CAIRO: Implementation of the banking sector reform plan, now well under way, is resulting in a strengthening banking system, says Moody s Investors Service in its new Banking System Outlook for Egypt. Nevertheless, the ongoing reform process still has some way to go. According to Moody s, the Egyptian government has acknowledged the longstanding issues constraining the performance of the banking system and has taken a number of steps to address them. Historically, banks have operated amid a weak economic base and low per capita GDP and, as a result, suffered from poor asset quality, low profitability and capital levels, as well as a bureaucratic operating style (particularly the four big state-owned banks). We believe that considerable progress has been made in many areas, and specifically in releasing the hidden value (in terms of capital gains) from the sale of joint-venture banks and other equity investments, allowing the loan loss provisioning gap to decrease. Progress has also been made in upgrading banking supervision within the Central Bank of Egypt (CBE) and in achieving consolidation within the sector, comments Constantinos Kypreos, a Moody s analyst and author of the new report. Moody s also acknowledges the authorities ongoing efforts with regard to the financial and operational restructuring of the state-owned banks, particularly in aiming to apply best practice to risk management, information technology and human resources, and in strengthening the banks management capabilities with the appointment of top managers with private sector experience. The authorities are also committed to resolve the issue of the high level of non-performing loans (NPLs). Public enterprise-related NPLs will be settled via the re-direction of privatization proceeds, while for the private sector s NPLs, new legislation, procedures and a special unit within the CBE were introduced to help banks settle these in the most expeditious way. According to CBE officials, more than 50 percent of banking sector NPLs (excluding public enterprises) have already been rescheduled and 20 percent of NPLs settled as a result of these initiatives. Nonetheless, Moody s expects that these issues (high NPLs and the restructuring of public sector banks) will take time to resolve. Given the improvements taking place at these banks as regards both their financial standing and operating practices and risk management, coupled with the expected improvements in the economy and the reformist agenda of the cabinet, Moody s anticipates that the average FSR of the state-owned banks is likely to improve over the medium term. However, we expect the differentiation in ratings between private and state-owned banks to remain, as the leading private sector banks benefit from stronger management teams, better operating systems, better asset quality and higher levels of capital and earnings, says Kypreos. The deposit ratings of all Egyptian banks are set at the Ba2/Not-Prime country ceiling for foreign currency, partly reflecting the implied support from the Egyptian financial authorities. The outlook on these ratings is stable and reflects the outlook on the country ceiling, Moody s concludes.
