Financial Risk and Financial Performance of Banks in Egypt

Abstract

This research focuses on the two main dimensions of bank performance; profitability and risk using a sample of the listed banks in Egypt. The lack of this type of research in Egypt is the main motive for this thesis, especially after years of political and economic instability in the middle east; in addition to the major regulatory reforms implemented by the Central Bank of Egypt through its banking reform program in the last few years. Therefore, this research examines the most important intra- and extra-bank profitability determinants, using data collected from the unconsolidated quarterly financial reports of the eleven banks listed consistently on the Egyptian Stock Exchange for the period (2005-2015), in addition to country data collected from Euromonitor International and Trading Economics databases. Moreover, the effects of the 2007/2008 Global Financial Crisis and the Arab Spring are considered. This is done along with estimating a panel vector auto-regression model under a generalized method of moments framework to investigate the Granger causality between two main financial risk types for banks; credit and liquidity risks. Furthermore, testing the effect of regulatory capital on bank profitability after applying Pillar I of Basel II in Egypt since 2013 is conducted through using additional data collected from Thompson Reuters databases based on the consolidated statements of the sample banks from the first quarter 2014 until the second quarter 2016. Findings of this research confirm the dynamic nature of the estimated models indicating profit persistence during the sample period, also the results show a general resilience of the sample banks to the effects of the Global Financial Crisis and the Arab Spring. Findings show that the effect of capitalization is positive when profitability is measured in terms of assets and negative when profitability is measured in terms of equity, as a result of the fall of leverage when increasing the equity to total assets ratio; while regulatory capital shows a negative relationship with bank profitability. This implies the need to be more conservative in applying further stages of Basel regulations in Egypt. Additionally, the intra-bank determinants of profitability show more significant effect than most of the extra-bank determinants. Liquidity risk, operational efficiency, and financial structure show negative relationships with bank profitability; while bank size, revenue diversification, and interest rate affect bank profitability positively. However, credit risk, economic growth, inflation, and money supply growth do not show significant effect on bank profitability in the estimated models. Finally, the results show a unidirectional Granger causality running from liquidity risk to credit risk of the sample banks, implying the importance of past values of liquidity risk in predicting future exposure to credit risk.