As of October 2020, there are 38 banks which are licensed to operate in Egypt. This number was higher back in 2005 but decreased gradually after a number of consolidations. This article aims to explore the Egyptian banking sector in detail through taking a closer look at the regulations imposed by the Central Bank of Egypt and understanding the dynamics of the market. The article examines everything from foreign investments in government bonds to financial inclusion.
State-owned commercial banks namely Banque Misr, National Bank of Egypt and Banque du Caire -expected to IPO on the EGX– still play a dominant role in Egypt’s banking sector. They rank among the top lenders. CIB Egypt is the largest private bank in Egypt.
As explained in the article about the reason behind the devaluation of the EGP, between 2011 and 2016 foreign investments in government bonds dropped significantly, and led to higher government borrowing from Egyptian banks. This lead to a very negative phenomenon called crowding out the private sector. Crowding out the private sector means that the credit to the government increased at the expense of the credit to the private sector. As expected, this limited the growth of the private sector and hence of the entire economy.
After Tarek Amer was appointed the governor of the CBE in November 2015, he has been actively encouraging banks to increase their lending to the private sector. As a result, the CBE has launched several schemes at the beginning of 2016 aimed at lending to small and medium-sized enterprises (SMEs) at below-market rates of interest. The CBE reimbursed banks that supported the private sector through providing them with below market interest rates -this was especially common in the tourism sector-. This lead to the sharp rise in loans to the Egyptian private sector (as seen in chart below). Loans to Private Sector in Egypt more than doubled since the beginning of 2016 reaching over LE 1 trillion in August 2020.
Still, the IMF issued a report in 2018 that noted that only 12% of Egyptian firms have access to bank loans or lines of credit. It has stressed the importance of financial inclusion which is one of the top agendas of the CBE and the leading Egyptian banks.
Commercial Banks in Egypt
According to the financial statements of the banks, Egyptian Banks benefited heavily during 2016 and 2017 from the successive hikes in interest rates which pushed up the yields on T-bills to almost 20%. Since banks had -and still have- large holdings of these T-bills, their yields and net interest margins (NIM) improved. The Central Bank of Egypt (CBE) started its rate-cutting cycle at the beginning of 2018. This came in response to the inflation figures normalizing -falling back down-. As expected this had a negative impact on the Egyptian banking sector. The return on equity (ROE) for the entire sector slipped from 30.9% in 2017 to 21.5% in 2018 and further fell to 19.2% in H12019.
Minimum Capital Requirement
The minimum capital requirement for commercial banks was raised in 2003 to its current level of LE500 million and is expected to rise to LE5 billion. Currently, there are only 6 commercial banks that have a paid-up capital of LE5 billion or more. These are: Commercial International Bank (CIB), National Bank of Egypt (NBE), Banque Misr, QNB Alahli, Arab International Bank (AIB) and Arab African International Bank (AAIB). However, the CBE will allow banks a three-year grace period.
The new capital requirement is expected to prompt a wave of capital increase, profit retention and consolidation in the sector.
Required Reserve Ratio
In 2017, the CBE increased the Required Reserve Ratio to 14% from 10%.
Exit of European Banks
Over the past couple of years, European banks have been exiting Egypt’s financial sector. For example, France’s Société Générale sold National Société Générale Bank to Qatar National Bank (QNB) in 2012 which has been rebranded as QNB Alahli.
Bahrain’s Arab Banking Corporation (Bank ABC) is expected to purchase Blom Bank Egypt after completing the due diligence by mid-November. Blom Bank Egypt is looking to sell its Egypt assets as its home country -Lebanon- is suffering from a severe economic crisis.
Investment Banks in Egypt
EFG-Hermes dominates the investment banking segment. It has been the target of a number of unsuccessful takeover bids. These included a bid from a rival, Beltone, to acquire a 20% stake and a merger proposal from Qatar Invest.
Beltone was taken over in 2015 by Orascom Investment Holdings. Beltone has a private equity arm, B Investments. In March 2018, B Investments (BINV:CA) raised over LE450 million in a heavily oversubscribed IPO.
In March 2017, CIB sold a 74.75% stake in CI Capital to a consortium of local and Arab investors for LE710 million. CIB sold a further 13.7% in May 2017.
This is one article out of many where I’ll be exploring different sectors in Egypt. Sectors include telecommunications, energy, healthcare, financial services among others. Articles are updated annually.