Egypt: Resilient and responsive
Egypt’s banks have survived years of political instability, the 2016 currency devaluation and a period of sky-high inflation without much pain. The central bank’s raising of interest rates bolstered profits as the government cut subsidies, pinching the poor and raising the prices of petrol, electricity and bread. There is a consensus that the economy is improving and that the fruits of the harsh measures will pay off in the coming years. As such, the central bank is expected to begin to reduce interest rates, as long as inflation remains within target levels.
With a return to stability, the central bank also returned the reserve requirement on deposits back to 14% in October 2017. It is now working on reforms that could increase capital requirements and improve bank governance. The proposals would raise banks’ capital requirement from E£500m ($32.9m) to E£1.5bn. If this happens, it could lead to a round of mergers and acquisitions. The central bank is already looking into the performance of several struggling small banks.
The current impact is a slowdown in small-scale business activity and a relative drying up of credit to the private sector. The International Monetary Fund (IMF) predicts that credit to the private sector will grow just 7.5% in 2017/2018, down from 38% in 2016/2017 and 14.2% in 2015/2016. The central bank reported that the banking sector generated profits of E£59.1bn in 2017, up from E£53.1bn in 2016, but expenses have been rising as banks build new branches and invest in infrastructure. Non-performing loans dropped to 4.9% in 2017, from a high of 13.4% in 2010, according to the IMF.
Small business loans
State-owned National Bank of Egypt (NBE, #6) remains the country’s largest bank by assets, playing a big role in financing state-run companies and buying government debt instruments. About 50% of the bank’s loan book is to the government. In order to bring more balance, the NBE signed a €375m financing deal with the European Investment Bank in July, to be used for loans to small and medium-sized enterprises. The central bank has of late taken an interventionist approach, pushing the big commercial banks to diversify away from the big corporates and lend more to retail clients and small businesses.
Egypt’s big banks have gone to the international markets to raise funds this year. NBE is working on a $600m syndicated loan, and Banque Misr (#9) has followed suit with one for $500m. The big banks need these capital injections in order to grow their loan books and to invest in information technology and physical infrastructure.
Many banks are expanding their footprints, some from small bases. Al Baraka Bank Egypt (#97) says that it plans to grow its network from 35 branches now to 50 by 2022. These moves follow on from 2014 central bank changes that make it easier for banks to open up smaller branches.
There have been few new entrants into the banking sector. However, Egyptian billionaire Naguib Sawiris says he has plans to open a bank focused on entrepreneurs. He says that he is waiting for approval from the central bank, which is not forthcoming.
Privatisation of state-owned firms has long been on the government’s agenda. An initial public offering for a government stake in Banque du Caire has been delayed and now is not likely before the end of 2018. Banque Misr holds a stake in Banque du Caire, and it plans to sell off shares it holds in two other banks and four companies in order to raise E£10bn.
Like its peers, the Cairo-listed Commercial International Bank (#20) has been growing its profits. It recorded a 15% rise in profits in the first quarter of 2018 as compared to the first quarter of 2017, reaching E£2bn. In June, chairman and managing director Hisham Ezz Al-Arab told media: “We have taken transformational steps over the past years, moving from traditional banking to a service provider that fits with the requirements of the newer generation. Technology will play a critical role.”
Growth in profits is not spread evenly throughout the sector. For example, the Arab African International Bank (#26) reported a 1% year-on-year rise in profit for 2017, reaching $260.4m. It is diversifying into microfinance and launched a new joint venture called Sandah in May.
The devaluation of the Egyptian pound has encouraged more remittances, and deposits have been on the rise across the sector. National Bank of Kuwait-Egypt (#82) recorded a 16.3% rise in deposits from the first half of 2017 to the first half of 2018. This helped it raise its profits over the same period by 36.1%, which was accompanied by a 13.2% jump in advances and loans. The bank is planning on soon adding five new branches to its current 45. It has two sharia-compliant banking branches, and its focus for the year ahead is the retail sector, especially mobile banking and payment services.
Catching them young
On the retail banking side, more banks are focusing on young people (see profile). “Everything starts with the youth,” says Alaa Farouk, retail chief executive at the NBE. The NBE was one of the first to start introducing youth-focused products with its initial tailored savings account launched more than 10 years ago. Banks are paying more attention to the youth segment in an effort to grow the banked population. The central bank estimates that only around a third of the adult population has a bank account, but analysts say the number is likely much lower. “The bank’s strategy is now focusing on the youth because we want them to enter the banking sector,” Farouk says. “When we attract them as they’re finishing school, entering university or just graduating, then they are more likely to become a potential customer for the bank.”
There is also the challenge of old and rigid banking regulations mired in red tape and bureaucracy, which keep much of the population away from the formal economy and, in turn, the banking system. Reforms of the laws that govern the central bank are under discussion, and they could create the space for more innovation.
Much of the new targeting of banking products and services to the youth has found ways to work around the current hurdles and simplify the documents and the overall process needed to open a bank account or get access to a debit card. The NBE’s Farouk says Egypt’s banking sector will increasingly be digital. “In Egypt, the trend is seeing growth in branches and ATMs,” says Farouk. “This will keep growing as digital grows, but at a smaller pace. Then after five to six years, digital will outpace traditional banking as the market matures and as QR codes, point-of-sale and mobile banking grows,” he adds.
From the September 2018 print editionTop photo:The Egyptian stock exchange reached an all-time high in april 2018, exceeding E£1trn
Credits:Shawn Baldwin/Bloomberg via Getty Images