CAIRO: Despite the ongoing challenges of unemployment and inflation, Egypt's banking sector has remained stable in the face of the global financial crisis, says a new report. Since the onset of the slump in 2008, local banks have managed to maintain healthy growth rates and high liquidity and deposit levels due to strong fundamentals built by a program of reforms, mergers and consolidations over the past several years. In recent years, the Central Bank of Egypt (CBE) has focused on implementing regulations to cut down on bad loans, which has helped local banks steadily improve asset quality, though this remains the sector's major challenge. The strength of the banking sector in Egypt is underscored by a culture of savings and low-debt prompted by a conservative lending environment that has provided for a strong funding base and potential for future growth in the lending sector. Egypt has one of the region's highest savings to GDP ratios. At the same time, private lending rates remain low, with the ratio of private credit to GDP at 34 percent. These numbers indicate a strong potential for growth and expansion in the lending sector, according to analysis by Cairo investment bank HC Securities. Overall, retail-lending penetration remains at a low 47 percent nationwide, with mortgage lending penetration at a mere 0.37 percent, despite a strong demand potential from Egypt's large low-income population. In a banking sector report released Thursday, HC economic analyst Germaine Benyamin wrote that although the local banking sector will inevitably feel the crunch of the financial crisis, potential for growth into the future is promising. "With low penetration rates, we believe there is huge potential for Egyptian banks to grow their lending portfolios. Retail is particularly significant here, with a low penetration ratio of 22,500 customers per branch, she wrote. With the corporate lending market slowing due to current economic conditions, the report suggests that SMEs provide an exciting opportunity for growth in the at-risk sector, which is primarily fueled by local demand at present. "The system is quite vulnerable to the surrounding economic conditions given that 72 percent of aggregate lending portfolio is booked by corporates, which would suffer the most given the slowdown of the main growth drivers within the Egyptian economy: tourism, FDI, Suez Canal revenues and exports, Benyamin wrote. "This leaves potential for banks to be confined to retail and SME segments in the short term, deriving their strength from domestic demand. Both segments are the most vulnerable to deterioration in asset quality, the sector s oldest and biggest enemy. The main challenge for banks is overcoming conservative tendencies during these times to open up into new lending markets, says Benjamin. She predicts that large-scale diversification into SME and mortgage lending will only be possible after a two-year slowdown during which banks will focus on improving asset quality. "We are expecting the slowdown to be limited to the coming two years, after which a pick up in the economy would be reflected in superior performance by the banking sector which has all the dynamics it needs in order to excel, she wrote. For the rest of 2009, Benyamin predicts in the report that a strong showing in July will be followed by declining earnings through when an expected pickup in international conditions will bolster growth in Egypt's banking sector.
