Despite continuing upheavals and controversial government conduct that raises persistent questions on governance and fundamental rights in Egypt, the country’s financial workhorse, the Arab African International Bank, seems to be doing fine. To the relief of European and other investors, the latest AAIB ratings announced by Capital Intelligence show the bank’s financial strength outlook has moved from ‘negative’ to ‘stable.’
Capital Intelligence (CI), the international credit rating agency based in Cyprus, announced 3 October 2014 that it has affirmed Arab African International Bank’s (AAIB) Long-Term Foreign Currency Rating (FCR) at ‘B-’ and the Short-Term FCR at ‘B’, on a ‘Stable’ Outlook. These ratings, which are constrained by CI’s sovereign ratings for Egypt (‘B-‘/’B’/’Stable’), denote significant credit risk – as the Bank’s capacity for timely fulfillment of financial obligations is very vulnerable to adverse changes in internal or external circumstances.
At the same time, the Bank’s Financial Strength Rating (FSR) is affirmed at ‘BB’, in view of the Bank’s solid capital adequacy ratio (CAR), good liquidity (though subject to systemic risk), strong profitability, and strategic shareholders. AAIB’s sound risk metrics are however outweighed by high sovereign and political risk factors, though receding. Also constraining the FSR are weak economic conditions and high credit risk, and significant borrower and customer deposit concentrations. On the basis of AAIB’s sustained sound financial position and receding sovereign risk factors, the Outlook for FSR is revised to ‘Stable’ from ‘Negative. An improvement in Egypt’s sovereign risk metrics and in the operating environment as well is more than likely to exert upward pressure on the Bank’s FSR. The Bank’s Support Level is affirmed at ‘3’, reflecting CI’s assessment of a high likelihood of shareholder support. Official liquidity support from the Central Bank of Egypt (CBE) is also expected to be forthcoming.
“Egypt’s elevated economic and political risks, although receding, continue to weigh negatively on the operating environment and all Egyptian banks as a group,” Capital Intelligence said. “Although the political climate appears to be stabilising, an increase in Egypt’s external financing needs could offset growth in the foreign reserves buffer and may lead to renewed balance of payments pressures in view of the lack of access to international markets. Notwithstanding the financial support for Egypt from Gulf Cooperation Council (GCC) countries, the operating environment is expected to remain difficult and credit risks high.”
Having seen asset quality improve in the previous year, AAIB’s non-performing loans (NPLs) grew in 2013 in the face of continued difficult economic conditions, CI Ratings said. A significant rise in ‘past due not impaired loans’ overdue by not more than 30 days evidences signs of increased credit stress, although watch-list credits declined. On a positive note, interim results show that NPLs declined moderately in Q1 2014 with the NPL ratio remaining at an acceptable level. Loan-loss reserves continued to provide more than full coverage for NPLs. In the event economic conditions deteriorate further, AAIB would be particularly vulnerable given its high borrower concentration. Mitigating factors in this regard are the Bank’s solid capital base and good operating profitability. Aided by strong internal capital generation, both CAR and the ratio of total capital to total assets have improved from an already sound level.
Despite a larger loan provision charge, AAIB’s net profit grew moderately in 2013, lifted by higher net interest and non-interest income and continued good cost control. This performance produced a still strong, albeit lower, ROAA (return on average assets), although not as high as the top tier private sector banks in Egypt. The Bank’s sources of income are reasonably diversified and continue to support gross income generation. However, unlike its peers, the retail credit activity remains limited.
As is the case with other Egyptian banks, AAIB’s liquidity ratios are strong, though subject to systemic risk. Liquidity continued to rest on a substantial customer deposit funding base. Notwithstanding the recent improved level of Egypt’s foreign currency reserves, there remain systemic risks to all 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 − may be expected to rise.
AAIB was incorporated as an Egyptian joint-stock company in 1964 under a special law in order to carry out a comprehensive range of commercial banking activities. The establishment of the Bank was the first example of official Kuwaiti and Egyptian co-operation in the banking sector. The majority shareholders are CBE and the Kuwait Investment Authority, with 49.37% each. While maintaining its core competence as a corporate bank, over the years AAIB has expanded its retail business notably retail customer deposits (and to lesser extent retail loans). The Bank is organised into four business segments: corporate banking, investment banking, retail and wealth management. AAIB operates a mid-sized network of 44 branches and 284 ATMs, as well as e-banking services. As at end 2013, the Bank’s total assets amounted to US$ 9.2 billion and total capital was US$ 1 billion.