(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has lowered the Outlook on the Long-Term Foreign Currency Rating (LT FCR) and Bank Standalone Rating (BSR) of Bank of Alexandria (Alexbank) to Negative from Stable. The change in the outlook follows a recent similar rating action on Egypt’s sovereign outlook. The level of Egyptian government securities held by Alexbank is high in relation to capital. Given this factor, we therefore believe there to be a close linkage to the ratings of the sovereign. At the same time, the Bank’s LT FCR and Short-Term Foreign Currency Rating (ST FCR) have been affirmed at ‘B+’ and ‘B’, respectively. CI Ratings has also affirmed Alexbank’s BSR of ‘b+’, Core Financial Strength (CFS) rating of ‘bb’ and Extraordinary Support Level (ESL) of High.
The Bank’s BSR 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+/Negative’, 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. 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 a continuing upward trend in the NPL ratio and a downward movement in the now less than full loan-loss reserve coverage, the bulk of the credit challenges that face Alexbank relate to the very difficult operating environment and the effects of a weakening economy − rather than financial issues internal to the Bank itself. 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 continue to follow a conservative approach to lending, although the rate of increase in money NPLs in 2021 and the first nine months of 2022 is a cause for a degree of concern as credit absorption capacity has weakened.
The Bank’s funding profile remains a key credit strength and 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 should 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 zero-weighted exposure to the ‘sovereign. While the high total CAR owes a great deal to the zero risk weighted asset weighting of the Egyptian government securities, the balance sheet and Basel III leverage ratios are good. Capital flexibility is strong as 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.
Rating Outlook
The Outlook for the LT FCR and BSR is Negative, indicating that CI expects these ratings to be lowered by one notch over the next 12 months, in line with the expected movement in the sovereign’s rating.
Rating Dynamics: Upside Scenario
As the Bank’s LT FCR is already set at the same level as the sovereign, we do not expect a change in that rating unless either the rating or the outlook of the sovereign itself was raised. This is currently seen as being very unlikely within a 12 month timeframe.
Rating Dynamics: Downside Scenario
Although we currently see it as being unlikely, the LT FCR could be lowered by more than one notch should the rating for the sovereign itself be lowered by more than one notch. Although Alexbank’s financial metrics show some weaknesses, a further downgrade would appear unlikely in the absence of such a further sovereign downgrade.
Contact
Primary Analyst: Rory Keelan, Senior Credit Analyst; E-mail: rory.keelan@ciratings.com
Secondary Analyst & Committee Chairperson: Morris Helal; E-mail: morris.helal@ciratings.com
About the Ratings
The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.
The following information source was used to prepare the credit ratings: public information. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2018-21 and Q3 2022. 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.
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