Export Development Bank of Egypt's ratings and 'negative' outlook affirmed

A downgrade of Egypt's Sovereign Ratings would immediately result in a lowering of EDBE's FC Ratings. The Bank's Support Level is maintained at '3', which reflects a high likelihood of support from the Bank's largely state-owned shareholders, as well as from Central Bank of Egypt, in case of need.

Despite weaker profitability, EDBE's Financial Strength Rating (FSR) is affirmed at 'BB+', in view of the comfortable liquidity position, strengthened capital adequacy, and currently limited accretion to NPLs. The Outlook for FSR remains 'Negative', reflecting the ongoing elevated credit risk in the Bank's respective markets and the challenging operating conditions in Egypt.

While Egypt has entered a period of marked institutional change and development which could have beneficial economic and social effects over the longer-term, in the near to medium-term ongoing political and economic risks will continue to weigh negatively on the operating environment. EDBE is mindful of heightened risks in the economy, and has effectively deleveraged its balance sheet - both net loans and funding contracted in the first nine months of FY 2012.

Although asset quality remains weak as evidenced by a higher than sector average NPL ratio, impaired credits started to decline in the final quarter of FY 2012, due to write-offs. Accretion to NPLs has also slowed down benefiting from a cautious lending policy adopted a few years earlier.

The broadening of activities into commercial and retail banking services have strengthened EDBE's funding mix and customer deposit base, while improving overall liquidity. Concurrently, the Bank has deployed part of its liquidity to build an equity and corporate bond portfolio, and also to subscribe to private equity funds. However, negative returns from the investment book in the first nine months of FY 2012 have markedly depressed profitability, at both operating and net levels despite good net interest income generation. The Bank's weaker than sector average operating profitability has diminished its risk absorption capacity, while sustained high loan provision charges have served to exacerbate falling returns. That said, loan-loss provisioning requirements are projected to reduce in the current fiscal year in view of the recent decline in impaired loans.

EDBE's capital adequacy ratio improved to a good level following a rights issue in the previous year. A sustained contraction in total risk weighted assets contributed to the further improvement in capital adequacy in the first nine months of FY 2012. However, free capital is impaired to some degree by unprovided NPLs.

Incorporated in 1983, EDBE's mandate is to develop Egypt's exports by supporting Egyptian exporters and facilitating the introduction of Egyptian products in international markets. State-owned entities including Banque Misr and National Bank of Egypt in aggregate hold the majority 75.3% of shares. As at fiscal year-end June 2012, the Bank's total assets were EGP14.1bn ($2.3bn) and total capital was EGP1.8 bn ($298m).