Egypt’s QNB Ahli, part of the QNB’s global investment portfolio, has weathered the financial and political upheavals in Egypt with strong ratings. The QNB group and other Qatari banks have a large presence in the City, London, and elsewhere in Europe.
Capital Intelligence (CI), the international credit rating agency based in Cyprus, announced [6 August 2015] that it has affirmed QNB ALAHLI’s (QNB AA) Financial Strength Rating (FSR) at ‘BBB-’. The FSR is constrained by the Bank’s considerable exposure to Egyptian government paper, ongoing sovereign risks related to the balance of payments and pressure on the currency, prevailing weak economic conditions and asset concentration risks.
The bank’s FSR is supported by sound loan asset quality, very comfortable liquidity and expanding customer deposit base, good capital adequacy and robust profitability at both operating and net levels. The Outlook for the Bank’s FSR is maintained at ‘Stable’. QNB AA’s Long-Term Foreign Currency Rating (FCR) remains at ‘B-’ and the Short-Term FCR at ‘B’, on a ‘Stable’ Outlook. These ratings, which are constrained by CI’s sovereign ratings (‘B-’/’B’/’Stable’) for Egypt, denote significant credit risk, as the Bank’s capacity for timely fulfilment of financial obligations is very vulnerable to adverse changes in internal or external circumstances. The Bank’s Support Level of ‘2’ (affirmed) denotes a very high likelihood of support from the parent Qatar National Bank (QNB), as well as from the Central Bank of Egypt (CBE), in case of need.
The elevated, albeit diminishing, economic and political risks in Egypt continue to weigh negatively on the operating environment and the balance sheets of all Egyptian banks as a group. Although the political climate appears to be stabilising, the sovereign risk − particularly that derived from the balance of payments and/or a currency crisis − remains high, notwithstanding the demonstrated GCC financial support for Egypt.
QNB AA − the name adopted in 2013 after Qatar National Bank bought the bank from Societe Generale − is mindful of the ongoing 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 past due not impaired loans <90 days, 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 at both operating and net levels. Operating profitability continued to provide high risk absorption capacity, while net profit increased significantly and is expected to withstand higher risk charges and potentially slower growth in operating profit.
The local market remains 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. Egyptian banks’ liquidity clearly remains subject to systemic risks in the event of an adverse sovereign and political 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.
The bank’s liquidity as indicated by key ratios remained good, subject to systemic risks, and improved as growth in customer deposits outpaced that of net loans. As is the case with peer banks, QNB AA’s excess liquidity is invested mostly in Egyptian treasury bills and bonds. While the liquidity of government bonds has reduced over the years due to heightened political and economic risk factors, treasury bills remain liquid instruments in the marketplace. Customer deposits are the bank’s principal source of funding, and these have enjoyed strong rates of growth in recent years despite a sluggish economy.
The bank was established in 1978 as a joint-venture between the National Bank of Egypt, with a 51% share, and Societe Generale, with an initial 49% stake, subsequently increased to 77.17%. In March 2013, the French bank sold its participation to QNB, which 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, the increasing importance of its retail banking operation is bringing diversification to risk assets and earnings. As at end 2014, the bank’s total assets were EGP103.3 billion (US $14.5 billion) and total capital was EGP11.9 billion (US $1.67 billion).