The Banking Executive Magazine - July 2022 Issue

National Bank of Egypt in suspense) declined to 1.1% at end-9M21 from 1.9% at end-June 2020, supported by strong lending growth and recoveries. NBE's high share of the government risk in total exposure underpins its asset quality. Volatile Profitability: NBE issues high-yielding certificate of deposits (CDs) that weight on its performance. Fitch views CDs as quasi-govern- ment policy aimed at limiting dollar- ization and support households' disposable incomes. Fitch's core profitability metric, operating profit/risk-weighted assets (RWAs), increased to 4.2% in 9M21 (annu- alised) from 3.8% in 2020 as 15% yielding CDs issued in 1H20 ma- tured. We expect the new 18% CDs issued in 1H22 will weigh on prof- itability in 2022-2023 but redemp- tion fees on early withdrawals by customers on existing CDs and strong growth in high-yielding loans could mitigate pressures. Weak Core Capitalisation: NBE's Tier 1 ratio (14.25% at end-9M21) and total capital adequacy ratio (16.3%) provide the bank with good buffers over minimum regulatory require- ments. Low RWA density results in a weak tangible leverage ratio (4.8% at end-September 2021), which weighs on our assessment. Strong Funding; FC Liquidity Pres- sures: NBE relies on funding from re- tail deposits, which represented 78% of customer deposits at end-9M21. Local-currency (LC) liquidity is sup- ported by the bank's large holdings of sovereign securities. NBE's foreign-currency (FC) liquidity as of June-2021 was adequate, with FC interbank placements covering 26% of FC customers deposits and interbank borrowings. However, we believe that in 1H22 systemwide FC liquidity pressure weakened the bank's FC liquidity and we expect further pressure in 2H22 in the ab- sence of notable strengthening of the sovereign's standing eg. resulting in a deal with IMF. Weaker FC liquidity conditions could pose refinancing risks to NBE's foreign liabilities (6.2% of total funding at end-June 2021). RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: A downgrade of Egypt's sovereign rating will lead to a downgrade of NBE's VR and IDR given the bank's very high exposure to sovereign risk. NBE's VR could be downgraded in case of intensifying FC liquidity pres- sures impacting the bank's ability to service its FC debt. Sharp deterioration in operating con- ditions increasing pressures on the bank's asset quality and, subse- quently, profitability and capital could also lead to a VR downgrade. A downgrade of Egypt's sovereign rating will lead to a downgrade of the GSR. Factors that could, individually or collectively, lead to positive rating action/upgrade: An upgrade of NBE's IDR and VR as well as an upgrade of the bank's GSR would require an upgrade of Egypt's sovereign rating. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS Sovereign Support: NBE's GSR) of 'b' is notched down from the Egyptian sovereign rating and is in line with Fitch's domestic systemically impor- tant banks (D-SIB) GSR of 'b'. Fitch believes Egyptian authorities have a high propensity to support NBE due to its high systemic importance, full state ownership and its important contribution to the government's macro-economic and social policies. However, the state's weaker ability to support D-SIBs, particularly in FC, caps their GSRs at 'b' in Fitch's view. VR ADJUSTMENTS The business profile score of 'b+' is below the 'bb' category implied score due to the following adjust- ment reason: management and gov- ernance (negative). 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 NBE's GSR is driven by support from the Egyptian sovereign. ESG CONSIDERATIONS NBE has an ESG Relevance Score of '4' for governance structure, reflect- ing the Egyptian government's influ- ence on its strategy and business activities especially through the is- suance of high-yielding CDs in 2016, 2020 and 2022. This has a negative impact on the credit profile by affect- ing the bank's cost of funding and net interest margin and is relevant to the rating in conjunction with other fac- tors. Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of '3' - ESG issues are credit neutral or have only a minimal credit impact on NBE, either due to their nature or the way in which they are being managed by NBE ISSUE 163 JULY 2022 the BANKING EXECUTIVE 27