Commercial Banks

National Bank of Egypt

Team Members

1. Amal Samir Ali 1137

2. Amira Mohamed Samir 1138

3. Asmaa Adel Hassan 1134

4. Ehdaa Refaat Elsayed 1139

5. Marwa Ossama Elmessiry 1197

6. Salma Mohammed Dehis 1255

Team Code (FI 11)

April, 2013

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Introduction

This research is developed to provide further information about Financial Institutions. It

represents a study about National Bank of Egypt (NBE); it covers a historical back ground

of the bank and its sources and uses of fund. In each sources and uses of fund, it includes

the definition of source, its type and its obligations and collaterals if any. It shows the

importance of technology and its effect on presenting valuable customer services. Also it

covers the financial analysis of bank, to know the extent to which NBE successes and

manages its operations and risk. The report ends with a conclusion and references list.

Definition of Bank

A bank is a financial institution which deals with deposits and advances and other

related services. It receives money from those who want to save in the form of deposits and

it lends money to those who need it. Bank is an establishment for custody of money, which

it pays out on customer's order (Bhatia, 2007).

National Bank of Egypt: Bank Background

National Bank of Egypt (NBE) is the oldest commercial bank in Egypt. It had been

established on June 25, 1898 with a capital of £ 1 million. NBE is one of important banks

whom reflect development in economic sector. It held equity participation in 186 projects

covering all fields of economic activities. In addition to it established some companies such

AL-Ahly Co. for land Reclamation and Cultivation, Egyptian Co. for Real estate management

and investment and Al-Ahly Financial Leasing. A bank's major role is to raise funds largely

through deposits and equity and invest them in productive assets. However, the resulting

differential interest income (interest earnings on assets minus interest costs on deposits)

will go to meet operating costs including loan provisions and provide the institution with

its net earnings. Egyptian Central Bank determines NBE’s reserve for each branch

depending on activities of the branch (NBE, 2013).

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Sources of Fund

Deposits and borrowed funds are the major sources of fund. As central bank's monetary

policy control the money supply of any bank, each bank has to compete for its share based

on service rendered to the depositor since interest is not paid on these current account

balances. Bank calculates the cost of services to make sure the value of deposits

compensate cost and provides a profit margin by calculating service charge (cost) plus

profit margin and offsetting this charge. So banks should provide the needed service at low

cost margin in order to succeed. Bank mobilizes savings in a variety of forms - savings

account, time deposit account, and certificate of deposit as follow (Selvavinayagm, 1995):

1. Savings account

Have no specific maturity date, no written contractual require from depositor about his

withdrawal funds. It is permitted by Local and Foreign Currency (NBE, 2013).

A. Local Currency: It has three types; each type differs in its interest frequency, opening

amount, prizes and holders. One example is EGP Retirement Saving which offers an

advantage to retired persons that allow pension amount be transferred to the account for

investing purpose. It is allowed only for Egyptians and interest on this account will be paid

monthly as helping holders as they took monthly salary (NBE, 2013).

B. Foreign Currency: Such as Saving Account with Prizes. It is allowed for Egyptian,

gives return annually. It has two different prizes one by US $and other by Sterling Pound £.

Each prize has different amount of US $ or £ is considered as separate deposit that can

enter draw monthly or by NBE announcement for large prizes (NBE, 2013).

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2. Deposits

1.2 Short Term Deposits: It is opened for Egyptians, Foreigners, legal persons and

Minors. It has many advantages such interest can be added to deposit balance at accrual

dates to be invested along with the principal. NBE permits deposits by different currencies

EGP, US, SR, € and £, however in different amounts and durations (NBE, 2013).

EGP 100,000 EGP Week – 2 weeks – less than one month

US 1000 $ 1-3 months – 6 months – 9 months – 1 year

2.2 Long Term Deposits: They are allowed only by Egyptian Pound (Min. 1000 EGP). It

offers monthly, quarterly, semi annually, and annually interest. In case of canceling the

deposit prior to its maturity date, an interest rate is calculated for the actual period, 2%

less than the rate at the time of booking deposit or the rate at the time of canceling deposit,

whichever is lower (NBE, 2013).

3. Certificate of Deposits

It is a deposit that provides from its face the amount of each deposit payable, either on

certain date specified in the certificate or at expiry of specified date that should be not less

than 30 days after the date of instrument. It is divided into two majors: Local and Foreign

certificates (NBE, 2013).

1.3 Foreign Certificates: have many different types, while they are somehow common

in their return which exceeds 2% above certificate rate of return. They differ in their

duration, interest frequency and denominations (NBE, 2013).

