National Bank of Egypt – Bank Standalone Rating Raised

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of National Bank of Egypt (NBE) at ‘B+’ and ‘B’, respectively. At the same time, CI Ratings has raised NBE’s Bank Standalone Rating (BSR) to ‘b+’ (from ‘b’) and Core financial Strength (CFS) rating to ‘bb’ (from ‘bb-’). The Extraordinary Support Level (ESL) of Moderate, and the Stable Outlook for the LT FCR and BSR have been affirmed.

Although most of the Bank’s financial metrics have been stable for several years, their resilience over a period in which the operating environment has been difficult is impressive. With the negative impact of Covid-19 lessening, the CFS has been raised to reflect this resilience and our expectation of improved performance ahead. The improved CFS is supported by the Bank’s government ownership alongside its systemic importance and dominant market share across all business segments. The rise in the CFS (combined with an unchanged Operating Environment Risk Anchor [OPERA] for Egypt) has also led to a one notch rise in the BSR.

Despite the ESL of Moderate, the Bank’s LT FCR is set at the same level as the BSR as it is already at the same level as the sovereign (‘B+’/Stable); the normal one notch uplift therefore does not apply. The ESL reflects the likelihood of official extraordinary support given NBE’s government ownership and systemic importance as Egypt’s largest bank in terms of assets. While CI considers the Egyptian government willing to provide extraordinary support, its financial capacity may be somewhat limited as indicated by Egypt’s sovereign ratings. As a result, the ESL is set at Moderate. NBE’s BSR is derived from a CFS rating of ‘bb’ and an OPERA of ‘b’. OPERA reflects the still high-risk sovereign profile of Egypt, as well as the potential adverse impact of Covid on economic activity and credit conditions, albeit that these risks are seen as receding.

Key strengths for NBE are its strong liquidity, underpinned by a deep (predominantly retail) customer deposit base and good access to other sources of funding. Although asset quality metrics are currently good − with the NPL ratio on a downward trend and loan loss reserve (LLR) coverage maintained at a strong level – this is in part due to strong loan growth and to some extent will also be due to the benefit of Covid-related forbearance measures. CI therefore considers the outlook for loan asset quality will remain uncertain for some time. Similarly, while the level of Stage 2 loan exposures is currently low, underlying pressures in the book may be obscured by Covid-related forbearance measures. The main constraints on the CFS are the high concentration risk in government securities and the modest bottom line profitability despite a low cost of credit. Although Egypt is essentially self-sufficient in energy (and so as a country should escape most of the negative impacts of higher hydrocarbon prices), the same is not true for food. Egypt has to import most of its needs and bread is a staple; the effects of higher wheat prices will put a strain on both consumers and government budgets.

Business strategy remains focused on modernising core banking business and improving financial performance. However, the Bank intends to build further on its very strong franchise to grow its SME and Retail banking businesses as this will support the national drive for increased financial inclusion. However, investment in government treasury bills and bonds still forms a very high proportion of assets and sources of income. Direct sovereign credit exposure increased further in the 12 months to June 2021 and stood at a very high multiple of the Bank’s equity. Accordingly, the Bank’s elevated exposure to Egypt sovereign risk remains vulnerable to downside risks affecting the sovereign profile, which could impact NBE’s capital through fair value losses or impairments.

The high proportion of zero risk-weighted government securities in the asset base also means a low risk weighted asset density. This in turn boosts most capital ratios to comfortable levels. However, balance sheet leverage – as measured by the ratio of equity to total assets – is low. This potential vulnerability is however offset by government ownership and the resulting high degree of capital flexibility. NBE occupies a systemically important position in the Egyptian banking sector. As a fully state-owned entity and the country’s largest financial institution, the Bank’s corporate identity and extensive distribution channels underpin its strong deposit mobilisation capacity and liquidity, as well as its ability to grow its asset base and (potentially) earnings. The Bank also has good access to wholesale sources of funds and term borrowings.

The relatively low profitability ratios – in terms of peer group comparisons – in large part reflect a declining trend in net interest margin. This in turn reflects the relatively low proportion of loans in the asset base and above median cost of funds. The latter should however correct over time as longer tenor (and higher cost) CD funding is now running off. Cost of credit is relatively low with this currently being a positive credit factor. However, once forbearance measures end, this may need to rise.

Rating Outlook

The Stable Outlook reflects our expectation that the ratings are not likely to change over the next 12 months.

Rating Dynamics: Upside Scenario

As NBE’s LT FCR is already set at the same level as the sovereign, we do not expect a change in either rating or Outlook unless the rating or outlook of the sovereign itself was raised. This is currently seen as being unlikely within a 12 month timeframe.

Rating Dynamics: Downside Scenario

A downward revision of NBE’s Outlook or ratings would require a significant deterioration in financial metrics, something that we do not envisage as being likely over the next 12 months. While not our current expectation, the Bank’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 for the 12 month period to end-June 2021. 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

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


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