Booz Allen Hamilton released a report entitled The New Economic Norm: How Egyptian Banks Must Adapt to Thrive, in which analysts gave their recommendations on how Egypt’s banking sector can improve at this critical moment in time. The report lays out strategies that Egyptian banks are encouraged to adopt, considering the new economic norm in Egypt of decreased government expenditure and constrained access to liquidity.
Tightened liquidity has increased competition in Egypt. This has caused banks to start enacting strategies and new operating models, coming up with differentiated offerings, implementing agile and lean operations, effectively leveraging capital markets, benefitting from the untapped small- and medium-sized enterprises (SME) segments, providing digital banking, and taking advantage of consolidations.
Egypt has been suffering from a shortage in foreign currency as a result of the decline in tourism, inflation, the easing of capital controls, and the potential slowdown in remittances from countries of the Gulf Cooperation Council (GCC) due to lower global oil prices. The continuing pressure on the Central Bank of Egypt’s (CBE) reserves and the depreciation of the Egyptian pound against the US dollar have also been causing a decline in the country’s foreign currency reserves. Booz Allen Hamilton stated in its report that if banks rapidly adapt to the new norm and “maneuver its diverse complexities”, they will be able to thrive in the new business environment.
Charles Habak, principal of financial services at Booz Allen Hamilton MENA, spoke to Daily News Egypt about specialised strategies for seizing opportunities in an economically troubled period.
Habak stated that there must be a focus on differentiation, as successful banks have to focus on establishing clear competitive edges over their rivals in the corporate and retail sectors. Banks in the MENA-region have been progressively converging towards commoditised offerings, driven by more stringent regulations and the executives’ interest in establishing universal offerings.
For example, Habak said that retail banks can seek to build a reputation and a specialisation in the market around focus areas such as cards and payments, innovative savings accounts, rationalised products and simple processes, user-friendly digital platforms, and enhanced premier customer service. Corporate banks can build expertise, recognition, and a stronger reputation for specific products such as the initiation of structured finance, supply chain finance, digital cash management, trade services, and joint accounts to link affluent and high net worth individuals’ corporate and personal accounts.
Retail banking is a highly underpenetrated sector and Egypt and is forming the main objectives in drives for growth amongst commercial banks, said Habak. ALEXBANK has a leading position within retail banking, with a market share of 8% according to the Oxford Business Group. However, according to a report by the World Bank on household surveys, 14% of adults in Egypt own a formal financial account at a bank, of which only 4% had saved money in that formal account in the past year, 6% had taken loans, as most prefer to borrow from friends or family members, while less than 2% own a credit card, and only 2.2% had a mortgage.
Brooking’s 2016 Financial and Digital Inclusion Project Report measuring national commitment to financial inclusion, mobile capacity and infrastructure, regulatory support, and population’s adoption of financial services.
Consolidation and tapping unexploited resources
Egypt has been in a gradual state of banking consolidation in which the number of banks operating in Egypt has decreased from 61 in 2004 to 40 banks licensed by the CBE in 2015. “Larger and well-capitalised banks should consider taking advantage of market conditions to opportunistically acquire or merge with smaller banks,” Habak stated.
Although banks are increasing the number of their branches and expanding from the traditional cities of Cairo and Alexandria, Egypt remains relatively under-penetrated, with only 4.9 banks per 100,000 people. In Iraq, for instance, the number stood at 5.5 in 2013.
“In allowing banks to open mini-branches with less capital than conventional ones, the government has greatly expanded the area and amount of people that will have access to quality banking services,” Nevine Loutfy, managing director and CEO of Abu Dhabi Islamic Bank Egypt, told Oxford Business Group. “This is particularly important in underserved rural areas like Upper Egypt, where current facilities are not enough to handle the large amount of remittances destined for the region each year.”
Gulf banks make up the majority of foreign banks attempting to branch into the Egyptian market to escape overcrowding in their domestic landscape. In March 2013, Qatar National Bank acquired 19.95% stake in the National Société Générale Bank, while in December 2012, the entire operation of BNP Paribas Egypt was sold to Emirates NBD. Kuwait’s Al-Ahli Bank also recently entered the market at the end of 2014 with the purchase of a 98.5% stake in Piraeus Bank’s Egyptian unit, totalling 39 branches.