2.3 Local Certificates: Such as Platinum Certificate. Its duration is 3 years, interest

paid monthly & quarterly and minimum amount for certificate is EGP 1,000 (NBE, 2013).

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Uses of Fund

A bank’s assets are grouped into four major subcategories: (1) Cash and Balances due

from other depository institutions (2) Investment Securities, (3) Loans and Leases and

(4) Other assets. Loans are the major items on a bank’s balance sheet and generate the

largest flow of revenue income. However, loans are the least liquid asset item and the

major source of credit and liquidity risk for most banks. NBE offers two kinds of loans

which are as follow (Saunders & Cornett, 2009).

1. Personal Cash Loan

1.1 With Company undertaking to transfer salary or installment

NBE offers this type of loans for governmental and public sector employees,

petroleum sector employees and for private multinational company employees listed in

NBE. It has common minimum amount 5000 EGP and different maximum amount for

different sectors. Maximum monthly installment value varies 50% to 60% of monthly

salary. It is free life insurance with competitive interest rates (NBE, 2013).

2.1 Without Company undertaking to transfer

This type of loan is offered for the same above sectors, in addition to bankers. Loan

tenure differs from sector to another such (For petroleum sector 4 years and for

bankers 7 years). Maximum monthly installment value varies from 25% to 50% of

monthly salary. It is free life insurance with competitive interest rates and without

guarantor. Bank requires fees 2% for late payment and 3% for early settlement (NBE,

2013).

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2. Loans guaranteed by deposits, saving pools and investment

certificates

1.2 Loans guaranteed by L.E. investment certificates: 2% above the credit interest rate

of the certificate + commission 0.75% (zero point seventy five per mille) per month on the

highest debit balance (NBE, 2013).

2.2 Loans guaranteed by L.E saving pools (certificates): 2% above the credit interest

rate of the saving pool + commission 0.75% (zero point seventy five per mille) per month

on the highest debit balance (NBE, 2013).

3.2 Loans guaranteed by L.E saving books and fixed deposits: 2% above the credit

interest rate of the book or deposit + commission 0.75% (zero point seventy five per mille)

per month on the highest debit balance (NBE, 2013).

4.2 Loans guaranteed by assets: They expired after 5 years and have 13.5% interest

rate which is determined by Central Bank (NBE, 2013).

And here's a simple comparison that shows the differences between the American

system and that in the national bank of Egypt according to types of loans:

The National bank of Egypt

The American system

Types of loans

Commercial and industrial loans

Real estate loans

Individual/ Consumer loans

loans guaranteed by deposits, saving pools and investment certificates

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Loans to nonbank financial institution

State and local governments loans

Foreign banks loans

Sovereign government loans

After reviewing the differences between the two systems, hence it is easier to understand

more about the NBE’s loans conditions. Amount of loan for each kind of NBE’s loans is 80%

from the value of saving pools, certificates or assets. 2% above credit interest rate is

considered gains for the bank. After three months in case of solvency of the borrower, the

bank will contact him to know the reasons that prevent him to pay the installments. Then

bank will give him a chance for extra three months to pay, if he cannot pay the installments

the bank will close his savings pools or certificates as collateral of the loan. In addition to

NBE participates in Insurance Policies against Risk Agency.

Banking services and Technology

Advanced technology affects well many institutions, companies and others. It allows

them doing their business and functions easily and in effective cost for time and effort. NBE

started to use the technology since 2002 by offering its customers E-Payment services. This

service allows customers to buy any product/ service over the internet for organizations

request to add this service on their websites. One of the advantages of this service is that it

offers technical support for companies 24 hours/ 7 days a week. NBE is able to secure

transactions over the internet by using the latest internationally recognized security such

Verified by Visa (VBV). It is worth to mention that NBE is keen on its customers, it offers

them outstanding service such ATMs which allow them to withdraw from their accounts

with maximum amount 5000 Egyptian pound from any installed ATM machine. Also NBE

offer a service named AL-AHLI Swift, which allows transfer any desired amounts from

customer’s account to other party’s account in other bank. For continual outstanding 7

services provided by NBE, it offers good investment service to its customers. This

investment service allows customers to buy or sell securities in stock market easily

through Brokerage Company owned by NBE, in turns of gains to the bank from

commissions (NBE, 2013).

