Banks double down on digital
Egyptian lenders are strongly capitalised, ensuring they are well placed to build for the future. Many are now looking to deliver more of their services digitally in the future.
Egypt’s banks have traditionally exerted a calming influence over the Egyptian economy, particularly during a decade of significant economic and political developments.
The Covid emergency has provided for another tough challenge for lenders. But the substantial efforts that banks have undertaken, under the guidance of the regulator, the Central Bank of Egypt, have helped build the buffers to withstand such shocks.
Although many banks have had to boost their provision for problem loans, with an inevitable impact on wider sector profitability, capitalisation levels are still robust and revenues sufficiently flush to withstand the crisis.
Liquidity is expected to remain strong, in light of banks’ stable funding base and low levels of loan leverage. There are, reports ratings agency Moody’s Investors Service, currently 38 banks operating in Egypt, with total assets of £5,830bn ($370bn) as of January 2020 — equivalent around 101% of nominal GDP. The two largest banks command a combined share of 47% of the country’s banking assets. Most private sector banks are foreign owned.
According to Moody’s, in an analysis of the Egyptian economy published at the end of August, all banks will be impacted by the economic shock unleashed by the coronavirus pandemic, which will take a toll on the Egyptian economy by reining in tourism revenue, reducing foreign direct investment, slowing the flow of remittances and pressuring the local currency. For banks, this will likely lead to lower business generation, higher non-performing loans (NPLs) from the 4.1% recorded in March 2020 and potentially renewed foreign-currency liquidity pressures.
However, Moody’s also notes that overall financial stability will be supported by stable local funding and high local currency liquidity; and that despite pressures on NPLs, two-thirds of banks’ investments are to (less risky) government securities, cash and interbank placements.
Profitability looks set to be resilient as banks invest more in government securities and at potentially higher yields given the current environment. The agency also expects capital buffers to remain broadly stable, as dividend pay-outs are reduced.
Egyptian banks’ credit profiles are linked to the government, given that 38% of total assets are invested in T-bills and government bonds, a strategy that is expected to continue.
According to Moody’s assessment, Egyptian banks have the capacity to further increase their exposure to the government, given the high core liquidity (cash and interbank assets make up 23% of total assets); and the bulk of the government securities held are unencumbered, hence they can pledge a portion of these with the Central Bank of Egypt and use the proceeds to buy more government securities. Thirdly, a solid yearly growth in deposits, stemming from efforts to increase financial inclusion and remittance inflows makes a difference. In a difficult year, Moody’s still anticipates witnessing 7%-10% growth, impressive in the circumstances.
The Central Bank of Egypt is meanwhile pushing ahead with regulatory improvements. In July 2020, Egypt’s House of Representatives approved the Law of Central Bank of Egypt and Banking System, generally known as the new banking law. This new law is set to ensure Egypt’s banking system keeps pace with international standards of best practice, as well as legal systems for the corresponding regulatory authorities worldwide. The aim is to allow Egypt’s banks to gain a competitive edge internationally.
The new law enhances the governance and independence of the Central Bank of Egypt. It also requires banks to build up, within three years, their capital reserves — they must increase their paid-up capital to $310m (E£5bn) and representation offices must have capital of at least $9.41m.
Alongside the new capitalisation requirement, the new law also seeks to modernise the system covering electronic banking, fintech and cryptocurrencies.
A key focus for leading Egyptian banks is to bring in more of the population into the formal banking system. According to Hesham Ezz Al-Arab, chairman and managing director of Commercial International Bank (CIB), currently more than 60% of Egyptian adults are unbanked. Financial inclusion is high on the agenda for banks seeking new growth avenues.
“Including this segment in the formal economy and adding it to the banking sector has become a national priority following the launch of Egypt’s Vision 2030 and the country’s alignment with the UN’s Sustainable Development Strategy. We envision a future where every Egyptian adult has a bank account and possesses the knowhow to save, receive funding for their projects, send money, and perform all banking transactions with security and ease,” says Mr Ezz Al-Arab.
Expanding services to the unbanked and underbanked segments of the population will not only benefit the bank but will benefit the Egyptian economy as a whole.
Despite the still large number of Egyptians — an estimated 40% — without a bank account, the country has nonetheless made significant strides in recent years in improving financial inclusion. For example, the percentage of Egyptians with a bank account was estimated to be in the range of just 8%-12% three years ago, but following economic growth and several national-level initiatives, it has expended significantly more recently. The total number of debit and credit cards in use in Egypt has nearly doubled since 2010.
In 2018 the government launched its Meeza payment card, available in either prepaid or debit form, as part of efforts to boost financial inclusion and reduce the reliance on cash. As of late 2019, four million Meeza cards had been issued. The government wants to issue 20 million cards to be used to conduct e-commerce transactions as well as receive pensions and subsidy payments.
Boosting financial sector inclusion offers other spin-offs for the wider economy, in that it will help the small and medium-sized enterprise (SME) sector, an important motor for the private sector.
The SME sector has been impacted by the Covid-19 pandemic, which has a significant follow-through to banks given that the SME sector is estimated to represent about 20% of the largest institutions’ lending books, and — notes ratings agency Standard & Poor’s — could be more exposed to the direct and indirect economic effects of social distancing measures than large corporates.
In S&P’s view, the magnitude of the impact will depend on the duration of the pandemic, as well as on the effectiveness of relief measures such as the six-month moratorium on principal and interest announced by the Central Bank of Egypt in March 2020 and the subsidised loans granted to SMEs. In addition, it says that some banks, both public and private, have signed agreements with multilateral lending institutions to finance the investments of some SMEs.
In January 2020, the central bank launched a pilot project that would enable bank accounts to be opened electronically, without the customer needing to visit a bank branch. The central bank is also expected to issue instructions in relation to internet banking services in the near future.
Digital banking penetration might accelerate, the agency predicts. New technologies could support financial inclusion. Amid the lockdown, Egyptian banks were using digital channels (including phone calls, mobile banking, and ATMs) in increasing volumes to interact with their customer bases.
The number of internet and mobile banking transactions undertaken through these means increased 100% year-on-year in July 2020, an indication of the rising interpenetration of technology and banking in Egypt. CIB launched its own ‘Smart Wallet’ in 2016, a system that allows for users to pay for items using their mobile phones. The bank has seen the number of subscribers to the smart wallet service for individuals by 17% as of July 2020 compared to December 2019.
Egyptian banks will likely enjoy a persistent boost to operations from the low interest rate environment, which should support their lending strategies. Standard & Poor’s says that while consumer spending has been negative affected, it expects economic activity will start recovering in the second half of fiscal 2021, potentially triggering an increase in credit demand. With this regard, it believes that the CBE’s decision to cut interest rates by 300bp in March 2020 could play a positive role by providing additional stimulus.
Although Egyptian banks of all sizes have been prompted to increase their provisions for doubtful loans this year, which invariably applies pressure on banks profits, the sector looks well placed to rebound once a level of normality returns to the global economy.
General profitability levels have been strong in recent years. For example, Egyptian banks’ net profits jumped 18% y-o-y to E£83.1bn by the end of 2019, according to the Central Bank of Egypt. Revenues reached E£154.95bn at the end of 2019, up 17.5% from E£131.9bn in 2018. In the first half of 2020, a total of 17 banks operating in the Egyptian market achieved combined net profits of about E£18.656bn.