Increasing efficiency and trimming the fat
The importance of a stronger operating model for the Egyptian banking sector is non-debatable. It was this improved operating model that helped maintain the profitability of the banking sector throughout the political and economic turbulence Egypt faced after the 25 January Revolution.
In 2015, credit ratings agency Moody’s upgraded the banking sector to “stable”, stating that the Egyptian banking system has benefitted from “improved operating conditions, resulting in rising consumer confidence and business investments, which in turn will support loan growth and asset quality”.
Booz Allen Hamilton is no different in promoting the refinement of operations and organisation, stating that “successful banks will transform structures, consolidate functions, reduce management layers and unnecessary red tape, as well as empower strong performing teams and individuals,” said Habak. This can be assisted through digitalisation, strategic outsourcing, and a more efficient return on investment policy.
On the importance of digital marketing and its relationship with specialisation, an efficient operating model, and higher rates of return, Habak stated: “For more sophisticated banks, big data and advanced analytics become essential to creating tailored customer journeys and continuously improving engagement. Banks must automate key customer processes—such as account opening, mortgages, and credit approval etc.—to provide a simple banking experience.” Banks should take steps to transition customers to digital platforms as efficiently as possible.
Innovation and untapped resources
SME financing has been most affected by the currency and liquidity shortages, as banks had tightened lending or stopped providing loans to SMEs altogether. “The SME loan market is relatively small in Egypt, with the vast majority of bank loans not going to private borrowers,” said Habak. International institutions have targeted the SME sector with financing between $300m and $500m.
The CBE has been attempting to promote SMEs by requiring banks to increase their proportion of SME lending to 20% by 2020. Habak stated that banks should seek to effectively capitalise on these opportunities by developing advanced due-diligence, credit assessment, and analytics capabilities.
Moody’s pointed to the potential risk of increased borrowing for SME financing at a time where government expenditure on debt already reaches a third of total and a foreign liquidity shortage has bottlenecked business conditions. Booz Allen Hamilton is optimistic about the future potential for SME financing in Egypt. Habak stated: “There is merit to Moody’s position based on the current paradigm. Opportunities for SME financing must be closely tied to greater innovation and use of digital platforms and analytics, whereby risk assessment and exposures are computed through analytics and machine-learning, leveraging a deep set of indices and data points that include key macroeconomic measures, such as exchange rate volatility, inflation, sector-specific data, and so forth.” This means that unless SME financing is carefully managed, tracked, and is accompanied by increased innovation, it may prove dangerous in the long-term.
The future of Egyptian banking
The banking sector has consistently shown to be able to perform under pressure and has successfully piloted through both domestic and international economic downturns and turbulence. Lending has been depressed but is picking back up now that risk is decreasing. Despite economic and political instability, Egyptian banks have increased their deposits from $178.6bn in 2013 to $216.7bn in January 2015. Both public and private banks have shown profitability, with the National Bank of Egypt (NBE) showing a 25% growth rate in 2015, and the Commercial International Bank (CIB) witnessed a 39% growth rate in 2014.
Source: Moody’s Credit Rating Agency’s analysis of Egypt’s Banking industry
The Egyptian banking sector has been the biggest beneficiary of stability returning to the country, and does have a lot of potential expansion capacity. The government’s development and investment strategy and legislations have helped spawn a revival for financing projects.
In 2015, supported by an overall improved macroeconomic environment, the total assets under management grew by 27.6% in local currency terms, and 16.4% in US dollar terms over the first 11 months of 2015, reaching $320.6. The $45.3bn asset-increase proved 31% higher than the growth registered during the corresponding period in 2014.
Egypt’s new norm, however, is not expected to be a long-term issue. Many are expecting that tourism will eventually recover and Egypt’s projects in natural gas development of the Zohr gas field will begin production in 2017. The tourism industry is also in the process of moving towards becoming a business and conference hub for the region, at a point where increased projects in the GCC and Africa will be able to utilise Egypt’s business-friendly infrastructure.
Habak further elaborated on the future of Egyptian banking, stating that “as the devaluation of the pound starts to stabilise, Egyptian banks will see growth opportunities for the domestic financial system in depth and in breadth, for instance in areas such as corporate bonds and sukuks, large syndications, and project finance. Overtime, greater regional leadership in North Africa will present important opportunities to Egyptian banks.”