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23 March 2020

COVID-19 poses downside risks to Egyptian banks

Fitch-rated Egyptian banks’ long-term issuer default ratings are at ‘B+’ with a stable outlook, in line with the sovereign rating

The 300 bp interest-rate cut by the central bank last week in addition to cumulative 450bp cuts in 2019 will squeeze the banks’ margins/Bloomberg

by Kudakwashe Muzoriwa

Fitch Ratings said that Egyptian banks’ credit profiles could come under pressure in a weaker operating environment and with an economic slowdown.

The lenders, which were set to enter into a credit expansion cycle in 2020-2021, will be impacted by the outbreak of the coronavirus and delayed CAPEX financing plans despite interest-rate cuts combined with a lack of appetite to lend to some distressed sectors will weigh on credit growth. 

Fitch stated that the asset quality of banks that are exposed to tourism, aviation and trade will be the most vulnerable to the impact of the outbreak and travel restrictions. The trade and services sectors account for around 27 per cent of total banking sector lending and 23 per cent of the GDP.

Similarly, banks with higher exposures to SMEs will also be affected given the sector’s weaker resilience to a deteriorating operating environment.

Egyptian banks’ access to foreign-currency supply might be constrained by lower tourism receipts, affected Suez Canal revenue from the global trade slowdown, weaker remittances from Egyptian expatriates in the Gulf region and foreign direct investment inflows.

Market volatility and concerns over emerging market economies may result in money outflows and could restrain the sovereign’s ability to tap capital markets for foreign currency.

Additionally, measures by the central bank to restructure credit facilities to the distressed tourism sector for three years combined with a six-month credit extension for corporates and retail is expected to provide some relief but will delay the recognition of impaired loans and understate the real level of problem loans in the sector.

Fitch said that the 300 bp interest-rate cut by the central bank last week in addition to cumulative 450bp cuts in 2019 will squeeze the banks’ margins. 

Profitability could prove highly volatile over the different interest-rate cycles given the banks’ undiversified business models and reliance on high yields on sovereign securities, which represent about two-thirds of their interest income. 

RELATED STORIES: COVID-19 Egyptian banks Fitch Ratings





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