(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) and Bank Standalone Rating (BSR) of Bank of Alexandria (Alexbank) to ‘B’ and ‘b’, respectively, from ‘B+’ and ‘b+’ . The change in the LT FCR and BSR follows a recent lowering of Egypt’s Sovereign LT FCR to ‘B’ on 1 September 2023. The sovereign downgrade reflects 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 LT FCR and BSR reflects CI’s view that downside risks for the banking system have increased and this is likely to now pressure Alexbank’s credit profile due to ongoing risks to macroeconomic stability. 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 Alexbank’s Short-Term Foreign Currency Rating (ST FCR) of ‘B’, Core Financial Strength (CFS) rating of ‘bb’, and Extraordinary Support Level (ESL) of High. The LT FCR is not however notched up for this level of support as the Bank does not meet our criteria for being rated above the sovereign.
Alexbank’s BSR is derived from a CFS rating of ‘bb’ and an Operating Environment Risk Anchor (OPERA) of ‘b’. Normally, this would result in a BSR of ‘b+’, but as with the LT FCR, the BSR is constrained by the Sovereign. 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.
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, and the state budget has come under increasing strain. Previously, Egypt was able to obtain support from the IMF and from the richer GCC states, but conditions have changed. Although an additional IMF programme was agreed, the size was relatively small and the associated conditionality required politically difficult economic reforms; these are still not fully in place. Meanwhile, historically friendly GCC countries have moved away from grant aid and deposits with the Central Bank of Egypt (CBE); instead money will be available from FDI and asset purchases.
The Bank’s ratings remain underpinned by the credit strengths of good profitability at both the operating and net levels, solid capital ratios and comfortable liquidity. The latter is supported by a large base of retail deposits and the sizeable portfolio of government securities (albeit that these also raise concentration concerns). Alexbank also continues to be a heavily net placer in the interbank market.
Notwithstanding a continuing upward trend in the NPL ratio and a loan loss reserve coverage that is only slightly more than full, 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 an intensifying squeeze on system FX liquidity; for the wider economy, the issues have been high and persistent inflation and a declining currency.
While overall asset quality has held up reasonably well so far within the banking system as a whole, pressures have been building – and these have begun to show in the asset quality metrics of all banks that have reported H1 23 results. Alexbank’s loan growth and asset quality metrics appear to confirm that management continues to follow a conservative approach to lending, although the faster rate of increase in money NPLs in 2022 and H1 23 is a cause for increasing concern. However, credit absorption capacity continues to be satisfactory, underpinned by sound capital buffers (and the implied ability to turn to the parent for support in case of need), while Stage 2 loans remain at a reasonably low proportion of gross loans. The significant holdings of government securities is (as with all Egyptian banks) another source of some concern in terms of concentration risk, although at a level equivalent to 2.3x equity, the ratio is lower than at many of its peers.
The Bank’s funding profile remains a key credit strength due to the predominance of EGP retail funds and the shift toward CASA deposits. Customer deposit gathering capability remains good, supported by the Bank’s relatively large branch network, and customer deposit growth in H1 23 was strong. 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 significant holdings of government securities and balances with the CBE. Systemic liquidity risks relate mainly to foreign currency funding, although the Alexbank business model has little reliance on FX in either assets or liabilities. Egyptian government securities denominated in EGP are readily tradeable and repoable.
CI considers capitalisation to be a credit strength in terms of capital adequacy metrics, although this is tempered by the high level of securities exposure to the ‘B’ rated 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 still good – as is the quality of capital. The rate of internal capital generation is satisfactory, while the presence of a large and financially strong foreign parent should mean additional ordinary capital support would also 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 2022, ratios recovered in H1 23, with the net interest margin (NIM) being particularly strong. The outlook for NIM for full year 2023 remains positive.
Rating Outlook
The Outlook for the LT FCR and BSR is Stable, indicating that CI does not expect these ratings to change over the next 12 months, unless there were to be a 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
Leaving aside another lowering of the sovereign rating or its outlook, the most likely development that would prompt a lowering of the outlook or actual ratings would be a significant rise in NPLs. We do not see this as being likely at this point, as the end-H1 23 base of NPLs was still adequate in ratio terms, and the level of Stage 2 loans was modest.
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