• CBE ups minimum CAR to 10.63% in 2016, minimum tier-1 to 6.63% The CBE has introduced a new capital conservation buffer (CCB) of 0.625%, raising the minimum tier-1 ratio to 6.625% (from the previous 6%) and the total capital adequacy ratio (CAR) to 10.625% (versus the previous 10%). The new 0.625% buffer comes into effect immediately. The CCB will be raised gradually every year to reach 2.5% by January 2019, raising the minimum CAR by then to 12.5% and the minimum tier-1 to 8.5%. The new buffer aims to prepare banks for Basel III, but in the meantime they will continue to report capital adequacy as per the Basel II requirements.
• All banks in our coverage meet min. Tier-1 requirements, but capital is tight for ADIB and Al Baraka Banks in our coverage as of Dec 2015 met the new minimum ratios. ADIB Egypt, EGB, and Al Baraka Bank Egypt comfortably meet the minimum tier-1, however their total CAR is only slightly above the regulatory minimum, and slightly below for ADIB Egypt (see figure 1). EGB’s loan growth momentum has been very strong and the bank’s new management continues to be focused on growth, but earlier this year it announced a rights issue of cEGP1.1 billion in several tranches, and this should boost CAR well above the minimum required. ADIB Egypt’s CAR will be on our estimates very close to the minimum, with the continued improvement in profitability leading to a very gradual build-up of its capital base. We believe however that beyond 2016, and as the minimum CAR increases, there is a risk that both ADIB Egypt and Al Baraka might have to slow down risk-weighted asset growth to comply with the central bank requirements.
• Higher risk-weightings for highly concentrated loan books could put additional pressure on banks’ CAR The CBE, in its effort to encourage banks to focus on lending to SMEs, directed in January 2016 that banks that have 50-70% of their loan book with their top 50 customers would need to apply a 200% risk weight to these loans, and a 300% risk weight if loans to the top 50 customers exceed 70% of the loan portfolio. The 1Q16 results season might not offer insight into which banks have more concentrated lending exposure, as banks have one year to comply with this regulation, but we could see a strong increase in RWAs for some banks by end 2016. CIB, being primarily a lender to large corporates, could fall into this category, but with its CAR at 16.6%, buffers should be enough to comfortably meet capital requirements.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel