“The Egyptian banking sector's performance in [the first and second quarters] mirrors the strong fundamentals and the vast liquidity of the sector, which has…allowed Egypt to safely navigate through the global turmoil,” Sherif Khalil, head of investor relations at Commercial International Bank (CIB), said. Still, he told Daily News Egypt, “the relative slowdown in economic activity and subsequent reduction in interest rates directly impacted Egyptian banks' profitability.” The central bank has held interest rates steady since September, with lending and deposit rates at 9.75 percent and 8.25 percent, respectively. In a statement in early July, the central bank's Monetary Policy Committee said, “inflationary pressures remain subdued and that the current level of policy interest rate is appropriate.” The financial crisis “instilled an element of fear of borrowing in the market,” Khalil added, but “this has begun to subside.” With recovery setting in, consumers are also “beginning to regain their faith in the resilience of the domestic economy, allowing banks to redirect their focus to new opportunities within the market.” The relative fear that may have temporarily struck the sector with regards to borrowing notwithstanding, “the conservative regulation and liquidity of the Egyptian banking industry has cushioned it well against the global financial losses and consequent credit freezes,” Khalil explained. He also indicated that the “average loan-to-deposit ratio of 50.9 percent…makes the banking sector highly liquid and immune to liquidity shocks that have been witnessed by other banks internationally.” As of March 2010, the average return-on-equity (RoE) was 13.1 percent, he added. Looking to the future, the trend toward recovery and a further strengthening of the Egyptian banking sector is set to continue, he concluded. Although the third quarter of the year may be somewhat slow, with lower volumes expected, as well as a decline in fees and commissions due to the effects of Ramadan on the economy, the sector will pick up in the fourth quarter, with increased loan growth and more volume in retail, Mai El-Hagar, director of research at Naeem Brokerage in Cairo, said in a phone interview. In a recent report focusing on the performance of the banking sector in MENA countries, Beltone Financial, a Cairo-based investment bank, expressed similar optimism for the Egyptian banking sector throughout the rest of 2010. “We expect Egyptian banks' results to be positive, with no major surprises on asset quality or growth,” Beltone's report said. Egypt vs UAE Although the United Arab Emirates had been the shining model for banking in the region, due to the continued fallout from the global financial crisis, its foundations have been shaken, while Egypt continues to post positive numbers in part due to its conservative banking practices. In its report, Beltone expressed “concern” about the UAE's banking sector, mentioning in particular the $23.5 billion debt held by Dubai World, which, nonetheless, is currently being restructured. Currently, UAE banks have an “estimated exposure of $15 billion” to Dubai World's debt, the Beltone report noted, with Emirates NBD and Abu Dhabi Commercial Bank (ADCB) carrying a large proportion of the exposure. El-Hagar said that if Dubai World fails to resolve these issues, the UAE banks will turn to non-performing loans, “which will have an affect on net profits and asset quality.” “It has been a bad year overall for UAE,” El-Hagar stated. Magda Kandil, executive director and director of research at the Egyptian Center for Economic Studies, agreed, saying that the UAE “has been severely impacted by the crisis.” When the real estate bubble burst, it affected liquidity in banks, she said. “The problem may persist, and the central bank in the UAE has been trying to target the liquidity problem in order to drive growth in the private sector,” she explained. Kandil explained that many central banks in the Gulf were affected by the financial crisis mainly because their currencies are pegged to the US dollar. Thus, their monetary policies have been largely influenced by the American Federal Reserve Bank, leaving Gulf central banks with “limited scope to deviate interest their rates,” she continued. This has not been the case in Egypt, she said, which has chosen a “managed float” rather than a pegging of the exchange rate. The result, she explained, has given Egypt “more flexibility” in taking decisions relating to its currency, resulting in more insulation from the financial crisis in contrast to the other banking sectors in the region. The CBE's policy has therefore allowed it to lower its currency's exchange, thereby driving Egyptian exports, she ended.
