Issa, Ahmed

Head of Financial Institutions Group

Commercial International Bank

INTERNATIONAL BANKING FORUM 2011

Brescia, 16 - 17 June 2011

Egypt

Resilience and Potential

22

Agenda

o January 25th – February 11th

o Why is Egypt resilient?

o Scenario analysis for Egypt post-Jan 25th

o Market update – the worst is behind us

o Review of Egypt’s banking sector

o Conclusion

33

January 25th- February 11th

44

Why Is Egypt Resilient?

55

Why is Egypt Resilient?

A diversified EconomyPopulation Structure by Age Bracket

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.

0 5,000 10,000 15,000 20,000 25,000

Below 5

"5-14"

"15-24"

"25-44"

"45-59"

"60-75"

Above 75

K inhabitants

Age bracket

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0% 5% 10% 15%

Communications

Infras & Const

Whol. & Retail Trade

Non-Oil Industrial

Real Estate

Agriculture

Transport & Storage

Oil Industrial

Shares

YoY

YoY GR Shares

Source: CI Capital, A CIB Group Member

66

Why is Egypt Resilient?

Egypt’s Costs of Production in 2009 Comparative Costs of Production

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.

Wages

Blue Collar (av. USD/month) 165

White Collar (av. USD/month) 212

Electricity: Energy Intensive Industries

Extra high voltage (USD/kwhr) 0.035

High voltage (USD/kwhr) 0.042

Medium voltage (USD/kwhr) 0.058

Electricity: Non-Energy Intensive Industries

Extra high voltage (USD/kwhr) 0.027

High voltage (USD/kwhr) 0.033

Medium voltage (USD/kwhr) 0.046

Natural Gas (USD/mmbtu) 2.125

Water (USD/sqm) 0.178

Egypt Sudan Algeria Syria

Energy-intensive industries

Electricity - USD/kwhr 0.035 0.13 0.04 0.13

Natural Gas - USD/mmbtu 2.125 - 0.51 -

Fuel (USD/ton) 183 406 - 290

Labor-intensive industries Egypt Turkey Morocco Tunisia

Labor cost/hr (USD) 1.2 4.3 2.8 2.1

Source: CI Capital, A CIB Group Member

77

2009/2010 Real GDP Growth (in %)

2009 GDP per Capita (PPP) in Emerging Markets

2009/2010 GDP Growth rate in Emerging Markets

2009 GDP for MENA region (in US$ bn)

A proven track record of strong historical growth compared to peers; not vulnerable to global cycles

Why is Egypt Resilient?

Source: CI Capital, A CIB Group Member

88

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

Source: Ministry of Finance

99

FDIs marched rapidly into Egypt following the economic reforms of 2003-2005; remained relatively high after the global financial crisis

Source: Central Bank of Egypt

1010

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

Source: Moody’s Investors Service

1111

Balance sheets across corporate Egypt are incredibly liquid and under-leveraged

Source: Central Bank of Egypt

1212

The rise in household spending was self-financed; household debt remains small in relation to GDP

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

EG

P M

illi

on

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

Household debt LCY Household debt FCY

Household debtLCY/GDP Household debtFCY/GDP

1313

Egypt’s external and domestic sovereign debt obligations are more manageable than in previous economic slowdowns

Source: Central Bank of Egypt

(LE mn)

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YearsNet Government Debt External Debt in LCY

1414

Pledged support to Egypt over the coming 12 – 18 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

Source: CI Capital, newspaper

1515

Scenario Analysis for Egypt post-Jan 25th

1616

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

1717

Three Scenarios in 2011

Source: CI Capital, a CIB Group member

1

1818

Long-term Macro Outlook

Democratic

rule

Corruption Clean-

up

Clear

Governance

Commitment to

Economic Reform

CATALYST

“NEW EGYPT”

