October 12 (Fitch) Fitch Ratings has affirmed Credit Agricole Egypt’s (CAE) Support Rating at ‘4’ and National Long- and Short-Term Ratings at ‘AA+(egy)’ and ‘F1+(egy)’, respectively. KEY RATING DRIVERS SUPPORT RATING CAE’s Support Rating reflects a limited probability of support from the bank’s ultimate shareholder, France’s Credit Agricole (CA; A+/Stable/a+).
While CA’s propensity and ability to support its Egyptian subsidiary are currently high, they are constrained by Egypt’s Country Ceiling of ‘B’. CAE is about 60%-owned by CA and is part of the French banking group’s presence and strategy in the Middle East and North Africa.
However, we do not view these regions as core markets for CA. To date, CAE has not required any extraordinary support from CA; this reflects CAE’s acceptable capitalisation, healthy structural liquidity profile and adequate risk management systems and policies. Given CA’s standalone creditworthiness and CAE’s small size compared with CA (less than 1% of assets and 3% of equity at end-2016), any required extraordinary support for CAE would be immaterial relative to CA’s ability to provide it.
CAE’s domestic franchise (1% market share of assets and deposits) benefits from the subsidiary’s integration with CA in governance, risk management, IT systems and branding. CAE has significant management independence but a number of senior managers are seconded from other CA subsidiaries, including CAE’s CEO and the CFO.
Despite CAE being a small player in the market, the bank is active in syndications, capital markets, retail, corporate banking and is particularly strong in private banking. CAE has one of the strongest profitability metrics among private sector banks in Egypt. The bank’s net interest margin (NIM) strengthened to 6.3% in June 2017, supported by a high interest rate environment and higher portion of retail lending than at peers. Similar to peers, CAE’s profitability is highly dependent on the high yields on the bank’s sizeable government debt portfolio, which accounted for 27% of assets and 37% of total interest income in 1H17.
CAE has a fairly diversified revenue base, with non-interest income representing on average 30% of its operating income, higher than peers’.
Despite a challenging operating environment, CAE has maintained its asset quality metrics. The impaired loans ratio increased to 4.2% at end-2016 due to EGP depreciation as most of the bank’s impaired exposures are in foreign currency (FC).
Loan impairment charges-to-gross loans increased to 1.5% in 2016 (from 0.8% in 2015) as the bank maintained a healthy reserve coverage of 178%. We do not expect a sharp increase in impaired loans owing to the bank’s cautious growth strategy and expected improvement in the operating environment. CAE is better-capitalised than peers but capitalisation needs to be viewed in light of its concentration to the sovereign through its investment portfolio and the 0% risk weighting on sovereign securities.
The Fitch Core Capital (FCC) ratio dropped to 16.2% at end-1H17 (from 18.9% at end-2015) due to an increase in FC risk-weighted assets after the EGP floatation. CA provided CAE with a USD30 million (EGP543 million) 10-year long-term loan to boost its capital ratios. The term loan qualifies as Tier 2 capital as per Central Bank of Egypt regulations; accordingly, the total regulatory capital ratio improved to 18.9% at end-1H17 from 11.6% at end-2016. CAE has healthy internal capital generation, supported by its profitability. In 1H17, CAE paid EGP684 million dividends, representing 51% of its 2016 net income (below its historical pay-out ratios of more 65%) to reduce pressure on its capital ratios. CAE has a healthy liquidity and funding profile but the deposit base is more concentrated than at peers due to its small franchise.
FC liquidity is well managed with an average FC loans-to-deposits ratio of only 23% at end-1H17, below the sector average of about 67%. NATIONAL RATINGS CAE’s National Ratings reflect the bank’s relative creditworthiness in Egypt. CAE is rated higher than peers owing to potential support from CA. RATING SENSITIVITIES SUPPORT RATING CAE’s Support Rating is primarily sensitive to a change in CA’s propensity to provide support as well as a change in Egypt’s Country Ceiling. Given CAE’s small size compared with CA’s as well as CA’s solid investment-grade rating, the parent’s ability to provide support is unquestionable and therefore not a primary rating sensitivity. CA’s willingness to provide support could be sensitive to a severe deterioration in Egypt’s operating environment, although we do not view this as likely. NATIONAL RATINGS The ratings are sensitive to a change in Fitch’s view of CAE’s relative creditworthiness in Egypt. Contact: Primary Analyst Eric Dupont Senior Director +33 1 4429 9131 Fitch France S.A.S.