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The Egyptian banking sector is expected to remain under significant pressure in the medium term, Standard & Poor’s says in a report Bank Industry Risk Analysis: Egypt.

“The Egyptian banks are not well equipped to face unexpected shocks,” says Standard & Poor’s credit analyst Emmanuel Volland. Volland says that Standard & Poor’s assessment of the banking system reflects the weak financial profile of the banks, particularly in the public sector, and the fragile economic environment in which they operate.
 “The sector is suffering from the slowdown in the economy and in structural reforms that started in 1998,” he adds. “In addition, the war in

  • Iraq is putting further pressure on the economy, particularly in the tourism sector.”

    Among the banking sector problems cited in the report are poor underwriting skills and asset quality; low profitability and undercapitalization of the state-owned banks; a low level of automation; underdeveloped risk management systems; and a low level of disclosure.
    On the other hand, the report points out, the creditworthiness of the Egyptian banking system is supported by the strong retail funding profile of the state-owned banks, and the low cost of labour.

    The Egyptian economy has suffered heavily in the past four years. Growth in gross domestic product (GDP) has slowed, and pressure on the currency and interest rates has been recurrent. Overall risk factors for the system continue to be high, while competition is intensifying. The rapid expansion of loans in the past decade leaves the system exposed to further deterioration.

    “If the economic environment deteriorates further, Egyptian banks could find themselves with an unsustainable level of bad loans,” says Standard & Poor’s credit analyst Ekaterina Trofimova. “Standard & Poor’s estimates that the level of nonperforming loans is already about 20% of total loans. In addition, banks tend to include rescheduled loans under performing assets, which leads to the risk of understatement of problem loans.”

    The report notes that with about 60% of system deposits, the four commercial state-owned banks dominate the system. Their extensive branch network enables them to attract large volumes of stable and cheap retail deposits, leading to relatively good liquidity profiles. For decades, however, they have financed state companies, under directed lending policies. Consequently, public-sector banks carry the burden of large bad loans to unprofitable, subsidised industries. Poor underwriting skills, economic uncertainties, and major fraud cases have recently put additional pressure on asset quality.
     The commentary article Bank Industry Risk Analysis: Egypt is available to subscribers of RatingsDirect, Standard & Poor’s web-based credit analysis system, at www.ratingsdirect.com.