Fitch affirms National Bank of Egypt at 'BB+', Outlook Positive

The bank's National ratings are affirmed at Long-term 'AA(egy)' with Stable Outlook and Short-term 'F1+(egy)'. The bank's other ratings are affirmed at Individual 'D/E' and Support '3'. The Support Rating Floor is affirmed at 'BB+'.

NBE's Long- and Short-term foreign currency IDRs and National ratings reflect Fitch's view of the very strong propensity of the Egyptian authorities to provide support to the bank in case of need, based on its systemic importance in Egypt, 100% government ownership, close relationship with the authorities and important role in implementing certain aspects of government policy.

NBE's Individual rating reflects its unreserved non-performing loans ('NPLs') and weak capitalisation, but also takes into account its strong franchise as the largest bank in Egypt, stable funding and adequate liquidity. An upgrade in the Individual rating would require the bank's unreserved NPLs and low capitalisation to be addressed.

NBE has a large proportion of NPLs, stemming from the economic downturn in Egypt in the late 1990s and early 2000s, and partly a result of state-directed lending. Provisioning costs have absorbed much of the profit since then, as NBE has sought to increase reserve coverage. Under a new business plan, the bank will increase provisioning aided by the sale of non-strategic equity holdings. However, Fitch believes the provisioning shortfall to be significant and will continue to absorb profits in the medium-term.

Revenue generation has improved at NBE along with improvements in the economy. NBE, in conjunction with the consultants McKinsey, has developed a medium- to long-term strategy to maintain the bank's leading franchise in Egypt and defend its strong market shares. Fitch believes this could prove challenging as the Egyptian banking sector becomes more competitive, with the increasing presence of private sector, including foreign-owned, banks. High costs remain a constraint on profitability.

NBE is the largest bank in Egypt and commanded a 23% share of banking system assets at end-December 2006. The bank provides a range of retail, wholesale and investment banking services.