Egypt Resilience and Potential

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1 Egypt Resilience and Potential INTERNATIONAL BANKING FORUM 2011 Brescia, June 2011 Issa, Ahmed Head of Financial Institutions Group Commercial International Bank

2 Agenda o January 25 th February 11 th o Why is Egypt resilient? o Scenario analysis for Egypt post-jan 25 th o Market update the worst is behind us o Review of Egypt s banking sector o Conclusion 2

3 3 January 25th- February 11th

4 4 Why Is Egypt Resilient?

5 Why is Egypt Resilient? Intrinsic Advantages Geography at the crossroads of Asia and Africa and a gateway to Europe. Demographics 80mn people means a large internal demand; private consumption contributes +70% of GDP. Demographics Young population implies considerable growth potential; c.80% are below the age of 45. A diversified economy with a diversified pool of labor. Population Structure by Age Bracket A diversified Economy Age bracket Above 75 "60-75" "45-59" "25-44" "15-24" "5-14" Below 5 0 5,000 10,000 15,000 20,000 25,000 K inhabitants Oil Industrial Transport & Storage Non-Oil Industrial Whol. & Retail Trade Infras & Const Communications YoY Agriculture Real Estate YoY GR Shares 0% 5% 10% 15% Shares 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 5 Source: CI Capital, A CIB Group Member

6 Why is Egypt Resilient? Competitive Advantages Despite strong price rises since 2006, energy costs are still relatively low. Water costs are also low compared to other countries. While wages up by 15% in 2008,10% in 2009 and 7% in 2010, and low unit productivity exists, labor costs remain cheap. Egypt s Costs of Production in 2009 Wages Blue Collar (av. USD/month) 165 White Collar (av. USD/month) 212 Electricity: Energy Intensive Industries Extra high voltage (USD/kwhr) High voltage (USD/kwhr) Medium voltage (USD/kwhr) Electricity: Non-Energy Intensive Industries Extra high voltage (USD/kwhr) High voltage (USD/kwhr) Medium voltage (USD/kwhr) Natural Gas (USD/mmbtu) Water (USD/sqm) Comparative Costs of Production Egypt Sudan Algeria Syria Energy-intensive industries Electricity - USD/kwhr Natural Gas - USD/mmbtu Fuel (USD/ton) Labor-intensive industries Egypt Turkey Morocco Tunisia Labor cost/hr (USD) Source: CI Capital, A CIB Group Member

7 Why is Egypt Resilient? A proven track record of strong historical growth compared to peers; not vulnerable to global cycles 2009/2010 Real GDP Growth (in %) 2009/2010 GDP Growth rate in Emerging Markets 2009 GDP for MENA region (in US$ bn) 2009 GDP per Capita (PPP) in Emerging Markets 7 Source: CI Capital, A CIB Group Member

years; Government consumption has gradually taken a

8 Private Consumption and Investment have been the key drivers of Egyptian GDP growth over the past 10 years; Government consumption has gradually taken a back seat as a driver of growth 8 Source: Ministry of Finance

9 FDIs marched rapidly into Egypt following the economic reforms of ; remained relatively high after the global financial crisis 9 Source: Central Bank of Egypt

10 Egypt s loans-to-deposits ratio compare favorably with those of banking systems across MENA and OECD The entire banking system assets is still at c.130% of GDP, leading to relatively controlled risk of systemic failure 10 Source: Moody s Investors Service

11 Balance sheets across corporate Egypt are incredibly liquid and under-leveraged 11 Source: Central Bank of Egypt

12 EGP Million The rise in household spending was self-financed; household debt remains small in relation to GDP 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, % 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% % Household debt LCY Household debtlcy/gdp Household debt FCY Household debtfcy/gdp 12

500,000 400,000 300,000 200,000 100,000-2001 2002 2003 2004 2005 2006 2007 2008

13 Egypt s external and domestic sovereign debt obligations are more manageable than in previous economic slowdowns (LE mn) 1,000, , , , , , , , , , Net Government DebtYears External Debt in LCY 13 Source: Central Bank of Egypt

