By Nasser Youssef
The banks have suffered major hits to their bottom lines in a country that has long enjoyed stability, especially after the collapse of the security apparatus that had kept the country in check during the rule of deposed president Hosni Mubarak.
The banks stopped signing financing deals over EGP 50 billion which were being negotiated a few months prior to the revolution and set to be signed in 2011. Likewise, they restructured some previous financing, especially foreign currency loans, by compressing the duration or increasing the return in order to cope with the new developments.
Despite the concern for the future that has haunted the sector in a country that has been living through political and economic troubles since January 2011, banks have achieved unprecedented gains over the last two years, even with diminished employment opportunities and precautionary measures taken when granting credit to companies and individuals.
Government debt securities were considered the decisive factor in the growth in bank earnings in 2011 and 2012 despite the increase in political and security unrest, which did not allow them to provide a larger volume of loans, especially syndicated ones.
While bank investments in loans and securities on the stock exchange, which was negatively affected by the political events, diminished, their investments increased very significantly in treasury bills and bonds with a tempting yield. These reached record highs over the last two years under the influence of the continued decline of the credit rating of sovereign debt.
The state faced down a growing budget deficit by offering larger quantities of bids, treasury bills and bonds in the midst of an economic crisis generated by the political conflicts that caused investors to flee and saw the decline of the central bank’s foreign reserves, especially those from the tourism sector.
Economic experts, including Ahmed Adam, said that the banks cut lending after the January 25 revolution and refused requests for financing altogether, especially after they raised interest on investors who refused to yield to repeated pressure from the banking sector. A recent report by the central bank revealed the continued decline of the use of deposits for loans, which last May reached their lowest level for the banking sector since 2002 at 46%, compared with 77% at the end of June 2002.
The report said that the employment rate declined 1% last May. It recorded 46%, compared with 47% in February due to weak growth in the providing of financing versus strong growth in deposits.
The lending rates for deposits in Egypt are much lower than the global rates, which average 86%, and rates in the Middle East and North African region, at 71%. Loans registered EGP 545.6 billion at the end of last May, compared with deposits, which reached EGP 1.17 trillion.
According to figures gathered by Al-Borsa on last year’s profits, rates of return on investments of government debt instruments made up the largest percentages of total interest income for a large number of banks. The National Bank of Egypt (NBE) was the largest Egyptian bank in terms of the value of assets, and interest on its investments in government debt securities made up 71% of gross income from return.
The bank’s revenues from treasury bills reached EGP 18.9 billion out of EGP 25.9 billion, which represents the bank’s gross income from return, while its revenues from loans amounting to EGP 109 billion were only 18.3%.
At the Commercial International Bank (CIB), the largest bank in terms of market value, interest income from government securities made up 51% of the bank’s gross income from return, compared with 41% the previous year. Returns on Treasury bill investments grew from EGP 2.2 billion to EGP 4 billion at the end of 2012 to come in second after the NBE in terms of growth in return on treasury bills.
Being the largest Islamic bank in the market did not prevent Faisal Islamic Bank of Egypt (FIBE) from expanding debt instrument investments to come in third among banks operating in Egypt in terms of growth in return on treasury bills, at a growth rate of 431.22%. Return on debt instrument investments made up 50% of the bank’s gross income from return over the last year. The bank managed to jump by way of returns on its investments in treasury bills last year from EGP 246.5 million to EGP 1.3 billion, an increase of about EGP 1 billion, while returns on Treasury bill investments in 2011 represented approximately 16.4% of gross income from return.
Meanwhile, growth rates of return on investments from bills and bonds at the Egyptian Gulf Bank (EGB) rose by 200.96% to occupy fourth place among the fastest growing banks in terms of income from returns on bills and bonds. Returns on bill and bond investments made up 46% of gross income from return, with revenues of EGP 326 million at the end of last year compared with 23% in 2011, which amounted to EGP 108 million of gross income from return.
The data revealed the ability of high-yield debt instruments to achieve a leap in earnings despite the fact that banks were, generally speaking, cautious about lending and meaning the growth of their portfolios slowed considerably. According to the Business News index of the fastest-growing banks in loans launched by the newspaper Al-Borsa this year, eight banks registered a contraction in their credit portfolios, while the portfolios of five others registered a growth rate of only 1%.
Said Zaki, a member of the EGB’s Board of Directors, said that treasury bills and bonds were not the only factor in the bank’s profit-making over the last two years, as two other factors were present alongside the tempting yield of government debt securities. The first related to taking advantage of differences in foreign exchange rates and management expenses, and the second the reduction of the reserve requirement from 14% to 10%.
Three factors combined contributed to strong growth rates in earnings despite the unfavorable political and economic situation, which negatively affected credit facilities and the demand for financing.
Last year, the central bank reduced the reserve requirement from 14% to 12% before bringing it down to 10% to support banks’ profitability and enhance liquidity in the market at a time when interest on government debt instruments rose to historic levels.
A recent report by the central bank said that the return on average assets in the banking sector rose from 0.8% at the end of 2011 to 1% last March, while the return on average equity rose from 11.7% to 13.9% and the net margin of return increased from 2.3% at the end of 2010 to 3.5% at the end of the first quarter of this year.
Hamdy Moussa, general director of the Egypt Iran Development Bank, said that the decrease in state spending on infrastructure projects and its focus on financing the national budget deficit from the banking sector led to a slowdown in credit rates and an increase in the employing of liquidity in treasury bills and bonds to recruit untapped liquidity in banks, which contributed to an increase in the banking sector’s revenues.
The banks made good profits after January 25 because of investment in government bills and bonds, on which the return increased significantly after the revolution. This suggests that the banks’ investments in debt instruments increased due to the drop in financing of development projects after the reduction of new investments. However, the banks will return to financing economic projects if the situation stabilizes in the coming period with the banking sector’s continued support for the government.