Sherine Abdel-Razek leafs through Moody's reports, highlighting the advantages and challenges the banking sector faces The Egyptian cabinet announced last week that it has started to lay down the main guidelines for the second phase of the country's banking sector reform programme. While no details were disclosed about the kind of reforms the second phase would entail, the announcement coincided with Moody's release of positive reports on the sector as a whole, praising the outcomes of the first phase and calling for more changes which may be the essence of the new phase. Moody's two recent reports were a profile of the banking sector on one hand, and the banking system outlook for Egypt on the other. The two reports say that "considerable success in implementing reforms has resulted in a more resilient banking system." And while the reports highlighted the fact that Moody's credit outlook for the Egyptian banking system is stable, the "local challenging operating environment" as well as the global economic slowdown are risks to this outlook. The outlook expresses the international rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades. The problems pushing Moody's to describe the local operating conditions as challenging included corruption. Moody's uses the World Bank's Control of Corruption indicator as its basic reference tool to rate corruption. Based on this index, Egypt ranks in the last quartile globally, with a score of -0.41 versus a score of two or higher for the least corrupt countries. And though it has diminished somewhat, the problem of non-performing loans (NPLs) still exists. The report estimates the level of NPLs in state-owned banks at above 20 to 25 per cent of the overall loan portfolios. What makes this even more challenging is the nature of the legal system, where "weak loan enforcement and collateral foreclosure practices and apparent inefficiencies in the judicial procedures have, in the past, hindered the effective resolutions of overdue exposures of Egyptian banks after the loans become problematic." This can't be more evident than in the state-owned banks, where NPLs rose to above 30 percent in the last few years. However, the reports emphasised the fact that no Egyptian bank has ever been allowed to default even though several banks have faced financial difficulties in the past 20 years. This, the reports say, is indicative of the Egyptian authorities' willingness to support the stability of the banking system. Moody's banking sector profile predicts that an implementation of the whole restructuring programme will take longer than management envisages. "On the one hand, changing the 'public sector mentality' and shaking off bureaucratic habits remains one of the state-owned banks' most challenging tasks, while their levels of IT automation, operational re-organisation and risk management capabilities still lag behind those of the leading private sector banks," it said. Still there is much potential ahead. The country, as it stands, is considered under-banked given that only 10 per cent of the 75 million-strong population has a bank account, and the loans-to-GDP ratio of 45 per cent in June 2008 indicates that there is significant growth potential for local banks. Moreover, the underdeveloped retail, mortgage and SME sectors all yield better profit margins than other lending institutions, and offer opportunities for growth over the medium term. As things stand, household debt as a percentage of GDP is estimated at less than nine per cent -- well below the levels of developed markets. Retail sector loans currently make up 20 per cent of total loans and just seven per cent of total assets. Mortgage-related finance constitutes less than one per cent of the sector's total loans.
