By: Heba El-Kourdy
The Egyptian government will begin enforcing a new law on the Egyptian Exchange (EGX) that involves raising the minimum capital requirement for banks to EGP 1.5 billion.
The new law will impact banks, particularly those whose capital is below the EGP 1.5 billion requirement.
According to a survey by Mubasher, five EGX-listed banks need to increase their capital by EGP 1.13 billion in accordance with the terms of the new law. These banks are: Union National Bank – Egypt (UNB), Al Baraka Bank – Egypt, Credit Agricole – Egypt, the Export Development Bank of Egypt (EBE), and the Housing and Development Bank (HDB).
The provisions of the new law stipulate raising banks’ minimum capital base to EGP 1.5 billion from EGP 500 million, while that of exchange companies to EGP 20 million from EGP 5 million, and boosting the capital base of money transfer companies to EGP 10 million from EGP 5 million.
Last week, the Cabinet of ministers agreed to issue the new banking system law, which is will be presented before Parliament in the next few days for discussion and approval.
Financial position
Commenting on the new law, former board member at EG Bank Saeed Zaki stated that four banks listed on the EGX, which have retained profits, might consider hiking their capital through their retained earnings, while banks that do not have retained earnings may resort to initial public offerings (IPO) or loans.
Banks like Credit Agricole – Egypt are among the banks that do not have retained earnings and may consider bonus share distributions as another means for raising capital.
The new law would strengthen banks’ financial position, Zaki told Mubasher, noting that the previous EGP 500 million requirement was not suitable considering the current value of the local currency.
The banking sector was the only sector to surpass the economic crisis in Egypt recently, Saeed said, indicating that the new law will bolster the banking sector’s financial position.
He told Mubasher that hopes the capital increase requirement would be lifted to EGP 2 billion, instead of EGP 1.5 billion.
Meanwhile, MubasherTrade Research highlighted in a note that it viewed the new law “as logical” following the devaluation of the EGP in November 2016.
“We note that non-compliant banks might need to halt the distribution of cash dividends,” the research note showed, indicating that in the event that the new law is passed, six out of the 13 EGX-listed banks will need to increase their capital.
“We believe that small-sized unlisted banks (with less maneuvering capacity and a weaker ability to raise capital) might be potential acquisition targets by other more capital-rich banks (i.e. we could see renewed M&A activity in the sector),” MubasherTrade Research added.
Positive performance
Meanwhile, Rania Yacoub, chairperson and financial analyst at 3Way Finance, commented that the banking sector would overcome the confusion caused by the new law and continue the bullish performance in the coming period depending on the profits achieved from the latest economic decisions, especially the liberalisation of the exchange rate and the interest rate hike.
The sector’s shares are likely to see a great turnout ahead of several IPOs and the distribution of bonus shares, after banks achieved notable profits recently, she added.
Loan portfolio
On a similar note, analyst at Prime Research Taher Seif noted that the new law will contribute to increasing bank’s loan portfolios by around 10% to 20% by 2018, indicating that loan portfolios would decline this year as banks bolster their spending to hike their its capitals, instead of using such funds for investment projects.
Translated by: Mai Ezz El-Din
