Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of National Bank of Egypt SAE (NBE) and Egypt-based Commercial International Bank (CIB) at 'B'. The Outlooks on both Long-Term IDRs are Stable. Fitch has also affirmed Credit Agricole Egypt's (CAE) Support Rating at '4' and its National Long- and Short-Term Ratings at 'AA+(egy)' and 'F1+(egy)', respectively.
The Long-Term IDR of National Bank of Egypt (UK) Ltd (NBEUK), a wholly owned subsidiary of NBE, has been affirmed at 'B' with Stable Outlook and its Support Rating has been affirmed at '4'.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRs, VRs AND SENIOR DEBT
NBE, CIB and CAE almost exclusively operate in Egypt ('B'/Stable). Their ratings reflect our view that the correlation between bank risk and sovereign risk will remain strong over the outlook horizon given exposure to domestic assets, including a sizeable proportion of Egyptian government debt. NBE's and CIB's Long-Term IDRs are driven by their respective Viability Ratings (VRs), whereas CAE's ratings are support driven from its French parent.
The operating environment for Egyptian banks remains challenging and was broadly unchanged in 2015. Strong deposit growth, only moderate credit demand from better-quality commercial counterparties and high yields on government debt, have resulted in increases in government debt holdings (up 19% in the year to end-July 2015) outpacing growth in lending to the private sector (up 16%).
Despite the challenging lending environment, non-performing loans ratios for the sector (as reported by the central bank) continued to moderately improve (8.3% at end-March compared to 9.3% at end-2013) and loan loss reserve coverage remains acceptable. However, in our view, asset quality is still vulnerable to the banks' significant lending concentration and economic volatility, and has a high influence on the banks' VRs.
Banking sector capitalisation remains weak (13.5% total capital and 11.0% common equity Tier 1 ratio respectively at end-March 2015) particularly in light of the zero percent risk-weighting of Egyptian government exposure. Profitability, while adequate for the sector, depends to a large degree on government debt yields.
NBE's credit profile and profitability are highly correlated with the Egyptian sovereign: at end-2014, around a third of its loan book and the bulk of its bond portfolio (53% of assets) related to sovereign risk. Interest earned on government bonds accounted for almost three-quarters of net interest income in the year to end-2014. NBE's profitability has held up well, supported by a stable net interest margin and contained loan impairment charges, but remains slightly weaker than peers.
NBE's lending concentration remained high at end-2014, with the largest and the 20 largest loans accounting for 0.9x and 3.2x equity, respectively. NBE's impaired loans ratio remains slightly weaker than that of its peers but loan loss coverage (121% at end-2014) has improved substantially (eg 79% at end-June 2012). NBE's capitalisation remains a rating weakness, despite improving in recent years, and we view its Fitch core capital ratio as thin (10.6% at end-2014).
NBE's funding profile and structural liquidity are adequate, reflected in sizeable liquid asset buffers and a low loans/deposits ratio (around 33% at end-2014). Foreign currency liquidity is weaker but still adequate with foreign currency loans entirely funded by foreign currency deposits.
We view many of CIB's financial metrics stronger and less volatile than those of its domestic peers. However, its unchanged high exposure to sovereign debt (around 47% of total assets at end-June 2015) remains of high influence for its VR. Credit concentration risk is lower than at peers but remains high (the 20 largest exposures accounted for 1.4x equity at end-1H15). CIB's impaired loans ratio is at the lower end of its peer group and loan loss reserve coverage (around 142% at end-1H15) is sound.
CIB's funding profile benefits from its strong retail deposit franchise which limits depositor concentration to some extent. Liquidity is adequate and liquidity gaps in foreign currencies are moderate and well monitored.
CIB's capitalisation (Fitch core capital ratio of 16.8% at end-1H15) is stronger than peers' and the sector average but should be viewed in light of the bank's large exposure to zero percent weighted government debt.
CIB's profitability is stronger than domestic peers and benefits from its relatively diversified business model and a superior net interest margin. Operating expenses are well controlled considering Egypt's inflation (of just below 10%).
