Export Development Bank of Egypt (EBank) – Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed Export Development Bank of Egypt’s (EBank) Long-term Foreign Currency Rating (LT FCR) and Short-term Foreign Currency Rating (ST FCR) of B’. At the same time the Bank Standalone Rating (BSR) of ‘b’, Core financial Strength Rating (CFS) rating of ‘bb-’ and Extraordinary Support Level (ESL) of Moderate have also been affirmed. The Outlook on the LT FCR and BSR remains Stable.

Given EBank’s base of operations in Egypt, exposure to Egyptian government debt securities and the governmental and state-owned enterprises (SOE) sectors exceeds the capital base; the ratings are therefore closely correlated with that of the sovereign. The linkage is also strengthened by ownership; although EBank is not directly owned by the government, over 75% of the shares in the Bank are owned by state-owned entities.

The Bank’s BSR of ‘b’ is derived from a CFS rating of ‘bb-’ and an Operating Environment Risk Anchor (OPERA) of ‘b’. The CFS is supported by generally satisfactory financial metrics and by EBank’s export credit and factoring franchises and business development potential. It should also in time be supported by the expected diversification benefits of the new business strategy adopted two years ago. However, the CFS also incorporates the execution risk inherent in any change of strategy. While the latter does not include any sharp departures from the current business model, it does however call for a multi-year programme of quite vigorous asset and loan growth. Such rapid loan growth always raises potential pressure on asset quality, particularly during difficult economic times, although to date achieving targeted growth rates has not been accompanied by any signs of increased NPL accretion. In the meantime, EBank faces strong competition from the larger universal banks.

The OPERA reflects a challenging economic situation, still very high inflation and large socioeconomic vulnerabilities. These challenges in part stem from significantly higher geopolitical risks, which led to large external liquidity risks and a sharp deterioration in Egypt’s external liquidity position. However, the increases in external liquidity risks, coupled with foreign currency shortages in the local market, have been mitigated by the recent, large inflows of funds from UAE through the Ras Al Hikmah project and conditional financial assistance from the IMF as well as the loans from the World Bank and the EU. Although monetary policy predictability has improved in line with the full liberalization of the exchange rate, implementation risks persist in view of the socially sensitive nature of these reforms. For Egyptian banks, the easing of FX liquidity will allow their manufacturing customers to be able to resume the import of crucial inputs and capital equipment. As well as strengthening the financial position of such customers, there will be opportunities for banks for trade finance and the financing of CAPEX.

The Moderate ESL would normally allow for a one notch uplift for the Bank’s LT FCR. However, as the BSR is set at the sovereign level, no uplift is possible. OPERA reflects Egypt’s high sovereign risk profile due to significant government borrowing needs, and long-standing balance of payments vulnerabilities which were exacerbated following the Ukraine conflict. These vulnerabilities were compounded by the effects of the Gaza war on Suez Canal revenues and the impact of the conflict on tourism.

The Bank still has reasonably good asset quality metrics, with a relatively low NPL ratio and full loan loss reserve coverage. It is moreover noted that Default Payment Insurance Guarantees are in place for part of the portfolio, limiting loss given default on the guaranteed NPLs. Potential receipts from claims under these guarantees are factored in when calculating required loss reserves. Loan asset quality however tends to be a lagging indicator and the potential longer-term impact of the current difficult operating conditions on asset quality may not become apparent for some time, especially given the concentrations in the loan portfolio. Sovereign exposure through holdings of government securities is significant, although lower than at some points in the past and on a declining trend. While these holdings of sovereign securities are moderate by Egyptian standards, the risk of valuation losses and potential impairments remains a significant constraining factor, as is the case with most banks in Egypt.

The funding and liquidity profile is considered to be adequate, although concentrations in the deposit base are still seen as being a constraining factor. These should however slowly lessen over time as retail and HNW banking services are expanded – retail deposits now make up 15.5% of the total. While holdings of sovereign securities are moderate by Egyptian standards, nonetheless, the risk of valuation losses and potential impairments remains a significant constraining factor, as is the case with most banks in Egypt. The Bank has a good business and operational profile, with the latter being steadily improved through digitalisation and business process re-engineering. EBank also retains its specialised export credit franchise with its majority ownership of Export Credit Guarantee Co of Egypt and related Factoring Co.

