Moody’s Downgrades Five Egyptian Banks, Maintains Review

Moody’s Investors Service has downgraded the ratings of five Egyptian banks. The affected banks are:

— National Bank of Egypt SAE, Banque Misr SAE and Banque Du Caire SAE: Moody’s has lowered these three government-owned banks’ standalone credit assessments to caa2 from b3 and downgraded their long-term local-currency deposit ratings to B3 from B2, and their foreign-currency deposit ratings to Caa1 from B3. The ratings remain on review for downgrade.

— Commercial International Bank (Egypt) SAE: Moody’s has lowered the bank’s standalone credit assessment to b3 from b2, and downgraded the long-term local-currency deposit rating to B3 from B2 and foreign-currency deposit ratings to Caa1 from B3. The ratings remain on review for downgrade.

— Bank of Alexandria SAE: Moody’s has lowered the bank’s standalone credit assessment to b3 from b2, and downgraded the long-term local-currency deposit rating to B1 from Ba3 and foreign-currency deposit ratings to Caa1 from B3. The ratings remain on review for downgrade.

The downgrade of the banks’ ratings follows the downgrade of Egypt’s government bond rating to B3 from B2 on 12 February (please refer to “Moody’s downgrades Egypt’s government bond rating to B3, maintains review for further possible downgrade”) and is driven by (1) the increased risks posed by the banks’ very high (and increasing) exposure to government securities; (2) Moody’s expectations of worsening asset-quality deterioration because of the renewed weakness in the operating environment; and (3) the weakening capacity of the Egyptian authorities to support the government-owned banks.

Moody’s maintains the review on the banks ratings, in line with the review on Egypt’s B3 government bond ratings, and expects to conclude its review following the conclusion of the sovereign rating review.

For a full list of affected ratings, please refer to the end of this press release.

RATINGS RATIONALE

The main factors driving today’s rating actions are:

(1) The weakening of Egypt’s creditworthiness as indicated by the downgrade of the government bond ratings to B3 from B2. The banks’ high — and increasing — exposures to Egyptian government securities and related instruments link the banks’ credit strength to the sovereign’s creditworthiness and heighten the banking system’s susceptibility to event risk;

(2) The weakening operating environment, which will exert additional pressure on banks’ asset quality, profitability and liquidity metrics; and

(3) The weakening capacity of the Egyptian authorities to support the government-owned banks.

— BANKS’ HIGH AND INCREASING EXPOSURES TO GOVERNMENT SECURITIES

The rating action reflects the direct linkages between the banks’ balance sheets and sovereign credit risk, which raise the banking system’s susceptibility to event risk in the context of Egypt’s eroding credit fundamentals. Moody’s says that according to the banks’ latest financial statements, exposures to government securities ranged between 800%-900% of Tier 1 capital for the government-owned banks (National Bank of Egypt, Banque Misr, and Banque du Caire), 277% for Bank of Alexandria and around 180% for Commercial International Bank.

These high exposures to government securities link the banks’ standalone credit profiles to the sovereign’s creditworthiness and make the banks vulnerable to potential event risk at the sovereign level.

— DETERIORATING OPERATING ENVIRONMENT

In addition to the direct linkages, the downgrade also reflects Moody’s assessment of the continued impact of the weakening operating environment, which will exert additional pressure on banks’ asset-quality and profitability metrics, and strain the banking system. Moody’s says that the operating environment is subject to high volatility, with ongoing unsettled political conditions and intensified civil unrest, despite the transition to civilian rule in June 2012.

The volatile operating environment exerts additional pressure on banks’ asset quality and capitalisation. In this respect, Moody’s believes that the government-owned banks remain more vulnerable, given their lower capitalisation levels and limited loss-absorption capacity (despite some recent improvements). The rated private-sector banks (Commercial International Bank and Bank of Alexandria) maintain relatively stronger capitalisation buffers and more robust risk-management practices.

— SUPPORT CONSIDERATIONS

The downgrade of the sovereign rating indicates the government’s reduced capacity to support the banks. Nevertheless, given their 100% government ownership, their systemic importance and high linkages with the government, the deposit ratings of these three government-owned banks (National Bank of Egypt, Banque Misr, and Banque du Caire) still incorporate two notches of systemic support to B3, in line with the sovereign rating.

Bank of Alexandria’s B1 deposit ratings continue to incorporate two notches of parental-support uplift from Intesa Sanpaolo Spa (rated deposits Baa2 negative, standalone C-/baa2 negative). This takes into account Intesa’s 70.25% ownership of the bank and strong operational support.

FACTORS TO BE CONSIDERED IN THE BANK REVIEW

Moody’s review of the banks’ ratings will focus on an assessment of the implications of deteriorating sovereign creditworthiness for the banks, through both their sizable holdings of government securities and their susceptibility to weakening operating conditions. For the government-owned banks, the review will also focus on an assessment of the government’s capacity to provide support, in case of need. For Bank of Alexandria, the review will also focus on an assessment of the parent bank’s capacity and willingness to provide support, in case of need.

WHAT COULD MOVE THE RATINGS DOWN/UP

The banks’ ratings could be downgraded following (1) a further weakening in sovereign creditworthiness and in the operating environment; (2) a further weakening in the banks’ loss-absorption capacity, specifically related to their asset-quality, profitability and capital metrics; and (3) reduced willingness/capacity to provide support.

Upwards pressure on the ratings is currently limited, as indicated by the review for downgrade. However, the banks’ ratings could stabilise following (1) the stabilisation of the sovereign’s credit-risk profile; and (2) improvements in the operating environment.

LIST OF AFFECTED RATINGS

National Bank of Egypt

-Bank financial strength rating (BFSR): Downgraded to E, equivalent to a standalone credit assessment of caa2, from E+/b3

-Local-currency (LC) deposit rating: Downgraded to B3 on review for downgrade from B2 on review for downgrade

-Foreign-currency (FC) deposit rating: Downgraded to Caa1 on review for downgrade from B3 on review for downgrade

-The backed senior unsecured FC debt rating (issued through its Nile Finance Limited special-purpose vehicle) has been downgraded to B3 on review for downgrade from B2 on review for downgrade.