Despite the impact of the coronavirus on the economy in general and the banks in particular, the Egyptian banking system will remain stable in 2021, according to a report issued by the international ratings agency Moody's. The sector's profits, as seen in results published by the listed banks, edged down in 2020 due to an increase in bad loans as some corporate borrowers found it difficult to meet their obligations amid the pressing economic conditions. The second factor that hit the bottom line was the decline in investment income as the Central Bank of Egypt (CBE) opted to reduce interest rates by a total of four per cent during 2020. The sector's star, the Commercial International Bank (CIB), reported a 14 per cent drop in profits for the first nine months of 2020 compared to the same period the previous year. Financial indicators for Credit Agricole Egypt showed that during the first nine months of 2020 its profits declined by 44.4 per cent year-on-year. The Housing and Development Bank's financial indicators revealed that for the first nine months of 2020 its profits had declined by six per cent on an annual basis. The Moody's report, however, noted that the banks' bottom lines would compare favourably to peers because of the CBE's decision to freeze cash dividends. In late January, the CBE instructed Egypt's banks not to pay cash dividends to shareholders in 2020 in order to protect the sector's liquidity amid concerns of the repercussions of the Covid-19 pandemic. The banks' low profitability has thus been offset by low dividend pay-outs, meaning that their internal capital generation will be maintained to cover the growth in risk-weighted assets and to keep capital ratios stable, the report said. However, Moody's expects the sector to witness an increase in non-performing loans this year, as other sectors of the economy are struggling to cope with the repercussions of the pandemic. “Non-performing loans will rise from a sector average of 3.9 per cent of gross loans as slowed business activity, subdued consumption, and disruption in the tourism and construction sectors take their toll on borrowers' repayment capacity,” it noted. Tourism revenues plunged by 74 per cent to reach $4 billion in 2020, with the pandemic resulting in the closing of airports. The number of tourists visiting Egypt sank to 3.5 million last year from 13.1 million in 2019, Tourism and Antiquities Minister Khaled El-Enany told Reuters in January. Foreign occupancy rates in Egyptian hotels dropped to just 10 to 15 per cent of 2019 levels. A positive factor highlighted by the report was low-cost customer deposits, with interest rates on deposits currently standing at 8.25 per cent compared to 12.25 per cent a year ago, giving the banks room for additional lending. In July 2020, deposits accounted for 73 per cent of the sector's total assets. A concern highlighted by Pharos, a local investment bank, in a recently published note was the fact that net interest margins — the difference between the interest rates banks pay on deposits and what they charge on loans — had already started to decline in the second half of 2020 and was likely to continue through 2021-22, with a further expected rate cut of two per cent in 2021. However, there is no liquidity crunch around the corner, as cash and interbank balances account for 19 per cent of the sector's total assets, according to Moody's. 39 per cent of these assets are invested in low-risk government securities. On another positive note, Pharos said that an improvement could be seen on the horizon in the level of corporate lending needed to fund the expected increases in capital expenditure in 2021, supported by the now low borrowing rate after the four per cent interest rate reduction. Pharos sees this expected increase in corporate borrowing supported by stronger macro-economic dynamics. Loan growth should beef up the utilisation ratios of deposits and might lead to competition among the banks to attract depositors and borrowers. A new tax law introduced in late 2019 and further taxes on the banks' investments in treasury bills would put a brake on the sector's profit growth, as “its impact becomes more visible in 2020, being applied on a larger portion of treasury investments, and since the banks parked high assets in treasuries in 2020,” Pharos said. A plan to allocate the equivalent of 0.5 per cent of bank deposits over 10 years in an emergency bailout fund to be dedicated to modernising and upgrading the sector is another profit-eating factor highlighted by Pharos. Another reason for the expected decline in the banks' bottom lines is the healthcare tax calculated on the lower 0.25 per cent of interest income or the first LE10,000. New capital requirements on the banking sector raising the minimum capital for the commercial banks to LE5 billion and up from LE500 million could trigger a wave of profit retention, capital raising, and mergers and acquisitions in the sector, according to Pharos. The local investment bank is betting on the effect of recent banking-sector acquisitions on stock prices. Two acquisitions took place last month. The First Abu Dhabi Bank (FAB) signed a final agreement to buy 100 per cent of Bank Audi's operations in Egypt in a deal that is expected to hover around $700 million. This came shortly after another struggling Lebanese bank, Blom Bank, was sold to Bahrain's Arab Banking Corporation (ABC) for LE6.7 billion. The two banks were in difficulties as the combined effects of the protests in Lebanon, the Beirut port explosions last August, and the Covid-19 pandemic have overshadowed the Lebanese economy and hit its banking sector hard.