SOLID

FUNDAMENTALS

Location/

Demographics

Diversified

Economy

Cost Edge

Economic Reform

STRONG GROWTH

POTENTIAL

BUSINESS

CONFIDENCE

RISING

INVESTMENTS

1919

Market update

Market Update

2020

Debt Markets are stabilizing much faster than expected

Source: Bloomberg, CIB Treasury and Capital Markets analysis

80

85

90

95

100

105

110

Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 3-Jun 10-Jun 17-Jun

Egyp

tian

Eur

o Bo

nd P

rice

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00

Basi

s Po

ints

Egyptian Euro Bond CDS

2121

Currency Markets have shown remarkable resilience; Central Bank Reserves stands at c.7months of Imports, higher than historical cycles trends

Source: Bloomberg, CIB Treasury and Capital Markets analysis

2222

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 20th April.

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 25th .

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.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

(800)

(600)

(400)

(200)

0

200

400

600

800

Retail (R) Institutions (R) Retail (L) Institutions (L)EGPmn

Local and Foreign Equity Investors Are Quickly Buying into the Market

Source: CI Capital, A CIB Group Member

2323

Review of Egypt’s Banking Sector

2424

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-25th 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

2525

Egypt’s banking sector enters this economic phase with a liquid Balance Sheet...

Source: Central Bank of Egypt

2626

Total System Deposits actually grew during the period from January – March by EGP 4.5 billion; Some dollarization took place

EG

P M

illio

n

Source: Central Bank of Egypt

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

LCY deposits FCY deposits

2727

On the average, Egypt’s banking sector enjoys healthy profitability in line with MENA and global peers; a closer look shows stronger relative performance

Source: Moody’s Investors Service

2828

Leading Banks enjoy stronger profitability than regional and global peers –ROE

Leading Egyptian Banks' ROE

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

CIB HSBC AAIB NSGB CAE Alex

Bank

NBE Misr Avg

%

Source: CIB Financial Division, Banks’ annual reports

2929

Leading Banks enjoy stronger profitability than regional and global peers – Net Interest Margins

Leading Egyptian Banks' NIM

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Alex Bank HSBC NSGB CIB CAE NBE AAIB Avg

Source: Banks’ Financial Statements, CIB Analysis

3030

Leading Banks enjoy stronger profitability than regional and global peers – Return on Assets

Leading Egyptian Banks’ ROA

Source: CIB Analysis, Banks’ annual reports

3131

Leading Egyptian Banks are comfortably capitalized to sail smoothly through the current economic phase

Leading Egyptian Banks' CAR

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

HSBC AAIB NSGB CAE Alex

Bank

CIB Misr NBE Avg

Source: CIB Analysis, Banks’ annual reports

3232

Leading Egyptian Banks are adequately capitalized to sail smoothly through the current economic phase

Leading Egyptian Banks' NPL to Total

Loans

0%

5%

10%

15%

20%

25%

CAE CIB AAIB NSGB Alex

Bank

NBE Avg

Leading Egyptian Banks' Coverage

Ratios

0%

20%

40%

60%

80%

100%

120%

140%

160%

CIB AAIB CAE NSGB NBE Alex

Bank

Avg

Source: CIB Analysis, Banks’ annual reports

3333

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 2011

3434

THANK YOU

3535

Credit Default SwapsCDS

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

1600.00

Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

US

D

Egypt Italy Portugal Greece Spain Ireland

CDS as of June 10:Egypt (USD302.91),Italy (USD 173.879), Portugal (USD742.39), Greece(USD1562.69), Spain (USD274.10), Ireland (USD713.41)

3636

80

85

90

95

100

105

110

Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 3-Jun 10-Jun

Egyp

tian

Euro

Bon

d Pr

ice

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00

Basis

Poi

nts

Egyptian Euro Bond CDS

Debt Markets are stabilizing much faster than expected

3737

Additional Info

Egypt’s Foreign Currency reserves –May 2011: USD 27.7 billion

Real GDP growth:

Moody’s: FY-11 2%

Fitch : FY-11 2-3%

S&P’s : FY-11 1.5%, FY-12 3%, FY-13 4%