Banque du Caire – Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Banque du Caire (BdC) at ‘B+’ and ‘B’, respectively. At the same time, CI Ratings has affirmed BdC’s Bank Standalone Rating (BSR) of ‘b’, Core financial Strength (CFS) rating of ‘bb-’ and Extraordinary Support Level (ESL) of Moderate. The Outlook for the LT FCR and BSR remains Stable.

The Bank’s LT FCR is set one notch above the BSR to reflect the moderate likelihood of official extraordinary support given BdC’s effective state ownership. While CI considers the Egyptian government willing to provide extraordinary support, its financial capacity may be limited as indicated by Egypt’s sovereign ratings (‘B+’/‘B’/Stable). BdC’s BSR is derived from a CFS rating of ‘bb-’ and Operating Environment Risk Anchor (OPERA) of ‘b’. OPERA reflects the sovereign risk profile of Egypt, as well as the negative impact of Covid-19 on economic activity and credit conditions – although this threat appears to be lessening. Operating environment risk is mitigated by financial support from the IMF and GCC countries and the sound condition of the banking system.

The CFS takes in the demonstrated continuing ordinary support available from the Egyptian Government via parent Banque Misr (BM), the diversified business model and the wide retail banking franchise. The latter underpins BdC’s strong funding and liquidity metrics, a leading credit strength. Profitability at both the operating and net levels has held up well (as has the net interest margin (NIM)) despite difficult operating conditions and on balance this remains a credit strength. There is some concern however that pressures on asset quality may result in a higher cost of credit going forward. Despite a negative internal capital generation rate for the nine months to September 21 (a consequence of a very generous dividend pay-out) the equity base actually rose due to retained earnings and a substantial infusion of fresh equity. Nonetheless capital ratios tightened – but remained at still comfortable levels with a now strong CET-1 ratio following the capital injection.

The main credit challenge therefore lies with asset quality – or more accurately, possible future asset quality. Currently asset quality still remains satisfactory in that the NPL ratio is still at an adequate level while loan loss reserves (LLRs) provide full coverage. That said, the metric trends seen in this area are a main concern. Given that forbearance measures are still being applied in Egypt, NPL accretion rates may rise further as and when these are lifted. Although the Bank has provisioned prudently, the still full rate of LLR coverage has begun to trend downwards.

BdC has a deep, predominantly retail customer deposit base, with limited single depositor concentrations, a good term structure and only a small foreign currency component. Usage of other sources of funding as well as refinancing risks are moderate and supported by zero coupon subordinated debt from BM and the Central Bank. The Bank is in a position to access additional term funds from multilaterals if necessary. Regulatory net stable funding ratio and liquidity coverage ratio in both EGP and foreign currency are more than adequate. Absent a very restrictive monetary tightening or a systemic liquidity crisis, large holdings of EGP government securities provide a large liquidity buffer. Primary readily available liquidity, as reflected by the net liquid asset and net interbank ratios, remains comfortable as is the case with peer banks.

Profitability is good at both the operating and net levels, with the cost of provisioning still at a moderate level – although this might have to rise if NPL accretion rises with the end of forbearance measures. NIM is strong and appears to be under less pressure than that seen at some of its peers.

BdC’s sovereign credit exposure in terms of government securities – as a proportion of its equity – is substantial, in common with almost all other Egyptian banks. Moreover, as a state-owned bank exposure (both funded and non-funded) to public sector borrowers is significant. As is the case with all Egyptian banks, the CAR is supported by zero risk weighting of EGP sovereign securities. Overall, capital flexibility is expected to remain satisfactory due to demonstrated capital support from shareholders, which is an important credit strength.

Rating Outlook

The Outlook for the LT FCR and BSR is Stable, reflecting our expectation that the ratings are unlikely to change over the next 12 months.

Rating Dynamics: Upside Scenario

Although the Bank’s LT FCR is currently set at the same level as the sovereign, it would not automatically benefit from an uplift were the rating of the sovereign itself raised as this would require the BSR to also be raised. This in turn would require an uplift in the OPERA and/or CFS. This is currently seen as being unlikely within a 12 month timeframe.

Rating Dynamics: Downside Scenario

While not our current expectation, BdC’s ratings could be reduced by one notch over the next 12 months if Egypt’s sovereign ratings are lowered.

Contact

Primary Analyst: Rory Keelan, Senior Credit Analyst; E-mail: rory.keelan@ciratings.com
Secondary Analyst & Committee Chairperson: Morris Helal, Senior Credit Analyst

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2017-20 and 9M 21. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity 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 principal methodology used to determine the ratings is the Bank Rating Methodology, dated 3 April 2019 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at

This rating action follows a scheduled periodic (annual) review of the rated entity. Ratings on the entity were first released in December 2009. The ratings were last updated in February 2021.The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure.

The ratings have been initiated by CI. The following scheme is therefore applicable in accordance with EU regulatory guidelines.
 
Unsolicited Credit Rating

With Rated Entity or Related Third Party Participation: Yes
With Access to Internal Documents: No
With Access to Management: Yes

Conditions of Use and General Limitations

The information contained in this publication including opinions, views, data, material and ratings may not be copied, distributed, altered or otherwise reproduced, in whole or in part, in any form or manner by any person except with the prior written consent of Capital Intelligence Ratings Ltd (hereinafter “CI”). All information contained herein has been obtained from sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error or other factors by third parties, CI or others, the information is provided “as is” and CI and any third-party providers make no representations, guarantees or warranties whether express or implied regarding the accuracy or completeness of this information.

Without prejudice to the generality of the foregoing, CI and any third-party providers accept no responsibility or liability for any losses, errors or omissions, however caused, or for the results obtained from the use of this information. CI and any third-party providers do not accept any responsibility or liability for any damages, costs, expenses, legal fees or losses or any indirect or consequential loss or damage including, without limitation, loss of business and loss of profits, as a direct or indirect consequence of or in connection with or resulting from any use of this information.

Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market price or suitability of any security for a particular investor.

The information contained in this publication does not constitute investment or financial advice. As the ratings and analysis are opinions of CI they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment or other business decisions.

Copyright © Capital Intelligence Ratings Ltd 2022

MENAFN30032022002960000411ID1103940856