Egyptian commercial banks are facing prospects of rising non-performing loans and potential losses on account of declines in loan growth and increased cost of funds, according to analysts and rating agencies.
"We do not expect the second quarter of this year to be a positive catalyst for Egypt banks. We expect earnings to fall, driven by higher credit losses," said Jaap Meijer, Head of Banks Research and senior analyst at AlembicHC.
Rating agency Moody's had recently revised its outlook on Egypt's banking system to negative from stable, citing growing exposure to lower-rated Egyptian sovereign debt and the effect of political turmoil on the economy.
The ratings agency said it expected that a decline in tourism, foreign direct investment, incoming fund flows and private consumption in the wake of political unrest would reduce Egypt's economic growth to around two per cent in the next 12 to 18 months.
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"These adverse economic conditions are likely to challenge the banking system's asset quality and business prospects as well as its profitability and internal capital-generation capacity," Moody's said in a report.
Sovereign debt exposure
It said the exposure of Egyptian banks to sovereign debt was a high 26 per cent of banking sector assets and was likely to rise further as the government turned to banks to finance its growing deficit.
Mass protests ended president Hosni Mubarak's 30-year rule in February. Egypt is currently ruled by a military council which faced a wave of public protest against administration of justice relating to corruption charges against the former political elite.
In the context of the ensuing volatile political situation in the country, analysts expect the economic environment to remain challenging for banks.
Commercial International Bank (CIB) reported a net profit of 495 million Egyptian pounds (Dh305.2 million) and declared a cash dividend of 1.25 Egyptian pounds per share. NSGB's net income for 2010 rose 3.5 per cent despite expectations of being impacted by the political unrest that has gripped Egypt since January this year.
"For NSGB we expect a significant catch up in Q2 , 2011. NSGB hardly took any loan impairments, while its parent company SocGen took €50 million as collective provisions for the Mediterranean basin. For NSGB, we expect a fall in earnings of 17 per cent year on year," said Meijer.
Although analysts do not see any imminent sovereign default risk, most Egyptian commercial banks are facing concentration risk from excessive holding of sovereign debt, adversely impacting commercial lending in the country. AlembicHC expects the overall lending in the country to decline over one per cent.
With growing pressure on banks to subscribe sovereign debt, banks are demanding higher interest rates to compensate the concentration risk. Last week, the government cancelled an auction of treasury bills due to the high prices demanded by banks. The maximum rate offered was 13.6 per cent on the short-term government debt obligation with a maturity of nine months, which averaged a yield of 12.95 per cent.
The average yield on the country's one-year bills has surged by 2.54 per cent, compared with the last pre-revolution auction, to reach 12.982 per cent, the highest level since November 2008