Egypt’s NBE: Africa’s second-largest bank hit by war challenges

By Ahmed Farid
Posted on Monday, 17 October 2022 18:00

National Bank of Egypt (NBE), (photo: twitter)

Financing government projects and boasting significant sovereign debt holdings are two key factors that helped the National Bank of Egypt (NBE) maintain a strong performance over the past decade. However, the outlook for the North African country's largest bank may not be so bright due to the Russo-Ukrainian war impact.

“By virtue of their size in the banking sector, the NBE and Banque Misr [Egypt’s largest two state banks] own the largest portfolios of Egyptian treasury bonds and bills,” economist Hany Genena, the former assistant sub-governor of the banking sector reform department at the Central Bank of Egypt (CBE), tells The Africa Report.

Egypt implements a primary dealers system where only around 16 banks have the right to purchase government securities; hence, each of them owns a share based on its size and weight. Thus, the NBE secures the lion’s share.

Meanwhile, state banks prioritise the provision of loans to the government. “If you look at the CBE data in terms of loans, you will find that the government and public sector companies were the main drivers for growth of loans during, maybe, the past 10 years,” Genena says.

Unlike lending to corporates and individuals, “when banks lend to the government, they don’t set allocations against the risk of defaulting, because the government in the worst-case scenario will print money to pay back its debt”, he says. This makes sovereign lending safer and more lucrative.

Financial structure, SME finance

On top of that, nearly all of the government employees have accounts in state-run banks, which consequently receive a large amount of deposits without bearing any costs, Genena points out.

High interest rates, big exposure to treasury bonds and bills, and its financial structure, these three factors backed up the performance of the NBE over the past 10 years,” he says.

Due to its huge network of branches, the NBE has a good reach to small and medium enterprises (SMEs), capitalising on the CBE’s initiatives to support SMEs.

Banks that finance SMEs are exempt from the reserve requirement on these loans, meaning that when lending to SMEs, they do not have to freeze a portion of their deposits in the central bank to meet the reserve requirement ratio, Genena says.

Showing resilience in the face of global headwinds, the NBE has climbed to second place on our 2022 ranking of Africa’s top 200 banks, up from third the year before and fourth in 2019. According to its most recent financial statements, the NBE’s net profits were LE29.7bn (over $1.5bn) in a year and a half ending June 2022.

Outlook not so bright

However, Genena expects that the NBE performance will be impacted by the Russo-Ukrainian wars’s economic repercussions, citing the issuance of high-yield certificates of deposits (CDs), devaluation of the pound, rise in reserve requirement, import restrictions, and large SME loan portfolio.

  • The NBE and Banque Misr issued 18%-yield CDs in March of this year following the devaluation of the pound by the central bank and a 100-bps interest rate cut. Both banks sold over LE750bn worth of the costly CDs; the NBE’s share was LE515bn. Also, the two state banks have recently issued dollar-denominated CDs at high annual yields, ranging from 5.05% to 5.30%.
  • Furthermore, the foreign liabilities of the NBE and Banque Misrare are higher than their foreign assets. “[…] as a bank, when your foreign liabilities are higher than your foreign assets, you get negatively impacted by the decline in foreign exchange. You are indebted by the dollar, so your debt cost is constantly increasing in the pound,” Genena says. The CBE devalued the pound by 16% in March, and it has been further declining since then, 25% year to date.
  • In addition, Genena expects that the CBE’s decision – last month – to hike the reserve requirement ratio for banks from 14% to 18% will place more pressure on the entire banking sector.
  • Also, with mounting pressures on the SMEs sector in the wake of the Ukraine war, more SME clients are expected to default on their debt payments, which will in turn burden their lenders, especially those with larger portfolios of SME loans.
  • What’s more, services fees, “which comprise a big source of income to banks as interest income”, are hampered due to the central bank’s restrictions on imports, which slowed the issuance of letters of credit to exporters.

Q4 may reflect challenges

Genena says the NBE results will be impacted from the fourth quarter of the previous fiscal year – from April to June – and that the current fiscal year results will be weaker than last year.

“I expect that this year the whole banking sector will embark on a trend to withhold a larger number of profits,” he says.

“I think that policies for distributing profits to shareholders will be conservative, meaning that the NBE and Banque Misr wouldn’t distribute large profits to the government this year in order to safeguard their capital against shocks.”

However, such economic pressures are expected to last at least until mid-2023 in the best-case scenario, then the landscape will begin to stabilise and pave the way for a slow, but steady, growth depending on how the war progresses, says Genena.

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