Mysterious things are happening within Egyptian banks

When the Ministry of Finance announces that the results of the first five months of the current fiscal year (2021-22) point to a growth in the total budget deficit by 35 per cent compared with the pre-budget assessments, it is only natural that the government will default on payments to its creditors. Owners of medical supplies companies have been complaining that they have not been paid what’s owed to them by university hospitals for the past four years. Contractors have also complained that they have not been paid for price differences in their contracts with government parties, which have been caused by floating the exchange rate since 2016. The people of Egypt did indeed watch the head of the regime tell the contractors working on government projects that they would be paid a quarter of what is owed, with payment of the balance postponed.

As a result, such companies cannot make loan repayments to the banks. In turn, this has an impact on the quality and designation of bank loans and liquidity, particularly given that some of these banks have had chronic problems with delinquent loans. These include the Real Estate Bank, the Agricultural Bank and the Industrial Bank.

Some Egyptian banks have resorted to putting a maximum limit on liquidity for the money deposited by clients with them set at 50,000 Egyptian pounds per day. This has been the case since the onset of the coronavirus pandemic that has had a negative impact on sales for numerous companies, including car manufacturers and dealers. Ultimately, this augments the difficulty of repaying loans on time.

Dollar shortages at the banks

Due to the recession throughout the past year and longer, which has resulted in poor liquidity for individuals — much of what they had went on medical treatment, healthcare and food — it is only natural for the level of bank deposits to be affected. This is especially so because deposits from families and individuals make up 83 per cent of the total deposits in Egyptian banks.

Some have linked this to the demands made by President Abdel Fattah Al-Sisi a few weeks ago that those who are building houses should instead deposit their money in the banks. This was despite the huge gap between supply and demand in the housing sector and the difference between investments and bank deposits, bearing in mind that banks are generally not tangible investment vehicles and direct most of their investments towards buying government debt.

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The banks have also faced a decline in foreign currency deposits and a shortage of foreign currency reserves. Net foreign assets in the banking system have seen the difference between what is available to the banks in terms of foreign currencies and their own foreign currency liabilities falling last year from $20.4 billion in February to $5.3 billion in November.

With the decline of net assets in the Central Bank during that period, as well as in the other banks, the situation was worse in those of the latter whose net assets of foreign currencies declined from $6.8 billion in February last year to a deficit from July to October. The most recent data available shows this deficit to be $5 billion despite the banks withdrawing some of their deposits in foreign banks. Those deposits overseas fell from $21.4 billion in March last year to $14 billion in October. Additional borrowing from foreign banks raised the total of foreign loans from $8.7 billion at the end of 2019 to $12.2 billion by the end of 2020, then to $14.4 billion by the end of last September.

Profits are less than the year when the pandemic was at its worst

Due to the Covid-19 pandemic, 2020 saw the closure of numerous economic sectors, including tourism and air travel for several months. There was also a ban on parties, exhibitions and similar events, which meant that economic activity fell dramatically. As a result, profits in twenty out of twenty-three banks that published their financial statements also fell. On top of this, the Central Bank decided to cut the interest rate by three per cent.

In view of the gradual restoration of normal conditions since the middle of 2020, the banking situation improved last year due to the change in the economic circumstances in which banks operate and the decision by the Central Bank not to change the interest rate during that period, let alone the growth rates about which the government talks. Yet it was noticed in the results of bank operations during the first quarter of the year that there was a decline in the profits of five banks compared with the same period in 2020, out of a total of nineteen banks that published their financial statements.

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In the results for the first half of last year, which are contrasted by the lockdown that dominated the first half of 2020, the profits of eight out of twenty-one banks that published their statements fell. This suggested real problems within those banks that rendered the results of their operations lower than the results at the peak of the coronavirus effect. In the third quarter of 2021, the profits of five banks out of nineteen that published their accounts fell.

Similarly, during the first nine months of 2021 six banks saw a decline in their profits compared with the same period during 2020, the peak year of Covid-19. The only bank to publish its accounts for the whole of last year so far, the profits of which increased during the year by about 1.8 per cent, saw profits fall by 18 per cent during the last quarter of 2021 compared with the last quarter of 2020.

A strange way of displaying financial results

The factor that made a difference was the publication by government-owned banks of their quarterly financial statements. This was commendable; something that we have been demanding for years so as to follow the example of private sector banks. However, it was noticed that the Egypt Bank, the second largest of the country’s banks in terms of assets and branches, compared results to the end of September 2021 with the results of June 2020, a gap of fifteen months. It was also noticed that the statement of income and expenditure for that quarterly period was missing. When a fifteen month period is compared with twelve months in the previous year, the longer period will always be favoured.

The same thing was seen when the third quarter results of Al-Ahli Egyptian Bank were published. This is the biggest of all Egyptian banks. Those results were for the assets, deposits, loans and other items compared with the results for June 2020, again a gap of fifteen months. The report also referred to the operations of that year’s quarter pertaining to revenues and expenses compared with the performance over fifteen months.

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The two banks justified this by saying that they were changing the publication of results from the fiscal year to the calendar year. They added that it would be difficult to provide data for periods that correspond to the financial period for which results were being published.

The issue was exposed when the Egyptian Bank resorted to the same method in order to nurture exports by contrasting the results of the third quarter of last year with the results of June 2020 — again, a gap of fifteen months — although the private sector owns 25 per cent of its shares. It is tied to the stock exchange and has for years been publishing its quarterly data just like the private sector banks, where comparisons are usually made between a quarter and the corresponding quarter from the previous year. This is what Cairo Bank stuck to despite being fully owned by the government. We have to ask why Al-Ahli Egyptian Bank and Egypt Bank resorted to this method of disclosure, covering the results of operations in a manner that has never been done before.

Bear in mind that these two banks are the two most important in Egypt. Together they owned 50.5 per cent of the total assets of Egyptian banks as at the end of last September, and had 54 per cent of deposits in all banks operating within Egypt. Moreover, they provided 55 per cent of bank loans and owned 44 per cent of shareholding rights.

The financial position of the Central Bank needs bolstering

What raised doubts about what lay behind this accounting method was that by means of comparing the previous statements published, it seemed that loans at Egypt Bank fell last September compared with the figure last June. This is despite the increase in total bank loans during that period and the fact that the method of calculating loans in Egyptian banks takes into consideration interest on previous loans as part of the net assets. This means that there has been a real decline in the loans, with figures higher than stated previously.

At the Egyptian Bank for Nurturing Exports, I found a decrease in the bank’s profits during the third quarter of 2021 compared with the profits for the same period in 2020, and the same period in 2019 as well. This means that there had to be a reason for resorting to the unusual accounting period of fifteen months.

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The Central Bank decided recently to make emergency liquidity available to the banks so as to tackle the liquidity crisis on a short term basis. This differs from operations on the open market through which the Central Bank buys government financial notes from the banks in order to pump liquidity into them. It also differs from the process of lending banks cash overnight at an interest rate of 9.25 per cent.

The financial position of the Central Bank by the end of last November was that it had assets of 2.4 trillion Egyptian pounds, whereas the assets of Al-Ahli Bank as of last September were put at 2.8 trillion Egyptian pounds. Ownership rights in the Central Bank amounted to zero as a result of the depletion by referred losses of every ownership right.

Ownership rights in Al-Ahli bank were valued at 135 billion Egyptian pounds. This makes me wonder about the ability of the Central Bank to provide emergency liquidity to the banks that complain about a shortage. The aforementioned ambiguities require an explanation and assurances from the authorities supervising the banks.

Translated from Arabi21, 23 January 2022 

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.