SUPPORT RATING AND SUPPORT RATING FLOOR
While we believe the Egyptian state has a strong propensity to support NBE and CIB if required, its ability to do so is constrained by the state's still weak credit profile as reflected in its sovereign rating. Both NBE's and CIB's Support Rating Floors are equalised with the Egyptian sovereign rating.
NBE is Egypt's largest bank by assets and has a dominant domestic franchise with market shares of 21.3% for lending and 27.5% for deposits at end-2014. It is also Egypt's biggest primary dealer in government debt. NBE is wholly owned by the Egyptian government.
CIB is a listed bank with a diversified shareholder base. It is the leading domestic private sector bank with lending and deposit market shares of 8.3% each at end-March 2015.
CAE's Support Rating reflects Fitch's opinion that its ultimate shareholder, Credit Agricole (A/Positive), has a moderate propensity to support its Egyptian subsidiary. However, the likelihood of support is constrained by Egypt's country ceiling and Credit Agricole's support propensity could change in the event of a severe deterioration in the Egyptian operating environment, which Fitch does not expect. CAE is about 60%-owned by Credit Agricole and is part of Credit Agricole's presence and strategy in the Middle East and North Africa. However, we do not view these regions as core markets for Credit Agricole.
The Stable Outlook on NBE's and CIB's IDRs reflects that on Egypt's sovereign rating.
NBE's, CIB's and CAE's National Ratings reflect their relative ranking in the market for local currency risk.
SUBSIDIARY AND AFFILIATED COMPANY
NBEUK's IDRs are equalised with its parent's IDRs. They reflect Fitch's view that there is a limited probability of support from the Egyptian state via NBE.
Given that the vast majority of NBE UK's funding and its main business are dependent on its connection to Egypt and Egyptian institutions (specifically government institutions), through NBE, and that NBEUK's strategy capitalises on NBE's franchise, we have not assigned a VR to NBEUK.
IDRs, VRs AND SENIOR DEBT
Given the high correlation between bank and sovereign risk, an upgrade of NBE's and CIB's VRs and IDRs is unlikely without a corresponding upgrade of Egypt's sovereign rating. However, in the case of CIB, its VR could be upgraded - and consequently be rated above the sovereign - as a result of lower direct sovereign debt exposure. As a private sector bank, we consider CIB has greater flexibility to adjust its risk profile to changes in the operating environment, for instance by prioritising loan book growth at the expense of sovereign debt investments should the operating environment, including loan yields, further improve.
For both banks reduced lending concentration risks and better revenue diversification would be credit-positive but on their own would unlikely lead to a VR or IDR upgrade.
A negative sovereign rating action would likely be mirrored in the ratings of the banks, in particular if the rationale for a negative sovereign rating action relates to a deteriorating operating environment. Worsening asset quality, for instance from a large corporate default, ultimately affecting capitalisation or a sovereign downgrade could lead to a downgrade of the banks' VRs.
SUPPORT RATINGS AND SUPPORT RATING FLOORS
NBE's and CIB's Support Ratings are primarily sensitive to a change in Egypt's ability to provide support as reflected in the sovereign rating, as we consider the sovereign's willingness to support domestic banks is, and will remain, strong. In addition, regulatory constraints to support, i.e. bail-in requirements, are in our view unlikely to be introduced in the medium-term.
CAE's Support Rating is primarily sensitive to any change in Credit Agricole's propensity to provide support as well as a change in Egypt's country ceiling. Given CAE's small size compared with Credit Agricole (accounting for less than 1% of group assets) as well as Credit Agricole's solid investment grade rating, the parent's ability to support is unquestionable and therefore not a primary rating sensitivity. Credit Agricole's willingness to provide support could be sensitive to a severe deterioration in Egypt's operating environment, although we do not consider this to be likely.
The ratings are sensitive to any change in Fitch's view of the relative ranking of the banks. The Outlooks on the National Ratings are Stable, reflecting Fitch's expectation that the relative ranking of the three banks will remain stable.