(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 Bank of Alexandria (Alexbank) at ‘B+’ and ‘B’, respectively. At the same time, CI Ratings has affirmed Alexbank’s Bank Standalone Rating (BSR) of ‘b+’, Core Financial Strength (CFS) rating of ‘bb’ and Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR and BSR remains Stable.
The Bank’s BSR of ‘b+’ is derived from a CFS rating of ‘bb’ and an Operating Environment Risk Anchor (OPERA) of ‘b’. The ESL of High is based on Intesa Sanpaolo (ISP) ownership. CI considers that the Italian parent has the capacity and willingness to provide extraordinary support to the Bank if needed. The LT FCR is however not notched up for this support as the Bank does not meet our criteria for being rated above the implied country ceiling for Egypt of ‘B+’. The latter takes into account our sovereign credit rating for Egypt of ‘B+’, and our assessment of the possibility of sovereign interference risk as being High.
Egypt’s operating environment risk reflects the still high sovereign risk profile. Although Egypt weathered the Covid pandemic reasonably successfully, it was subsequently adversely affected by the war in Ukraine; higher costs for food imports have strained the trade account and raised the government’s subsidy bill. While Egypt is relatively self-sufficient in terms of energy, prices are set internationally; supply is assured, but at a price. Once again, subsidy bills are impacted. Fortunately, the government has been able to rely on continued support from the IMF and GCC countries, which reduce the economy’s external refinancing and macro-financial risks. A new IMF agreement is imminent. The Bank’s ratings remain underpinned by the credit strengths of high profitability, solid capital ratios and comfortable liquidity. The latter is supported by a large base of retail deposits and the sizeable portfolio of government securities. Alexbank is also a heavily net placer in the interbank market.
Notwithstanding an upward trend in the NPL ratio and a downward trend in loan loss reserve coverage, the bulk of the credit challenges that face Alexbank relate to the operating environment and the economy rather than any financial issues internal to the Bank itself. The fallout on markets from the war in Ukraine has been a negative credit development globally but the inflationary pressures in Egypt have been acute, especially as they have impacted key commodities and the very important tourism trade – a major source of FX earnings. For the government, this has meant budgetary pressures and a squeeze on system FX liquidity; for the wider economy, the issue has been high and persistent inflation and a declining currency.
While asset quality has held up well so far within the banking system as a whole, pressures may be building – something that would impact all banks. Alexbank’s asset quality metrics appear to confirm that management continues to follow a conservative approach to lending, although the rate of increase in money NPLs in 2021 and H1 22 is a cause for a degree of concern. However, credit absorption capacity continues to be good, underpinned by solid capital buffers (and the implied ability to turn to the parent for support in case of need), while Stage 2 loan outstandings remain at a reasonably low proportion of gross loans.
The Bank’s funding profile remains a key credit strength due to the predominance of EGP retail funds and the shift toward cheaper CASA deposits. Customer deposit gathering capability remains good, supported by its relatively large branch network. Alexbank has very limited reliance on wholesale funds. Moreover, in case of need it would be able to access funding from ISP. The Bank also continues to exhibit good liquidity metrics, reflecting its holdings of government securities and balances with the Central Bank of Egypt. Systemic liquidity risks relate mainly to foreign currency funding, although the Alexbank business model has little reliance on FX in either assets or liabilities.
CI considers capitalisation to be a credit strength in terms of capital adequacy metrics, although this is tempered by the high level of exposure to the ‘B+’ rated sovereign. While the high total CAR owes a great deal to the zero risk weighted asset (RWA) weighting of the Egyptian government securities, the balance sheet and Basel III leverage ratios are good – as is the quality of capital. Although the rate of internal capital generation is low, the presence of a large and financially strong foreign parent should mean additional ordinary capital support would be forthcoming if required. Similarly, earnings and profitability remain an area of credit strength; the track record at both the operating and net levels has been good. Although some profitability metrics slipped in H1 22, it is possible that the ratios will recover for the full year given the upward pressure that higher interest rates should exert on net interest margin.
The Stable Outlook reflects our expectation that (unless there is a change in the sovereign’s ratings or outlook) the ratings are unlikely to change over the next 12 months given Alexbank’s generally satisfactory risk profile. We expect key profitability metrics and liquidity to remain good, with capital metrics to be maintained at near to current levels.
Rating Dynamics: Upside Scenario
An upgrade to the ratings or favourable change in the outlook on the LT FCR and BSR would require a similar upward revision to either outlook or ratings for the sovereign. This is currently seen as being unlikely in the specified time frame.
Rating Dynamics: Downside Scenario
Alexbank’s ratings could be lowered by one notch over the next year if Egypt’s sovereign ratings are lowered because of higher-than-expected pressures on external balances or deterioration in the public finances. A downward adjustment could also be prompted by a significant deterioration in the Bank’s loan asset quality and a noticeable weakening of liquidity and capital ratios, but such adverse developments are seen as being unlikely at this point.
Primary Analyst: Rory Keelan, Senior Credit Analyst; E-mail: firstname.lastname@example.org
Secondary Analyst: Morris Helal, Senior Credit Analyst; E-mail: email@example.com
Committee Chairperson: Karti Inamdar, Senior Credit Analyst
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