14 Pledged support to Egypt over the coming months is >13% of GDP; an additional c.10% of GDP pledged by G8 Donor Total Amount (USD mn) Details World Bank 4,500 USD 1bn for the budget support, USD 1bn available next year dependent on progress, USD 2.5bn investment lending for specific projects, financing for private business and political risks and guarantee KSA 4,000 USD 1bn to be deposited in the CBE, USD 500mn in bonds, USD 500mn for general budget support, USD 500mn in soft loans for development programs from the Saudi Fund for Development, USD 200mn as grant to be placed with the fund or in a current account to finance projects as SMEs, USD 750mn would be extended as a line of credit to finance Saudi exports to Egypt. IMF 3,000 Surprisingly with minimal preconditions, repaid over 5 years with a grace of 3 years, Supporting economic recovery; Assisting low-income households; Maintaining economic stability USA 2,150 USD 150mn to assist Egypt s democratic transformation; USD 1bn debt relief; USD 1bn directed to infrastructure and employment projects in the country; Canada 11 Development assistance China 10.2 USD9.2mn in aid; USD 1mn to support evacuated Egyptians from Libya EBRD 2,500 To be announced Qatar 10,000 To be announced G 8 20,000 Deauville Partnership to be distributed between Egypt and Tunisia, conditional on IMF 14 Source: CI Capital, newspaper

15 15 Scenario Analysis for Egypt post-jan 25 th

16 Economic Implications in 2011 The short term economic prospects remain weak as key contributors to the economy will be hit: Tourism revenues will drop Foreign investment (has a 4% contribution to GDP) might fall Construction and real-estate activities will be reduced (representation reaches 6% of GDP) Remittances will be negatively impacted (a category that contributes around 5% of GDP) Key risks are: Higher headline CPI; core CPI will rise above CBE s comfort zone Fiscal deficit will widen due to rising social spending A widening deficit in job creation will lead to rising unemployment 16 16

17 Three Scenarios in Source: CI Capital, a CIB Group member

18 Long-term Macro Outlook SOLID FUNDAMENTALS CATALYST NEW EGYPT BUSINESS CONFIDENCE Location/ Demographics Diversified Economy Democratic rule Clear Governance RISING INVESTMENTS Cost Edge Economic Reform Corruption Cleanup Commitment to Economic Reform STRONG GROWTH POTENTIAL 18

19 Market update Market Update 19

20 Egyptian Euro Bond Price Basis Points Debt Markets are stabilizing much faster than expected Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 3-Jun 10-Jun 17-Jun Egyptian Euro Bond CDS Source: Bloomberg, CIB Treasury and Capital Markets analysis

21 Currency Markets have shown remarkable resilience; Central Bank Reserves stands at c.7months of Imports, higher than historical cycles trends 21 Source: Bloomberg, CIB Treasury and Capital Markets analysis

Local and Foreign Equity Investors Are Quickly Buying into the Market The EGX 30 currently trades on a forward P/E of 7.5x*. The index hit a near 2-year low of 6.

Net sellers for much of the last year, local investors turned net buyers during post Jan 25 th. Foreign Arabs moved back to being net buyers in April after exiting the market in January.

22 Local and Foreign Equity Investors Are Quickly Buying into the Market The EGX 30 currently trades on a forward P/E of 7.5x*. The index hit a near 2-year low of 6.9x on 20 th Relative to its emerging market benchmark the MSCI EM Index this constitutes a significant 33.9% discount. Net sellers for much of the last year, local investors turned net buyers during post Jan 25 th. Foreign Arabs moved back to being net buyers in April after exiting the market in January. Foreign non-arabs represented 57% of market in March, well above 12-month average. This eased off to c.35% in April. April. EGPmn (200) (400) (600) (800) Retail (R) Institutions (R) Retail (L) Institutions (L) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 22 Source: CI Capital, A CIB Group Member