Risk Faced by Bank

Having a risk management plan is essential for any bank, as it can help preventing

disasters and losses. Central Bank of Egypt (CBE) takes then responsibility of undertaking

any tasks or measures required for applying the monetary, credit and bank policies for

guaranteeing the soundness of bank credit. Most of banks nowadays suffer from existing of

many deposits without using in useful or profitable track. NBE does not face any risk

problems, since Board of Directors of CBE sets rules for the regulations and supervision

over banks such:

1. A determination of the minimum capital adequacy requirement.

2. Determination of the liquidity and reserve ratios.

3. The rules of disclosure, and the data to be disseminated, as well as the means of

dissemination.

4. The rules concerning the maximum limit of the bonds each bank may issue or guarantee,

and the conditions of bonds issuing or guaranteeing (NBE, 2013).

Banking Supervision Departments are responsible for implementing CBE’s supervisory

objectives. These departments supervise 39 banks in Egypt as per annual supervisory plan.

They consist of seven departments such On- Site and Off- Site Supervision (NBE, 2013).

On-Site Supervision Department aims to apply effective and efficient supervision

standards through controls systems based on a risk approach. This department plays an

important role in assessing financial condition of banks and risks associated with current

and planned activities, in addition to following up with banks and verifying that

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deficiencies have been corrected. Banking supervision process is carried out by control

system that includes a mixture between the CAMELS rating system and the Risk

Assessment (NBE, 2013).

The Risk Assessment system assesses quantitative and qualitative risk inherited in

banks such credit risk and market risk and assessing bank’s quality of risk management.

While the CAMELS rating system assesses bank’s performance through capital adequacy,

asset quality, management quality, earnings quality, liquidity and funding and sensitivity to

market risk. This system ensures effectiveness of internal control of the bank and existing

and potential risks (NBE, 2013).

Off-Site Supervision Department is responsible for developing an effective risk based

approach that monitors different types and developments of risks facing banks. Also it

assesses the extent to which banks are affected by current events. It is a whistle Brower

whom allows CBE to take proactive measures to ensure the safety and soundness of the

banking sector (NBE, 2013).

Financial Analysis and Bank’s Appraisal

Financial analysis is to select the information relevant to the decision under

consideration to the total information contained in the financial statement. Then arrange

the information in a way to highlight significant relationship. Finally interpret and draw

inference and conclusions. It is useful to present complex data in financial statement in a

simple and understandable form, to know the earning capacity or profitability of any

institution and to measure the efficiency of management. Bank can do it by many methods;

this research will cover only financial analysis by using financial ratios (Bhatia, 2007).

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Cash Ratio

It is a ratio of total cash and cash equivalents to its current liabilities. It is most

commonly used as a measure of a company’s liquidity; which means how quickly a

company can repay its short-term debt. A strong cash ratio is useful to creditors when

deciding how much debt they will be willing to extend to the asking party. A cash ratio of

1.00 and above means business will be able to pay all its current liabilities in immediate

short term. However, the ratio in 2010 is 0.3029* which means that it is lower than 1, that

could be explained , the bank prefer to use the idle cash to generate profit , and it decrease

in 2011 to be 0.1811* which prove the strategy the bank prefer. This means that a normal

value of cash ratio is somewhere below 1 (Selvavinayagm, 1995).

Loans to asset Ratio

This ratio measures the total loans outstanding as a percentage of total assets. The

higher this ratio gets the lower is the liquidity of a bank. Hence, the higher the ratio, the

more risky it is for a bank for to encounter higher defaults. The higher the level of long-

term debt, the more important it is for a bank to receive positive revenue and steady cash

flow. In 2010, the percent was 59.86%* which means that more than 50% of the current

asset of the bank is financed in loans, then in 2011 it increase to be 74.39%* which means

that loans are one of the most important source of profit. It is very helpful for management

to check its debt structure and determine its debt capacity (Selvavinayagm, 1995).

Loans Deposit Ratio

This ratio is used to measure a bank’s liquidity through dividing the total bank’s

loan by its total deposits. This ratio is expressed as a percentage; as if this ratio is too high

it means that the bank may not be able to have sufficient liquidity to cover any fund

requirement and vice versa. In 2010, the rate was 33.37 %* that means that bank uses that

ratio from deposit to provide loans for companies. Then in 2011 it decreased to be

32.58%* which means that bank decided to keep a certain level of mandatory reserves,

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they may also choose to keep a percentage of their non-lending investing in short term

securities to ensure that any monies needed can be accessed in the short term

(Selvavinayagm, 1995).

Return on asset Ratio

This is an indicator of how well is a company or a bank is profitable relative to its

total assets. ROA is efficient as it shows how management is utilizing assets to generate

earning. Return on assets in 2010 was 1.22* indicates the number of cents earned on each

pound of assets, it shows the profitability on asset before tax, then it increases in 2011 to

be 1.36*, Thus higher values of return on assets show that business is more profitable

(Selvavinayagm, 1995).

