International credit rating agency, Capital Intelligence (CI) announced Thursday that it affirmed Export Development Bank of Egypt's (EBE) Financial Strength Rating (FSR) at ‘BB-'. The outlook was also affirmed as ‘Stable', reflecting the bank's comfortable liquidity and growing customer deposit base, strengthened loan-loss reserve (LLR) cover, improvement in both operating and net profitability, and the increased capital adequacy ratio (CAR). "The past demonstrated capital support from largely state-owned institutional shareholders is also a supporting factor. The FSR is constrained by high exposure to sovereign credit and political risks, low free capital in relation to total capital (due to investment in equity of related companies), ongoing customer concentrations in both loans and customer deposits (despite sectoral diversification), and a slightly higher non-performing loan (NPL) ratio than the average for the CI rated banks in Egypt (despite the improvement). EBE's Long and Short-Term Foreign Currency Ratings (FCRs) are maintained at ‘B-' and ‘B', respectively, on ‘Stable' Outlook, constrained by CI's sovereign ratings for Egypt (‘B-'/‘B'/‘Stable'). These ratings denote significant credit risk, as the Bank's capacity for timely fulfillment of financial obligations is very vulnerable to adverse changes in internal or external circumstances. The Bank's Support Level is affirmed at ‘3', reflecting CI's continuing assessment of a high likelihood of shareholder support. In case of need, official liquidity support would also be available from the Central Bank of Egypt. "Egypt's elevated economic and political risks continue to weigh negatively on the operating environment and all Egyptian banks as a group. Any significant increase in Egypt's external financing needs could offset the growth in the foreign reserves buffer, and may lead to renewed balance of payments pressures given the lack of access to international markets. Notwithstanding the demonstrated financial support for Egypt from Gulf Cooperation Council (GCC) countries, as well as the current moderate economic growth, the operating environment is expected to remain difficult and credit risks relatively high. "EBE's loan asset quality has continued to improve as evidenced by the further decline in NPLs and the strengthened LLR cover. A combination of write-offs, settlements and renegotiation produced another fall in NPLs in Q1-Q3 FY15 and into the fourth quarter, while the decline in past due not impaired loans90days suggests that stress in the credit portfolio has eased. That said, the Bank's ratio of NPLs to gross loans remained slightly above the average for the CI rated banks. Nevertheless, the stricter credit sanctioning followed by management immediately post events in 2011 proved very effective given the ensuing deterioration in Egypt's economic conditions. "The Bank has strengthened its funding mix and customer deposit base, supported by an expanding branch network. Customer deposits are the principal source of funding. Although liquidity has improved as a result, with the bulk of surplus funds invested in local T-bills and government bonds, clearly there are systemic risks to all Egyptian banks' liquidity in the event of an adverse sovereign and political event. This is particularly the case with respect to foreign currency liquidity as net official foreign currency reserves would be depleted at the same time that the conversion of deposits from local currency into foreign currency, as well as cash withdrawals, may be expected to rise. Egypt's economy remains characterised by a shortage of foreign currency funds, highlighting the significant depletion of the country's international reserves post 2011. There are restrictions on the transfer and withdrawal of foreign currency deposits by individuals and corporates, although these have been eased in recent periods. "Despite a fall in non-interest income, as well as ongoing provisioning, in Q1-Q3 2015 compared with the same period a year earlier, EBE recorded a further rise in net profit due to significantly higher net interest income and net interest margin (the latter driven by a reduced cost of funds). This better performance yielded an improved and strong ROAA. Similarly, thanks to effective cost control, the Bank's operating profit also continued to improve in both money and percentage terms to a good level. "Given the decline in total risk-weighted assets in the first nine months of FY15 and into the fourth quarter coupled with the increase in retained earnings, EBE's CAR improved to a sound level. Although the ratio of total capital to total assets was generally better than the sector average, EBE's free capital represented less than one-half of total capital at end FY14. This underscores the significant amount of Bank capital invested in the equity of subsidiaries and affiliates. Meanwhile, the ratio of unprovided NPLs to free capital improved thanks to much improved LLR cover." Source: CPI Financial
