Fitch Ratings hason Thursday affirmed the National Bank of Egypt's (NBE) Long-term Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook. Fitch has simultaneously upgraded the bank's Individual Rating to 'D' from 'D/E'. The bank's Short-term IDR is affirmed at 'B', Support Rating at '3' and Support Rating Floor at 'BB+'. The National Long-term rating is affirmed at 'AA(egy)' with a Stable Outlook, and the National Short-term rating is affirmed at 'F1+(egy)'. The upgrade of NBE's Individual Rating is largely driven by improvements brought about by the bank's senior management which has been in place since 2008. These include a clearer strategy that involves the ongoing strengthening of risk management, a greater recognition and disclosure of legacy problems such as asset quality helped by improved management information systems, as well as utilising franchise strengths to support growth and profitability. These improvements have helped Fitch obtain greater comfort about the extent of the historical asset quality problems and the adequacy of provisioning levels. Fitch expects the bank to start to internally generate capital to lift its currently low level of capital adequacy to support future growth. The rating takes into account the bank's dominant local franchise, substantial depositor base and strong liquidity. NBE's IDRs and National ratings reflect Fitch's view of support from the Egyptian authorities in case of need, based on the bank's systemic importance in Egypt, its 100% government ownership, and substantial retail deposit franchise. NBE's profitability improved both in the year ending June 2009 and the six months to December 2009. Pre-impairment operating profit was up 38% in FY09 and almost doubled y-o-y in the half year to December 2009 on stronger core earnings, which mainly related to rising interest income on the bank's holding of Egyptian government treasury bills and bonds. While non-performing loans remain high, they are longstanding legacy problem loans, and provisioning levels have improved so non-performing loans were almost fully covered by reserves (on an unconsolidated basis) at end-December 2009. In addition there has been improvement in the reporting and disclosure of non-performing loans, and in their follow up and recovery. At end-June 2009 non-performing loans amounted to LE21.2b or 22.4% of the loan book and dropped to 20.3b by end-December 2009, about 21% of the loan book. Funding is one of NBE's main strengths and reflects the bank's extensive domestic franchise. Non-equity funding consists entirely of customer deposits, of which around two-thirds are retail. Deposit growth was strong at 26% in FY09, outpacing loan growth and increasing the bank's already strong liquidity. NBE's capital adequacy ratio improved to 12.6% at end-December 2009 with a Tier 1 ratio of 7.4%, but the bank's equity/assets ratio remained low at 3.4% at end-December 2009. However, in addition to the improvement in profitability and therefore capital generation, capitalisation will be further boosted by a long-term USD400m (EGP2.2bn) subordinated loan which management have advised will be included as Tier 1 capital as of end-June 2010. A credit report on NBE is available on the agency's website. In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs. Applicable criteria, "Global Financial Institutions Rating Criteria", dated 29 December 2009, and "National Ratings - Methodology Update", dated 18 December 2006.
