Egyptian banks face further pressure from coronavirus fallout
Egyptian banks face asset-quality deterioration and continued pressure on profitability through 2021 amid the economic fallout of the pandemic, Fitch Ratings says in a new report. Capitalisation remains a credit weakness and foreign-currency liquidity is still vulnerable to external shocks. However, the sector could benefit from growth and revenue opportunities, with Egypt’s lockdowns less stringent than those in many jurisdictions, and consumer consumption and public investment more resilient.
The sector average Stage 3 loans ratio was stable at 3.4% at end-3Q20, supported by the Central Bank of Egypt’s (CBE) significant interest rate cuts to boost lending, a six-month deferral of loan repayments and flexibility on how banks classify loans. However, we believe these measures have delayed rather than prevented asset-quality deterioration.
We expect the sector average Stage 3 loans ratio to increase to about 4% by end-2021. However, the key indicators of asset-quality pressures are likely to be a higher level of restructured exposures and migration of Stage 1 loans to Stage 2. Ratios of Stage 2 loans vary significantly among banks, largely due to some banks more proactively front-loading their provisions by classifying performing loans as Stage 2 despite forbearance measures.
We expect continued pressure on operating profitability due to lower interest rates and higher loan impairment charges as borrower support measures end. We do not expect this to lead to capital erosion, but capitalisation remains a credit weakness given banks’ high exposure to the sovereign and large individual obligors. Regulatory capital ratios are inflated by the zero risk-weighting on local-currency sovereign debt.
Banks’ foreign-currency liquidity has recovered from the large sell-offs and portfolio outflows in March and April 2020 but remains vulnerable to foreign investors’ confidence in emerging-market debt and exchange-rate fluctuations.