Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed the Long and Short-Term Foreign Currency Ratings (FCR) for National Bank of Egypt (NBE) at ‘BB’ and ‘B’, respectively. These ratings are set at CI’s sovereign ratings for Egypt. NBE’s Financial Strength Rating (FSR) was also maintained at ‘BB’ on the basis of improved asset quality, increased operating profitability in H1 FY 2012 and ongoing high levels of liquidity. Constraining the Bank’s FSR is the declining capital adequacy ratio, low gross income generation combined with the difficult operating environment. The Outlook for the FSR remains ‘Negative’. As is the case with other Egyptian banks, NBE’s Foreign Currency Ratings carry a ‘Negative’ Outlook in line with the sovereign. A downgrade of Egypt’s sovereign ratings would immediately follow with a lowering of the Bank’s ratings. The Support level is affirmed at ‘3’, based on the government’s full ownership of NBE, the systemic importance of the Bank and the high likelihood of support.
Sustained political and economic risk factors continue to have a strong bearing on the country’s short to medium-term prospects. These dynamics weigh negatively on the operating environment and, post revolution, exacerbate already difficult credit conditions. That said, NBE’s improving risk management combined with the advances made in its restructuring and modernisation programme over the past few years places it in good stead in the face of a difficult economy.
Asset quality significantly improved as the Bank wrote off more than one-half of non-performing loans (NPLs) against loan-loss reserves. A substantial amount of legacy public sector loans were also settled in exchange for real estate assets. As a result, NBE’s ratio of NPLs to gross loans more than halved to a satisfactory level, although it remained moderately higher than the sector average. In mitigation, the Bank’s share of loans in total assets was lower than other Egyptian banks. Loan-loss reserves provided an adequate level of coverage for NPLs.
Notwithstanding the Bank’s increased exposure to government paper (largely local currency), liquidity remains strong, reflecting a deep customer deposit base and large holdings of repoable treasury bills. Liquidity, however, could become strained in the event of a possible balance of payments crisis or tighter monetary policy. Capital adequacy continued to decline to just above the regulatory minimum at end H1 FY12. Higher buffers are deemed necessary in the current environment to cover ongoing heightened credit risk. Market risk also remains elevated given the risks of currency devaluation.
In common with other state banks, NBE’s profitability at both operating and net levels remains low in large part due to limited income generation. High provisioning has historically dented net profit. In view of sustained high credit risk in the local market, provision and impairment charges may start to rise again. In that regard, the Bank’s improved operating profitability has strengthened to a degree its risk absorption capacity.
NBE was originally established in June 1898 as the first Egyptian private joint-stock commercial bank. For a time, it also acted as the country’s Central Bank. When Egyptian banks were nationalised in February 1960, the government transferred NBE’s central bank functions to a newly created entity “ the Central Bank of Egypt (CBE), while NBE absorbed the assets of foreign banks which were also nationalised at the time. Over the years the Bank has developed a strong corporate banking and structured finance expertise to meet market needs. NBE is 100% state-owned and operates under the auspices of the Ministry of Finance. As at end-December 2012, the Bank’s total assets amounted to EGP305 billion (USD50.5 billion) and total capital was EGP14.2 billion (USD2.3 billion).
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