We will not put depositors' money at risk by investing in stock market: Banks

Foreign banks prevent branches from investing in stock market, Egyptian banks resort to creating subsidiary companies, investment funds

Banks confirmed that they would not put depositors' money entrusted to them at risk by investing it in the stock market despite the current attractive stock prices, according to a number of Egyptian bank officials in statements to Daily News Egypt.
According to Head of the Treasury at the Arab Banking Corporation (ABC) Tamer Youssef, the banks' investments in the stock market are subject to each bank's investment policy. It is also subject to regulations set by the Central Bank of Egypt (CBE) and to regulations stipulated in the law governing the work of banks.
Youssef explained that some banks prefer to invest in the stock market indirectly through subsidiaries, while other banks invest in the stock market through affiliated investment funds, and a limited number of banks invest directly.
Foreign banks in particular prevent their branches in Egypt from investing in the stock market, to protect them from exposure to any risks that may affect the depositors' money.
According to Article 60 of the Banking law No. 88 of 2003, the CBE prohibits banks from allowing the nominal value of shares or stocks owned by the bank – for purposes other than trading – to exceed the value of the bank's capital base.
Regarding the types of shares banks can trade in, Youssef said this will also depend on each bank's policy. Some banks may prefer to invest in fast-moving stocks, with the aim of quick profits, but these investments are fraught with high risks and banks keep such investments to the minimum.
Banks usually examine the shares they will trade in carefully through specialised departments and set several standards as a condition for trading in these stocks.
According to Youssef, the most important of these standards relate to the size of trading on the stock, and the shares are the major companies in the stock market such as shares of banks. Another standard is how easily they can sell the stock at any time, in addition to other factors determined by the departments of investment in each bank.
In response to a question about banks not entering as a supporter of the Egypt Exchange (EGX) in times of decline, Youssef said that this is not the role of banks. The role of banks is to attract liquidity from citizens and employ it in safe tools so that they can return such liquidity to depositors when they want it.
After the 25 January Revolution in 2011, demands were voiced for banks to invest in the stock market to support it. Had banks responded to those claims, they would have lost at least half of their customers' deposits over the past five years, Youssef noted.
Banks resort to the stock exchange when they need to increase their capital, with the CBE having recently announced the launch of the shares of two banks in the stock market to increase their capital.
The size of banks' investments in the stock market is not publicly available, whether directly or through investment funds and subsidiaries. These investments are included within the securities portfolio at banks.
According to the latest CBE report, the total value of the securities portfolio at banks was EGP 1.052tr by the end of October 2015, EGP 1tr of which are treasury bills and bonds.
According to the head of the investment sector at a public bank, who preferred to remain anonymous, banks investing in the stock market contradicts their actual role, which is accepting deposits and re-loaning them to customers. Moreover, investment in the stock market is highly risky for banks' liquidity, which in reality is depositors' money.
Despite the recent drop in stock prices, banks are still not encouraged to buy those shares, since it follows specific policies in the employment of their funds, the source said. The decline in stock prices is not considered an attractive factor for banks to enter and invest in the stock market.
The source explained that the decision for banks to buy shares in a particular company is subject to detailed studies to get to know the size of the company's business and economic activity, the attractiveness of the shares, and whether they are expected to achieve high rates of profitability in the following period.
The official ruled out that banks would re-consider investing in the stock market for many reasons. The most important of these reasons is the small size of available liquidity at banks due to their activities in financing projects and retail loans, as well as the debt instruments, which account for the largest proportion of banks' assets.
Banks will not consider replacing their investments in debt instruments, in which there is no risk, in order to buy stocks with a high risk.
Despite the low prices that a large number of companies' shares registered at the EGX, which could rise dramatically in the upcoming period and see high returns for banks, banks are not encouraged to buy those shares for fear of further losses.
According to the Deputy Managing Director of an Arab banks operating in the Egyptian market, banks investing in the stock market require several conditions, the most important of which is a steady upward trend in the stock market.
The EGX has suffered from instability in stock prices over the last period, which has discouraged banks from investing in it.
The source ruled out the possibility that banks would lean towards investing in the shares of some companies, which have seen a decline in stock prices over the past year. Banks do not choose to invest based the low prices alone, but also the financial position of the company, its business size, and the value of its cash flows over a specific period of time.
Banks are launching investment funds that invest in stocks and fixed income instruments, such as treasury bills and bonds, to reduce the degree of risk in investing in the stock market. The source also linked between the banks expanding their presence in the stock market and the decline in state budget deficit.
A large proportion of bank money is directed to meet the budget deficit by covering treasury bills and bonds launched by the government, the official said, noting that government debt instruments are characterised by lack of risk, contrary to investing in the stock market.