Return on Equity Ratio

It reflects the amount of net income returned as a percentage of shareholder’s

equity. It is a measure of profitability as how much profit is generated from shareholders

investments. This ratio is useful as it compares the company’s profitability to other

companies of the same industry. Higher values are generally favorable meaning that bank

is efficient in generating income on new investment. In 2010, it was 0.616* it means the

profitability on equity after tax. Then in 2011, it increased to be 0.6387*, which means the

investment of the bank became better. The management, for example, can artificially

influence it when debt financing used to reduce share capital there will be an increase in

ROE even if income remains constant (Selvavinayagm, 1995).

Return on Investment Ratio

This ratio mainly measures performance, as to evaluate the efficiency of an

investment. In 2010, it was 5.63 %* refers to the proceeds obtained from selling the

investment of interest, and then it increased in 2011 to be 8.68 %*, which means the

interest received on security increased and that is a good indicator for the buyer. Return on

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investment is a very popular metric because of its versatility and simplicity. That is, if an

investment does not have a positive ROI, or if there are other opportunities with a higher

ROI, then the investment should be not be undertaken (Selvavinayagm, 1995).

Net Interest Margin

It is a performance measure as it examines how well a firm’s investment decisions

are compared to its debt situations. So; a negative value would indicate that the firm did

not make an optimal decision, simply because interest expense was greater than the

amount of returns generated by investments. NBE’s net interest margin in 2010 was -5.84

%*. However, Bank’s yield on security depends on the general level of interest rates and

the maturity distribution of the portfolio. Then in 2011 it decreased to be -5.72 %* that

means NBE would have been better off if it had used the investment funds to pay off debts

instead to making an investment. Typically, a portfolio with long-term securities earns

more than one with short-term securities, the differential accounting for lower liquidity

(Selvavinayagm, 1995).

Other Operating Income Ratio

This ratio shows the dependence of NBE on income other than (operating) interest

earnings on loans, in 2010 it was 0.54%* which represent a small rate then it slightly

increased to be 0.55%* which means that NBE depends on other operating income by that

ratio (Selvavinayagm, 1995).

(*) It refers to appendix 1 which includes any calculation of all ratios.

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Appendix 1

No. Ratio Formula 2010 2011

1 Cash ratioCash at the bank

Total deposit 0.3029 0.1811

2 Loans to asset

Loan X 100% asset 59.86% 74.39%

3 Loans deposit ratio

loan at the bank x100% total deposit 33.37% 32.58%

4 ROA

Profit before tax Average total asset 1.22 1.36

5 ROE

Net profit after tax X100% Capital+ reserve 0.616 0.6387

6 Return on loans

Interest/fees earned X100% Total loans 11.66% 9.46%

7 Return on investment

Interest on security X100%Total book value of security 5.63% 8.68%

8 Net interest margin

Interest income-interest exp.Average total asset -5.84% -5.72%

9 Other operating income

Other operating income X100% Average total asset 0.54% 0.549%

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Conclusion

Finally, this research concludes that banks as a kind of financial institutions play a

crucial role in serving country’s economy and finance some vital projects. One of Key

success factors of National bank of Egypt (NBE) is the way the bank mobilizes its savings

and deposits and how it uses that to develop its operations and handling its risks. It also

concludes that Loans are considered main use of fund in the bank while they include high

risks and requires from bank to have a good management which facilitate loans’ obligations

and guarantee repaying the amount of loan at due date. In addition to the way Central Bank

of Egypt (CBE) manage risk over other banks, in turns to that (NBE) does not face such

disasters or harmful risks. NBE uses technology well and offering its customers ultimate

services such transferring money online and ATM’s. In addition to presenting a financial

analysis of NBE by using financial ratios, this analysis reflects successful management of

bank’s operations and its profitability.

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References

Bhatia, Meeru, (2007). Comprehensive Study on Financial Analysis (M.B.A). Kurukshetra

University.

Central Bank of Egypt (CBE). Retrieved From: http://www.nbe.com.eg/en/main.aspx

National Bank of Egypt (NBE). Retrieved From:

http://www.cbe.org.eg/English/Banking+Supervision/Banking+Supervision+Departments

Saunders, Anthony & Cornett, Marcia million (2009). Financial Markets and Institutions.

McGraw- Hill 4th Edition: New York.

Selvavinayagm, (1995). Financial Analysis of Banking Institutions. FAO Investment Center,

Occasional Paper Series NO. 1.

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