23 Review of Egypt s Banking Sector 23

24 Review of Egypt s Banking Sector One of the most liquid and stable sectors in the MENA region Deposits at banks are mostly stable household customer deposits (64%); no threats of runoff were detected during or after Jan-25 th uprising Despite the uprising, business operations at banks resumed at the beginning of the third week following the uprising to serve its customers No toxic assets; Not over-exposed to the real estate (6.5% of total loans); Minimal dependence on foreign interbank A strong regulator CBE announcements during the uprising solidified confidence in the sector s liquidity Has successfully undergone Bank Reform Program Phase I allowing asset quality and capitalization to significantly improve Phase II is currently underway aiming at improving regulatory environment, adopting Basel II and increased focus on corporate governance 24

25 Egypt s banking sector enters this economic phase with a liquid Balance Sheet Source: Central Bank of Egypt

26 EGP Million Total System Deposits actually grew during the period from January March by EGP 4.5 billion; Some dollarization took place 900, , , , , , , , ,000 - Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 LCY deposits FCY deposits 26 Source: Central Bank of Egypt

27 On the average, Egypt s banking sector enjoys healthy profitability in line with MENA and global peers; a closer look shows stronger relative performance 27 Source: Moody s Investors Service

28 % Leading Banks enjoy stronger profitability than regional and global peers ROE 35.00% Leading Egyptian Banks' ROE 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% CIB HSBC AAIB NSGB CAE Alex Bank NBE Misr Avg 28 Source: CIB Financial Division, Banks annual reports

29 Leading Banks enjoy stronger profitability than regional and global peers Net Interest Margins 4.50% Leading Egyptian Banks' NIM 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Alex Bank HSBC NSGB CIB CAE NBE AAIB Avg 29 Source: Banks Financial Statements, CIB Analysis

30 Leading Banks enjoy stronger profitability than regional and global peers Return on Assets Leading Egyptian Banks ROA 30 Source: CIB Analysis, Banks annual reports

31 Leading Egyptian Banks are comfortably capitalized to sail smoothly through the current economic phase 25.00% Leading Egyptian Banks' CAR 20.00% 15.00% 10.00% 5.00% 0.00% HSBC AAIB NSGB CAE Alex Bank CIB Misr NBE Avg 31 Source: CIB Analysis, Banks annual reports

32 Leading Egyptian Banks are adequately capitalized to sail smoothly through the current economic phase 25% Leading Egyptian Banks' NPL to Total Loans 160% Leading Egyptian Banks' Coverage Ratios 20% 140% 120% 15% 100% 80% 10% 60% 5% 40% 20% 0% CAE CIB AAIB NSGB Alex Bank NBE Avg 0% CIB AAIB CAE NSGB NBE Alex Bank Avg 32 Source: CIB Analysis, Banks annual reports

33 Conclusion Egypt s economy has entered into a slowdown phase; but long-term potential is still very strong; markets are all for the most resilient scenario Egypt has seen much more difficult economic times during previous economic cycles; had shown remarkable resilience If compared to previous cycles, the variables are more favorable during the current economic phase; recovery from this phase will be quick and strong Banking system is strong; systemic failure risks are low Banks will see declining profitability and higher exposure to Government Debt during 2011; will not need to raise capital All leading banks will still see positive bottom line in

34 34 THANK YOU

35 USD Credit Default Swaps CDS Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Egypt Italy Portugal Greece Spain Ireland CDS as of June 10:Egypt (USD302.91),Italy (USD ), Portugal (USD742.39), Greece(USD ), Spain (USD274.10), Ireland (USD713.41) 35

36 Egyptian Euro Bond Price Basis Points Debt Markets are stabilizing much faster than expected Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 3-Jun 10-Jun 0.00 Egyptian Euro Bond CDS 36

37 Additional Info Egypt s Foreign Currency reserves May 2011: USD 27.7 billion Real GDP growth: Moody s: FY-11 2% Fitch : FY % S&P s : FY %, FY-12 3%, FY-13 4% 37

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