International rating agency Standard & Poor's had lowered its long-term counter-party credit ratings on National Bank of Egypt and Egypt‘s Commercial International Bank (CIB) to double-'B'-plus from triple-'B'-minus. At the same time, S&P's lowered its short-term counter-party credit ratings on the two banks to 'B' from 'A-3'. The rating actions were the result of the downgrade of ratings on the Arab Republic of Egypt. The outlook on the two banks is stable.
"The rating action on the two banks reflects the deteriorating operating environment in Egypt, notably the limited effectiveness of structural reforms, insufficient fiscal adjustment and the reduced scope of the government to deal with negative external shocks," said Emmanuel Volland, a director in Standard & Poor's Paris office.
In addition, structural weaknesses in the banking sector persist. While the government is currently adopting new measures for the banking industry, it has done this only after long delays and with limited vigor, and the long-awaited privatization of the public-sector banks has been postponed.
"The banking sector represents a significant contingent liability to the government," explained Volland, "due to deteriorating asset quality, concerns over the capitalization of the state banks, and the implicit guarantee of the government. Asset quality deteriorated throughout 2001, with an official ratio of non-performing loans to total loans having risen to about 16 percent at year-end for the country's banking system."
While public-sector banks continue to dominate the market, their financial profile and performance show contrasting profiles to those of the private banks. The public-sector banks suffer from low automation, overstaffing, poor asset quality, and weak capitalization with respect to risks. Any improvement will mainly depend on the evolution of the domestic economic environment.
The ratings on NBE are based on the bank's 100 percent ownership by the Arab Republic of Egypt and its strong commercial position. The bank remains burdened by a portfolio of bad loans, however, and needs to improve its information technology. The rapid expansion of NBE's lending business is pressuring the bank's liquidity position and capitalization. NBE's links to the state are strong, and S&P's does not expect the government to privatize the bank in the medium term due to its status as Egypt's flagship bank.
The ratings on CIB continue to benefit from the bank's good financial and client profiles, experienced management team, well-developed credit culture, and important market position as the largest private bank in Egypt, particularly in servicing the corporate private sector and multinational companies operating in the country. CIB has continued to achieve good results despite the economic slowdown in Egypt over the past two years. These factors are largely offset, however, by the risks associated with operating in the high-risk Egyptian economy.
The stable outlook on the two banks reflects that on the Arab Republic of Egypt. With asset quality and profitability under pressure in the current economic environment, the banks are vulnerable to any further deterioration of the government's finances and the domestic economy as a whole. In the case of NBE, the ratings will continue to reflect the bank's public ownership and its close ties with the government. In the case of CIB, the stable outlook reflects S&P's expectation that, despite the difficult economic environment, the bank will maintain adequate profitability and asset quality. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
