(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has lowered the Long-Term Foreign Currency Rating (LT FCR) of Banque du Caire (BdC) to ‘B’ from ‘B+’. The change in the LT FCR follows a recent similar rating action on Egypt’s sovereign rating (‘B’/‘B’/Stable) on 1 September 2023, reflecting the increase in Egypt’s external financing risks due to the country’s high external financing needs and risks to the sufficiency and timeliness of financing inflows. The change in the Bank’s LT FCR reflects CI’s view that downside risks for the banking system have increased and this is likely to now pressure BdC’s credit profile due to ongoing risks to macroeconomic stability. BdC’s Bank Standalone Rating (BSR) remains unchanged at ‘b’. The Outlook for the LT FCR and BSR has been revised to Stable from Negative in line with the sovereign. At the same time, CI Ratings has affirmed BdC’s Short-Term Foreign Currency Rating (ST FCR) of ‘B’, Core Financial Strength (CFS) rating of ‘bb-’, and Extraordinary Support Level (ESL) of Moderate. Such an ESL would normally allow for a one notch uplift for the Bank’s LT FCR. This is however precluded as the Bank does not meet the criteria that would allow the LT FCR to be set at a level above the sovereign.
The ESL of Moderate reflects the likelihood of official extraordinary support given BdC’s effective government ownership. While CI considers the Egyptian government to be willing to provide extraordinary support, its financial capacity may be somewhat limited as indicated by Egypt’s current sovereign rating. Ordinary capital support has nonetheless been regularly forthcoming, as was last demonstrated in Q1 of last year.
BdC’s BSR is derived from a CFS rating of ‘bb-’ and the constraints imposed by the Operating Environment Risk Anchor (OPERA) of ‘b’. OPERA reflects the still high-risk sovereign profile of Egypt, as well as the adverse impact of first Covid-19 and currently the Ukrainian conflict on economic activity and credit conditions.
The CFS reflects the Bank’s supportive, government-owned parent Banque Misr and through them, the support of the government itself. The diversified business model and quality of management also support the rating. BdC’s operational and business strength underpins still sound operating profitability, although ROAA is on a declining trend. The second most important credit strength is BdC’s broad retail-based deposit funding profile and adequate buffer of liquid assets, albeit that these are mainly in the form of government securities. Capitalisation is seen as still being satisfactory despite the downward trend in balance sheet leverage and notwithstanding the RWA-based ratios being flattered by the large portfolio of zero-weighted government securities. While asset quality metrics remain adequate, the NPL ratio is on a rising trajectory while loan loss reserve coverage is declining. However coverage remains well above 100% and the adverse changes in these metrics is mitigated by the fact that gross loans were less than 40% of total assets and end-Q1 23. The level of Egyptian government securities held by BdC remains high in relation to capital at over 4x; this concentration is seen as a credit weakness. Any significant sovereign credit event would therefore potentially transmit sovereign stress to BdC’s balance sheet and impact capital as well as earnings. CI expects these concentration risks to persist over the foreseeable future.
Looking ahead, the high interest rate environment is likely to have supported the net interest margin in Q2 and Q3 2023, but it also raises funding costs for borrowers. Given the difficult operating environment and a high rate of inflation, these higher rates may in time negatively impact the debt service capacity of some borrowers; NPL ratios at some banks that have already reported for H1 23 have shown growth in NPLs. If this leads to the rate of new NPL growth rising at BdC as well, the cost of credit is likely to increase, impacting ROAA.
Rating Outlook
The Outlook for both the LT FCR and BSR is Stable, indicating that CI does not expect these ratings to change over the next 12 months unless there is further movement in the sovereign’s ratings.
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
The Outlook for the LT FCR or the rating itself could be lowered should the rating of the sovereign be lowered. Although BdC shows some financial weaknesses in terms of balance sheet leverage and the trend in loan asset quality, financial metrics are currently such that a downgrade within the next 12 months on grounds of financial weakness would appear unlikely.
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 FY2019-22 and Q1 23. 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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Unsolicited Credit Rating
With Rated Entity or Related Third Party Participation: Yes
With Access to Internal Documents: Yes
With Access to Management: Yes
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