NPL to gross loans ratio retreated to just below the sector average, flattered by significant credit expansion. In view of Egypt’s still challenging economic outlook, a deterioration in loan asset quality cannot be ruled out over the near to medium term.
The Bank’s Basel II CAR recovered to an adequate level following an injection of Tier 2 qualifying subordinated funds from the central bank in 2016. Furthermore, in December 2017 the shareholder granted a new EGP2,000mn 7-year subordinated loan. Despite the improved CAR, the Bank’s loss-absorbing capital remains moderate as indicated by the Tier 1 ratio. The Bank’s leverage was similar to the average of the other two state banks, National Bank of Egypt and BM, but considerably higher than the sector average. CI considers stronger levels of Tier 1 capital as increasingly necessary given industry-wide trends in capital management.
Following the setback in profitability in 2017, BdC’s operating and net profit recovered to a good level in Q1-Q3 2018 YoY measured in both money terms and against average total assets. Despite increased loan-loss provisioning, the ROAA (annualised) reached a strong level on the back of higher net interest income and non-interest income (NII). It should be noted however that NII benefited from a significant non-recurring gain from sale of equity investment. Fee and commission income − which remained the largest contributor to NII − expanded further driven by increased loan fees as lending resumed. By way of comparison, profitability in 2017 had been negatively impacted by a combination of factors including lower net interest income and margin compression, along with increased operating costs, provisioning and tax expense. BdC’s profitability remains underpinned by strong gross income generation, particularly net interest income, combined with adequate cost control.
BdC was established in May 1952 and is currently the sixth largest bank in terms of total assets in the Egyptian banking sector. Under the impetus of new management installed a decade ago, BdC has adopted a business model focused on retail activities and, to a lesser degree, corporate banking. Retail is premised on payroll based loans to government sector employees. Newer products such as credit cards, car loans and vehicle finance have also been launched. The Bank maintains a strong operating platform of more than 200 outlets nationwide. As at end-September 2018, BdC’s total assets were EGP148 billion (USD8.3 billion) and total capital was EGP7.49 billion (USD418mn).
CONTACT
Primary Analyst
Morris Helal
Senior Credit Analyst
Tel: +357 2534 2300
Email: morris.helal@ciratings.com
Secondary Analyst
Chris Nicolaou
Senior Credit Analyst
Email: chris.nicolaou@ciratings.com
Rating Committee Chairman
Darren Stubing
Senior Credit Analyst
The ratings have been initiated by CI. However, the issuer participated in the rating process. The information sources used to prepare the credit ratings are the rated entity and public information. CI had access to the published financial statements of the issuer for the purpose of the rating and had access to one or more of the following: the internal accounts; management; and other relevant internal documents of the issuer. CI considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in December 2009. The ratings were last updated in September 2018.
The principal methodology used in determining the ratings is the Bank Rating Methodology. The methodology, the meaning of each rating category, the time horizon of rating outlooks and the definition of default, as well as information on the attributes and limitations of CI's ratings, can be found at www.ciratings.com. CI’s policy on unsolicited ratings including an explanation of the colour coding of credit rating symbols can be found at the same location. Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at http://cerep.esma.europa.eu
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