Capital Intelligence (CI), the international credit rating agency, has announced that Cairo-based QNB ALAHLI’s (QNB AA, formerly ‘Nationale Societe Generale Bank’) Financial Strength Rating (FSR) is maintained at ‘BBB-‘, notwithstanding ongoing economic pressures and the high sovereign risk related to a balance of payments and/or currency crisis. The FSR reflects the Bank’s sound risk metrics thanks to adept balance sheet management, and its ongoing strong capacity to absorb unexpected losses. The FSR is also supported by continued good loan asset quality, comfortable liquidity and customer deposit funding, sound capital adequacy, and robust profitability at both operating and net levels. In view of the Bank’s continued sound risk profile and effective buffers, the Outlook for the Bank’s FSR is revised to ‘Stable’ from ‘Negative’. QNB AA’s Long- and Short-Term Foreign Currency Ratings (FCR) are maintained at ‘B-‘ and ‘B’ respectively, on a ‘Stable’ Outlook, constrained by Egypt’s Sovereign Ratings (‘B-‘/’B’/’Stable’). The FCRs denote significant credit risk, as the Bank’s capacity for timely fulfillment of financial obligations is vulnerable to adverse changes in the operating environment and economy. The Support Level of ‘2’ (affirmed) denotes a very high likelihood of support from Qatar National Bank (QNB), as well as from the Central Bank of Egypt (CBE), in case of need.
Economic and political risk factors in Egypt continue to weigh negatively on the operating environment and all Egyptian banks as a group. Although the political climate appears to be stabilising and the violent unrest has somewhat abated, the sovereign risk related to a balance of payments and/or currency crisis remains high. The operating environment is expected to remain difficult and credit risks significant, notwithstanding the financial support received from Gulf Cooperation Council (GCC) countries, following the toppling of the Islamist government by the military last year. That said, the government’s recent announcement of much-needed economic reform is a step in the right direction following years of inaction.
QNB AA, the name adopted in 2013 after QNB bought the Bank from Societe Generale (SocGen), is mindful of the continued heightened risks in the economy and continues to follow a cautious credit policy. Effective risk management has safeguarded the Bank’s credit metrics in the face of difficult lending conditions. Although there are signs of pressure on the loan portfolio, as evidenced by the rise in non-performing loans (NPLs), the Bank’s loan asset quality remained sound and significantly better than the sector average. Capital buffers are more than adequate and supported by a strong rate of internal capital generation. The latter is a reflection of QNB AA’s moderate dividend payout ratio coupled with its strong profitability. The Bank’s operating profitability continued to provide high risk absorption capacity. CI expects net profit to withstand potentially higher risk charges and slower growth in operating profit.
Egypt’s economy is characterised by a shortage of foreign currency funds, reflecting the significant depletion in the country’s international reserves. Although payments of letters of credit are permitted (once the commercial transaction has been verified), there are restrictions on the withdrawal and transfer of foreign currency deposits by individuals and corporates. Clearly, there are systemic risks to all Egyptian banks’ liquidity in the event of an adverse sovereign and political risk event. This is particularly the case with respect to foreign currency liquidity as net official foreign currency reserves would be depleted, at the same time that the conversion of deposits from local currency into foreign currency, as well as cash withdrawals, would be expected to rise.
That said, the Bank’s liquidity as indicated by key ratios remained strong and improved as growth in customer deposits outpaced that of net loans, while surplus funds were deployed into Egyptian government paper. As is the case with peer banks, QNB AA’s excess liquidity is invested mostly in Egyptian treasury bills and bonds. While the relative liquidity of government bonds has reduced somewhat due to heightened political and economic risk factors, treasury bills remain liquid instruments in the market. Customer deposits are the principal source of funding, although their rate of growth has slowed due to sluggish economic conditions.
The Bank was established in 1978 as a joint-venture between the National Bank of Egypt (NBE), with a 51% share, and SocGen, with 49%. In 2005, the French parent increased its stake to 77.17% through the purchase of NBE’s remaining shares and minority shareholders’ stake. In March 2013, SocGen sold its participation to QNB, who has since increased its ownership to 97.12% by buying out other shareholders. QNB AA is the second largest private sector bank in the Egyptian market with a 7.65% market share of loans and 5.14% of deposits. While the Bank continues to concentrate primarily on corporate lending and investment banking activities, the importance of its retail banking operation is increasing steadily, bringing diversification to risk assets and earnings. As at end 2013, the Bank’s total assets were EGP81.3 billion (USD11.7 billion) and total capital was EGP10 billion (USD1.4 billion).
Senior Credit Analyst
Tel: +357 2534 2300
E-mail: [email protected]
Senior Credit Analyst
E-mail: [email protected]