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Egypt: CIB set to benefit from higher credit demand as Fitch raises outlook

By David Whitehouse
Posted on Monday, 16 August 2021 21:05

A branch of Commercial International Bank (CIB) is pictured in Cairo
A branch of Commercial International Bank (CIB) in Cairo. REUTERS/Mohamed Abd El Ghany

Ratings action from Fitch on Egypt’s Commercial International Bank (CIB) shows that the country’s banking sector is poised for recovery, analysts say.

Fitch this month raised CIB’s outlook to stable from negative, saying that CIB’s corporate franchise allows the bank to focus on private-sector borrowers with good credit quality.

“We are positive on the strong recovery story the Egyptian banks are ready to capture,” says Abanob Magdy, vice president for banking at Beltone Financial in Cairo. “Our discussions with banks’ management teams reveals that there is no trend of credit delinquencies” and there has been a partial economic recovery which should ease the pressure on asset quality, he says.

CIB, Egypt’s large private commercial bank, reported a 24% increase in second-quarter net income. Along with Qatar National Bank and Crédit Agricole Egypt, CIB will benefit from an expected surge in credit demand, underpinned by its strong capital base and customer reach, Magdy adds.

Banking analyst Victor Galliano, who publishes on SmartKarma, scanned credit quality and value of 35 global emerging market banks and includes CIB among his top six picks – albeit as a higher risk play.

  • The bank offers “deep value” having achieved double-digit compound annual growth in tangible book value per share from 2016 to 2020, Galliano says.
  • At a price of E£47.5 ($3.03), CIB trades on a price-to-earnings ratio of 8. Twelve out of 13 analysts surveyed by Zawya recommend buying the stock, with an average target price of E£58.98.

For Egypt’s banking sector as a whole, the impact of Covid-19 on non-performing loans is likely to be confined to 2021, says Radwa El-Swaify, head of equity research at Pharos Holding for Financial Investments in Cairo. Lending momentum has picked up this year on demand for working capital financing, she says.

Still, fee income has been hurt after the central bank cancelled fees for online and ATM transactions due to the pandemic, she adds.

Sovereign exposure

Policy reforms, the fact that Egypt managed to avoid a recession in 2020 and the country’s strong foreign-exchange buffer have benefited the commercial banks, says Callee Davis, an economist at NKC African Economics in South Africa.

  • According to Fitch, the banking sector’s net foreign assets reached $3.5bn at the end of April 2021, versus a net liability of $5.3bn a year earlier.
  • Stronger-than-expected remittance flows have also provided support, Davis says.
  • Remittances from Egyptians abroad rose by 10.5% to $29.6bn in 2020 and kept rising in the first quarter of 2021.
  • “This has defied the expectations of most large forecasting agencies, as well as the World Bank and the IMF,” says Davis.

Fitch says that Egyptian banks have largely succeeded in containing the deterioration in loan quality, due to high exposure to sovereign debt, made up of investments in bonds and loans to the public sector. That exposure, though, means fewer loans to the private sector.

  • Sovereign security interest rates remain appealing, with almost no credit risk, says Magdy at Beltone.
  • But increasing foreign participation in the sovereign-debt market along with the recent tax amendments on banks’ sovereign income have weakened the industry’s appetite for the debt, he says.
  • He sees “a gradual shift” to more private-sector lending, especially for capital expenditure, as asset quality fears ease.

Bottom line

Analysts are signalling increased confidence that the worst is over for Egypt’s banks.

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