CAIRO: Analysts are largely unanimous in their assessment that 2010 was solid year for the local Egyptian banking sector, as it posted healthy growth figures. This view contrasts sharply with the previous year, which they say was plagued by moribund lending dovetailed with weak non-interest income. This is in part thanks to the Egyptian banking sector remaining relatively insulated from foreign banks, consequently protecting itself well against the financial crisis that gripped Europe and the US — the effects of which are still being felt. Besides Asia, both the EU and the US have been the main drivers of the global economy. Sherif Khalil, the head of investor relations for Commercial International Bank (CIB), explained that the global recession led to a dip in trade as well as lower GDP growth in other parts of the globe, such as Egypt. “The crisis had instilled an element of fear of borrowing in the market, which has since begun to subside over 2010,” he said, noting that lending and growth rates are inextricably linked. However, Khalil went on to explain that the local banking sector is “witnessing a recovery” and that both companies and individual market actors are reviving their faith in the local economy, which in turn has allowed banks to “redirect their focus towards new opportunities.” In its annual banking sector report, Pharos Holding supported this view, concluding that globally the Egyptian banking sector has performed a volte-face, playing a “defensive” role to providing an array of “growth stories.” Before lowering interest rates several times, the Central Bank of Egypt (CBE) held them steady throughout all of 2010. The interest rate has not been lowered since Nov. 2009. The CBE's Monetary Policy Committee left the overnight deposit rate constant at 8.25 percent and left the overnight lending rate at 9.75 percent. Partially thanks to the CBE's actions, according to a recently released report by CI Capital, loans are up by 8 percent in 2010, and this increase is starting to show its positive effects on net interest income and fee income generation. Khalil noted that retail banking penetration has increased by 6.1 percent, expanding banks margins in the process. Liquidity remains robust, especially when compared to other countries in the Middle East and North Africa region. To be sure, loan-to-deposit ratios currently float around 50 percent in the Egyptian banking system, and the loans-to-GDP ratio is at 40 percent, signifying that the market is not fully penetrated. This dynamic has been largely driven by core deposits' contribution to funding at 70 percent, which lies in contrast to the 7 percent from wholesale inter-banking funding, the CI Capital report noted. Recovery in credit growth “has largely been driven by syndicated loans,” the Pharos Holding report stated. The firm's report added that this “reflects an underlying recovery in investment expenditure and personal loans.” Such figures and trends are supported by the “high liquidity, capitalization, asset quality and profitability” that has generally characterized the sector, CI Capital summarized. Alembic HC noted in a report that only 20 percent of the Egyptian population currently holds a bank account, which is much lower than other Middle Eastern and North African countries. According to Alembic HC, this signifies that, while credit penetration is considerably low, this may present a major retail banking opportunity. The firm predicts that, due to further expansion in Egypt's banking infrastructure, low credit penetration should be increasingly reversed. In 2010, the overall network grew by nearly 2 percent, reaching 3,502 branches in June of this year, Khalil noted. Projections by industry insiders and analysts for 2011 are certainly optimistic about the banking sector's prospects. “There are multiple areas of growth in the Egyptian banking sector,” Khalil stated. CIB, he said, is confident that the local banking sector will step up to the plate and “provide better service to consumers” and increase lending, “especially on the retail front.” Khalil stated that, like his cohorts, he believes retail banking will continue to be particularly attractive given “Egypt's massive and still under-penetrated lower- and middle-income customer base and small- and medium-sized businesses.” Khalil predicted that the small- and medium-sized enterprises (SME) sector, which represents 70–80 percent of GDP, is an area to watch, placing emphasis on the recent efforts that have been taken to provide SMEs with greater support. The CBE's exemption of SME lending from the 14 percent reserve requirement provides an excellent example, which Khalil says will encourage banks to hand out loans to struggling or start-up SMEs that need a boost. Citing another example, the Industrial Modernization Centre (IMC) shored up LE 90 million in the form of private equity funds, which will be funneled by way of investment into companies that have previously benefited from the IMC's support. CIB gave predictions that lending will continue to rise — not only due to growing consumer confidence, but also due to the recent Public-Private Partnership (PPP) law that was passed in May of this year. The PPP law should allow the private sector to have a larger role in undertaking and managing the public sector's infrastructure, transportation and industrial projects. Pharos Holding noted that banks with significant exposure to retail credit “will most likely benefit from the loose monetary stance” that the CBE has taken, which is not the case with banks that are entrenched in larger corporate exposure. CI Capital forecasted that loan growth for banks will reach a solid 22 percent in 2011.