Capital support from EBank’s mainly state-owned shareholders is expected to remain a credit strength, with this support most recently demonstrated by the 2022 and 2023 rights issues. However, the risk-weighted asset (RWA) growth implied by the current strategy would almost certainly eventually require further additions to capital going forward – although not yet. Following the rights issue in 2022 and the further capital increase in 2023, capital ratios remain satisfactory, although those based on the level of RWAs are flattered by the zero risk-weighting of government securities and the substantial statutory reserves held at the Central Bank of Egypt (CBE). Both the balance sheet and Basel III leverage ratios remain sound and have been on a rising trend. Capital flexibility is considered satisfactory given the track record of a relatively high level of internal capital generation and the support demonstrated by the seven rights issues over the past 11 years.

Earnings quality is good but profitability ratios have shown some past volatility. Operating and net profitability are nonetheless expected to remain sound and to continue to support the CFS. The previously relatively high cost-to-income ratio is now more in line with those of other Egyptian banks. Operating expenses have been increasing considerably due to expenditure related to branch openings, product development and personnel costs but the growth rate for operating income has been more rapid. Provisioning expenses have been well contained to date in terms of both percentage of operating profit consumed and in relation to gross loans. Although asset quality pressures are always seen as being likely to rise in a weak economy, to date metrics in this area have remained good.

EBank is a fully fledged commercial bank that operates a universal banking model and is not overly dependent on official sources of funding. The Bank’s primary source of funding is its customer deposit base. Although there is a growing base of retail deposits, concentrations of deposits from corporates and related parties introduce a degree of potential volatility. Access to temporary liquidity through repos is available from the CBE and in the interbank market by pledging the investment securities portfolio. However, as is the case with all Egyptian banks, this is subject to systemic liquidity risks. EBank maintains good access to term funding from multilateral entities on commercial terms.

Rating Outlook

The Stable Outlook reflects the Stable Outlook assigned to the sovereign rating and indicates our view that the ratings and outlook are unlikely to change within the next 12 months unless the sovereign ratings or outlook were to change.

Rating Dynamics: Upside Scenario

The most likely upside scenario would be for a revision of the outlook on the LT FCR to Positive. This would require a similar upward revision to the outlook for the sovereign rating. While not our current base case scenario, this is nonetheless seen as being a possibility in the specified time frame. As the BSR is not constrained by the sovereign rating, an upgrade in that rating or its outlook would require both an upward shift in the sovereign rating and a one notch upgrade to either the CFS or the OPERA.

Rating Dynamics: Downside Scenario

The most likely downside scenario would be for a revision of the outlook on the LT FCR and BSR to Negative. Given EBank’s still generally satisfactory risk profile, such a ratings change would probably be driven by a similar movement in the outlook on the sovereign rating. That said, a lowering of the outlook to Negative or even a one notch reduction in the LT FCR could also be prompted by a significant deterioration in the Bank’s loan asset quality and a noticeable weakening of liquidity and capital ratios, adverse developments for EBank which are seen as being unlikely at this point.

Contact

Primary Analyst: Rory Keelan, Senior Credit Analyst; E-mail: ...
Secondary Analyst and 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 FY2019-23. 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.

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

This rating action follows an ad hoc review of the rated entity. Ratings on the entity were first released in May 1987. The ratings were last updated in August 2024. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure. The ratings have been assigned or maintained at the request of the rated entity or a related third party.

Conditions of Use and General Limitations

The information contained in this publication including opinions, views, data, material and ratings may not be copied, distributed, altered or otherwise reproduced, in whole or in part, in any form or manner by any person except with the prior written consent of Capital Intelligence Ratings Ltd (hereinafter “CI”). All information contained herein has been obtained from sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error or other factors by third parties, CI or others, the information is provided “as is” and CI and any third-party providers make no representations, guarantees or warranties whether express or implied regarding the accuracy or completeness of this information.

Without prejudice to the generality of the foregoing, CI and any third-party providers accept no responsibility or liability for any losses, errors or omissions, however caused, or for the results obtained from the use of this information. CI and any third-party providers do not accept any responsibility or liability for any damages, costs, expenses, legal fees or losses or any indirect or consequential loss or damage including, without limitation, loss of business and loss of profits, as a direct or indirect consequence of or in connection with or resulting from any use of this information.

Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market price or suitability of any security for a particular investor.

The information contained in this publication does not constitute investment or financial advice. As the ratings and analysis are opinions of CI they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment or other business decisions.

Copyright © Capital Intelligence Ratings Ltd 2024

MENAFN26092024002960000411ID1108719129