Egypt Commercial Banking Report Q3 2008

Key Issues Over the last year, the crisis in the inter-bank market, and the soaring prices of oil and other raw materials, have tended to obscure several other important trends. In most of the developing world (i.e. the vast majority of the countries whose banking industries are surveyed by BMI), lending has been growing quickly. In many emerging markets, inflationary pressures have been boosted by a rapid increase in credit.

In a number of emerging markets, macroeconomic imbalances are evident.

The figures on the tables above provide a snapshot of the banking sector in Egypt and the changes that have taken place within it over the last year. To put the figures in context, it may be useful to bear in mind certain aspects of the 59 countries whose banking sectors are currently surveyed by BMI. Across this sample, the median growth in assets in local currency terms was 21.3% (in Colombia). The median loan growth was 21.6% (in India). The median growth in deposits was 17.9% (in Brazil).

On their own, the ratios of loans to deposits, assets, and GDP mean little. However, they can provide useful hints when combined with other data. Across the 59 countries, the median loan/deposit ratio is 92.3% (in Greece). The median loan/asset ratio is 56.0% (in Poland). The median loan/GDP ratio was 63.9% in India.

From Q308, we have included a section that examines the risks associated with each country's banking sector in a new way. We have essentially sought to ask this question: to what extent will the banking sector likely need to source funding from banks in the rest of the world over the course of 2008? Given that the answer is not necessarily, on its own, meaningful, we have looked at other key issues such as the size and recent movement in the loan/deposit ratio, macroeconomic developments and recent movements in financial markets.

Booming oil prices - and, in Iran at least, highly inflationary monetary policies - have led to a surge in bank lending in much of the Middle East and North Africa. It is not clear that all of this lending has been prudent. Nevertheless, the massive current account surpluses being achieved by many of the countries in the region indicate that - quite unlike South East and East Asia in 1997-1998, for instance - the currencies are undervalued. There is no reason why the boom should stop anytime soon. The Middle East and North Africa should, collectively, continue to be a significant supplier of capital to the rest of the world.

However, in part because of the relative underdevelopment of financial services and banking in most countries, relatively little of this money should come directly through the local banks.

As in previous reports, we include a SWOT analysis for Egypt. In essence, Egypt's banking sector is far less exciting - both in upside potential and downside risk - than its peers in most of the other 59 countries surveyed by BMI. The macroeconomic environment is broadly favourable - and the banks appear to have shown discipline in lending. Against this, the major ratios of the banking sector (such as the loan/GDP ratio) imply that there are constraints on lending by the banks.

Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of potential returns. It does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns. This reflects BMI's assessments of overall country risk, together with the regulatory and competitive environment.

CBBER for Egypt Egypt's overall CBBER is 53.2. The banking market structure of the limits to potential returns has, unsurprisingly, a higher score than the country structure (58.8 versus 45.4). Similarly, the market risks of the risks to the realisation of potential returns have a slightly higher score than the country risks (56.7