Moody’s maintains stable outlook for Egyptian banks
Move reflects strong funding and profitability
LIMASSOL, June 6: Moody’s Investors Service has maintained its stable outlook on Egypt’s banking system, reflecting the rating agency’s expectation that the country’s banks will continue to benefit from a stable deposit base, high local currency liquidity and strong profitability over the next 12-18 months.
“We expect Egypt’s gradually recovering economy to continue to provide banks with plenty of business opportunities,” says Melina Skouridou, an Assistant Vice President at Moody’s. The rating agency expects GDP growth to slow to 3.5 percent for the fiscal year ending in June 2016 (4.2 percent FY2015), but accelerate to 4.0 percent in 2017. “As a result, we anticipate domestic loan growth of around 15 percent over the next 12-18 months, although Egyptian banks’ increasing exposure to the sovereign will remain a key risk, given modest capital buffers.” Asset quality metrics are likely to improve over the outlook horizon, in Moody’s view. The rating agency expects the system’s ratio of nonperforming loans to gross loans to decline to around 6.0 percent by December 2016 from 6.8 percent in December 2015. This will likely be the result of the settlement of certain legacy cases which have lingered on Egyptian banks’ books. Asset risks, however, will remain high, especially those amongst the troubled tourismrelated borrowers. Over the longer term, government-mandated lending to small and mid- sized businesses (SME) could compromise asset quality. The Egyptian banking system’s capital buffers against asset risk are low, particularly when Moody’s adjusts for its heavy exposure to government securities.
Liquidity
On the other hand, Moody’s expects Egyptian banks to maintain their high liquidity buffers, with ample, lowcost customer deposits continuing to finance banks’ lending growth. “Migrant workers send home large flows of remittances, which will likely remain a significant driver of deposit growth over the next 12-18 months,” explains Ms. Skouridou. “In addition, deepening financial inclusion will further support deposit growth.”
However, the rating agency notes that foreign currency liquidity is under pressure, due to the severe dollar shortage, although this should partly be mitigated by increasing foreign direct investment in the medium term.
Profitabilty for Egypt’s banks will likely remain robust, with the sector’s return on average equity at 18.9 percent and return on average assets 1.3 percent as of December 2015, which compares favorably with similarly-rated banks in the North Africa and Levant region. Moody’s considers that banks’ profitability will continue to benefit from their high exposure to high yielding sovereign debt as well as from rising interest rates, central bank regulations allowing banks to finance certain SME loans from their reserves, and high lending volumes.
Finally, Moody’s considers that while the Egyptian government remains willing to support the banking system, its capacity to do so is limited. Over the past three years, the authorities’ capacity to support any bank in financial difficulty has weakened as its finances have deteriorated.