The Banking Executive Magazine - July 2022 Issue

Banque du Caire (impaired) at 4.4% at end-1Q22 compared to end-2021, and Stage 2 (watch) at 16%. Reserve coverage of Stage 3 loans was comfortable 167% at end-1Q22. The high share of non- lending assets with a sovereign credit risk underpins our assessment of the bank's asset quality. Good Profitability: BDC's Operating profit/risk-weighted assets (RWAs) stayed relatively flat at 4.1% in 2021 (4.2% in 2020; 5.5% in 2019). Despite some decline, BDC's bottom-line profitability re- mained at healthy levels with ROAE at 16% in 1Q22 (annualised) (20% in 2021 and 2020). This is a function of good NIM (4.9% in 1Q22 annual- ized; 5.2% in 2021), fee income and controlled provisioning costs. We ex- pect NIM compression in 2022-2023 due to higher cost of funding, higher provisioning costs and operating ex- penses, but this should be offset by higher net interest and fee income that are supported by the loan growth. Shareholder Supports Capital: BDC's CET1 ratio was 11.3% at end- 1Q22 (below sector average of 13.3%). This compares to a tight 8.0% at end-2021, owing to contin- uous capital support from the parent Banque Misr (BM), namely a EGP4 billion core capital injection in 1Q22. The adoption of the standard- ized approach for operational risk starting from 2022 also supported the CET1 ratio. Stable Funding; Sound Liquidity: BDC's funding mix is favorable with retail customer de- posits amounting to 60% of total de- posits at end-1Q22. Nevertheless, the depositor concentration is high (top 20 depositors are 22% of total depositors at end-2021; 13% at end- 2020). The loans-to-deposits ratio is low (56% at end-1Q22). Net liquid assets (including securities) covered 31% of total customer deposits at end-1Q22. FC liquid assets (cash and due from banks in FC) covered 241% of FC interbank borrowings and 75% of total FC customer deposits and in- terbank borrowings at end-1Q22, mitigating FC liquidity risk. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: BDC's VR could be downgraded if the bank's profitability weakens sig- nificantly or if its asset quality deteri- orates. A sharp deterioration in operating conditions or a downgrade of Egypt's sovereign rating would lead to a downgrade of the bank's ratings. Factors that could, individually or collectively, lead to positive rating action/upgrade: An upgrade of BDC's ratings would require an upgrade of Egypt's sover- eign rating and a marked improve- ment of the operating environment, combined with strengthening of the bank's standalone creditworthiness. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS BDC's National Ratings reflect the bank's creditworthiness relative to that of other issuers in Egypt and are driven by standalone creditworthi- ness. They benefit from the bank's strong retail franchise with the third largest customer base in Egypt. BDC's Government Support Rating of 'b' reflects a limited ability of sup- port from the Egyptian authorities. We believe the Egyptian authorities have a strong propensity to support domestic banks because of the sec- tor's importance to the economy and to the country's development plans, but the ability to support is weak. Fitch views BDC as a domestic sys- temically important bank (D-SIB), and its GSR is therefore at the coun- try D-SIB GSR of 'b'. This reflects BDC's D-SIB status as per the regula- tor's classification and its systemic importance as Egypt's fifth largest bank with a 3% market share of as- sets and deposits. The bank is indi- rectly state-owned through BM and has a strong record of support from BM and the Egyptian authorities (to- taling EGP19 billion since 2016; 7% of the banks' total assets at end- 1Q22). OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES BDC's GSR is sensitive to changes in the ability or propensity of the Egypt- ian authorities to provide support. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst- case scenario credit ratings for all rat- ing categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS The GSR assigned to the issuer at 'b' is derived from the Sovereign rating and is linked to sovereign's credit- worthiness. ESG CONSIDERATIONS The highest level of ESG credit rele- vance, if present, is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on BDC, either due to their nature or to the way in which they are being managed by BDC ISSUE 163 JULY 2022 the BANKING EXECUTIVE 25