Ratings agency gives Egyptian banks a lift



Egypt's banks have narrowly avoided a ratings downgrade from Standard & Poor's as the country's government requests a US$4.8 billion (Dh17.62bn) loan from the IMF.

At the weekend the credit ratings agency lifted three Egyptian banks - Commercial International Bank, National Bank of Egypt and Banque Misr - from negative watch after taking the same action on the credit rating of Egypt's government.

"Negative watch" is defined by ratings agencies as an even chance of a downgrade within the next three months.

The three Egyptian banks were put on "negative watch" alongside the country's government because the credit ratings of banks cannot exceed their government's. Egypt's ratings - along with those of the banks - were affirmed at B. S&P said the risk of a downgrade had receded as a result of a "working arrangement" between the ruling Freedom and Justice Party and the country's armed forces.

"In our view, [the banks] face significant sovereign risk because they hold a high amount of government debt compared with their equity base and earnings capacity," the ratings agency said. "Our ratings on [National Bank of Egypt] and [Commercial International Bank] do not exceed those on the sovereign because we do not believe that the banks would withstand a scenario where Egypt defaulted on its obligations."

National Bank of Egypt and Banque Misr are also both owned by Egypt's government.

Commercial International Bank's shares rose 0.7 per cent to 29.07.Egyptian pounds each in trading yesterday.

Ironically, the bank has benefited from investor fears over Egypt's solvency. Its latest quarterly earnings beat analysts' estimates.

"A key highlight of the quarter is the hike in interest income from the investment in government securities, which surpassed that from lending to clients for the first time in at least eight quarters," analysts from Beltone Financial wrote in a research note.

However, S&P remains wary over the "delicate" balance of power in Egypt. The Salafist Nour Party, the next strongest Islamist faction in the country after the Muslim Brotherhood, has opposed the IMF's loan needed for the country to avoid bankruptcy as "un-Islamic".

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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