Egypt's cash-rich banks proved themselves resilient through the years of upheaval that followed the 2011 revolution which paralysed the economy and scared away foreign investors. For the banks, a steep rise in lending to the Cairo government struggling to plug a widening budget deficit has offered a safe way of making handsome earnings, while longstanding conservative credit policies have enabled them to keep bad loans in check. Now, as a degree of confidence returns to the economy — anchored in perceptions of the durability of the regime of Abdel Fattah al-Sisi, the president and former army chief — banks report a take-off in corporate lending at levels unseen since pre-revolution days. Foreign currency shortages as a result of the damage to tourism and the drop in foreign investment are still considered a brake on economic activity, but big companies in a range of sectors in this market of 90m people have increased their borrowing for capital expenditure. Hussein Abaza, chief executive officer of institutional banking at Commercial International Bank-Egypt (CIB), the country's biggest private sector bank, says the trend started in June 2014 and that it affects sectors such as food, pharmaceuticals, consumer non-durables, energy, construction and even tourism — an industry which has been badly hit by the turmoil since 2011. "We are seeing a lot of multinationals that are working in Egypt now borrowing. The loan growth we have is primarily from existing borrowers. It is a huge jump from 2012. It reflects confidence coming back. A lot of it is pent up demand." Mr Abaza acknowledges, however, that despite the upward trend in loan growth at CIB — 16.7 per cent last year and expected to reach more than 20 per cent this year — lending is still below 2010 levels. About half of the loan growth is to the private sector. Jacques-Emmanuel Blanchet, chief executive officer of HSBC in Egypt, says that the bank's loan portfolio rose by 15 per cent in the first half of 2015, with borrowers coming from the "energy, manufacturing, mining, construction and telecoms sectors". "Loan growth has recovered," says Elena Sanchez-Cabezudo, banking analyst at EFG-Hermes, the regional investment bank. "The figures vary between banks, but across the system the increase is close to 20 per cent year on year. Banks continue to be positive on the outlook for corporate loans, though of course, they are saying the shortage of foreign currency is constraining economic growth. " She says improvements in the macroeconomic backdrop account for the renewed appetite for borrowing and the rise in business confidence. Gross domestic product is expected to grow by 4.5 per cent in 2015, up from 2.2 per cent last year. The government has introduced measures to tackle the deficit, including a reduction in energy subsidies and a planned value added tax. Moody's rating agency, which in July changed Egypt's banking sector outlook from negative to stable, cited at the time the country's improving macroeconomic performance and the government's "commitment" to reform, as well as prospects for an increase in foreign investment. Melina Skouridou, Moody's lead analyst for Egyptian banks, says banks asset quality has been improving because lenders with "legacy bad loans" focused on repairing their balance sheets in the past four years in which lending plummeted. She expects problem loans across the system to decline to 8 per cent this year down from 8.4 per cent in December. "Actually, what we have seen is that in the difficult period the asset quality of the banking system has improved," she says. "We expect this will continue as loans grow and the operating environment is conducive." Overall, however, Egyptian banks are conservative lenders, and loans per GDP are significantly lower in Egypt than in other countries, says Ms Sanchez-Cabezudo who points out that, even with the recent increases, the ratio is also still below that before the revolution. There is only a small mortgage market, which means that household loans are also small. Small and medium enterprises often complain that it is difficult to access loans. In contrast, a large chunk of bank lending goes to the government in the form of purchases of bonds and treasury bills — seen as lower risk than lending to business. According to Moody's, lending to the government accounts for 43 per cent of the assets of the five Egyptian banks it covers. The rating agency expects this proportion to rise as the government continues to seek funding for the deficit. Mr Abaza says lending to the government accounts for almost half of his bank's balance sheet. He cites decreased economic activity in recent years as a reason for the increase. Source: Financial Times
