Standard & Poor’s Ratings Services has revised its outlooks on National Bank of Egypt (NBE) and Commercial International Bank ( Egypt ) (CIB) to negative from stable. The outlook revisions follow the downgrade of the long-term local currency sovereign rating on the Arab Republic of Egypt to ‘BBB-‘ from ‘BBB’, and the revision of the outlook on Egypt to negative from stable.
At the same time, the ‘BB+’ long-term and ‘B’ short-term counterparty credit ratings on both NBE and CIB were affirmed.
The downgrade and outlook revision on Egypt ‘s sovereign rating reflect the projected deterioration of the budget deficit, the consequent reduction in domestic financing flexibility, and the likelihood of a further downgrade if wide budget deficits persist and the general government debt burden continues to rise.
“The ratings on NBE and CIB will continue to depend directly on the ratings on Egypt , and indirectly on the economic environment,” says Standard & Poor’s credit analyst Emmanuel Volland. “The Egyptian banking sector faces asset-quality pressures due to fallout from the attempted economic restructuring of domestic industries and signs of stress in some key economic sectors.”
The ratings on NBE are based on the bank’s full ownership by the state, strong commercial position, and adequate liquidity. NBE remains burdened by an increasing portfolio of bad loans, however, and its profitability and capitalisation are weak for the current ratings. The bank’s below-average information technology (IT) capabilities represent an additional concern. The rapid expansion of NBE’s lending business is also pressuring the bank’s capitalisation.
“We expect NBE to continue to exploit its strong commercial position and retain low pre-provision operating profits. Should the bank’s strong market share and operating profits start to erode significantly, the ratings could be lowered,” adds Volland.
The ratings on CIB reflect the bank’s importance to the Egyptian financial system as the country’s largest private bank, its solid wholesale banking franchise, good financial profile, experienced management team, and well-developed credit culture. The ratings are constrained, however, by the risks associated with operating in the problematic Egyptian economy.
“CIB’s competitive position and core corporate franchise are likely to remain strong in coming years as a result of investment in technology and commitment to both new services and product diversity,” Volland says. “A significant slowdown in the economy, however, could have a major impact on the bank’s asset quality.”