In a move designed to protect the Egyptian banking sector’s liquidity during the coronavirus pandemic, the Central Bank of Egypt (CBE) has decided to ban the country’s banks from distributing cash dividends among shareholders.
The banks are not permitted to “distribute dividends from this year’s profits or retained profits to shareholders,” CBE Governor Tarek Amer said.
Radwa Al-Swaify, head of research at Pharos, an investment bank, said the decision was meant to help the banks comply with Egypt’s Banking and Central Bank Act, which stipulates that the country’s banks should have capital requirements of a minimum of LE5 billion in less than three years.
It will also help the banks to accumulate retained profits, which will assist them in increasing their capital before the deadline and improving their capital ratios, she added.
The decision was issued in the wake of the continuing coronavirus crisis on the local and global levels, the CBE said, stating that the amount of economic damage was not yet clear, particularly as the pandemic was far from over.
The CBE made the move as part of its role in preserving the safety of the monetary and banking system and hedging against crises that could arise in the coming period, it added.
Mohamed Abu Basha, a senior macroeconomic analyst with investment bank EFG-Hermes, said the CBE decision would not have a large impact, since the banks do not make large dividend payments, but it would support their financial positions through the growth of loans.
This was the case for the majority of the banks operating in Egypt aside from Credit Agricole and the Housing and Development Bank, which distribute significant profits among shareholders, Abu Basha stated.
The CBE move would not affect the performance of bank stocks, he said, as had been evident in stock market sessions following the decision. The Commercial International Bank (CIB) had recorded a rise in its share price at the end of last week’s sessions, Abu Basha added.
The CIB saw an increase in the value of its shares by 7.3 per cent in last week’s trading ending on 14 January to close at LE63.5 per share, with a total value of LE774 million in transactions.
The performance of the banks had been negatively affected by the coronavirus pandemic, Abu Basha said, with the banks having to make precautionary provisions that had reduced their profits.
The CIB’s financial statement for the first nine months of 2020 revealed that its profits had declined by 14 per cent year-on-year. It recorded net profits of LE7.34 billion from January through September 2020, with these dropping in the fourth quarter of the year to register LE2.34 billion from July to September, down from LE3.18 billion during the same period in 2019.
The financial indicators for Credit Agricole Egypt showed that during the first nine months of 2020 its profits declined by 44.4 per cent year-on-year. The Housing and Development Bank’s financial indicators revealed that for the first nine months of 2020 the bank’s profits had declined by six per cent on an annual basis.
The CBE may also be preparing for more defaults on the part of businesses and individuals in repaying loans as a result of the coronavirus pandemic, said Allen Sandeep, head of research at Naeem Brokerage.
In March, the CBE had extended the tenor of bank loans for six months to alleviate the repercussions of the pandemic on borrowers. “The CBE certainly wants the banks to shore up balance sheet liquidity to be on the safe side,” Sandeep told Reuters.
Analysts believe that the CBE’s latest decision means that it expects further defaults in repaying loans. The banks, in turn, have been preparing for the worst, raising non-performing loan provisions in case borrowers cannot repay.
However, the analysts believe that the majority of Egypt’s banks are still “in a good financial position” with a decrease in loan-to-deposit ratios and ample liquidity. The effect of any defaulting loans will not be clear before mid-2021, they said.
Abanob Magdi, a banking analyst with Beltone, an investment bank, said the performance of Egypt’s banks in 2020 had been affected by multiple factors, the most significant of which were lower interest rates and increased risks, reflecting negatively on profits which are anticipated to be less than those seen in recent years.
The banks are facing increased risks now, Magdi said, citing borrowers’ inability to repay loans and operation and market risks as potential hazards and making the banks want to increase their capital base.
Bank profits have retreated by 10 per cent overall, with the profits of the Export Development Bank of Egypt, the Abu Dhabi Islamic Bank, and Credit Agricole being affected because of their large number of loans, Magdi explained.
Banks that employ a large portion of their deposits in debt instruments faced limited risks, he added.
Magdi said that the profits of the majority of the banks had been affected by factors such as a reduction in net income from banking transactions, the CBE’s decision to stop commissions on withdrawals from ATMs, and decreasing revenues due to the decline in interest rates.
Many banks have been unable to attract new deposits because the National Bank of Egypt and Banque Misr issued certificates bearing a 15 per cent interest rate, withdrawing a lot of available liquidity from the market.
However, Magdi did not anticipate bank stocks being much affected by the CBE decision. The banking sector was still attractive among investors, he said, citing the recent sale of BLOM Bank to the Bahraini Arab Banking Corporation as an example.
*A version of this article appears in print in the 21 January, 2021 edition of Al-Ahram Weekly.