ArabFinance: Egyptian banks Viability Ratings (VRs) could come under pressure if the banks foreign assets continue to drop, Fitch Ratings revealed in a recent report.
The sector had a net foreign liabilities (NFL) position of EGP 112 billion ($7 billion) at end-November 2021, according to Central Bank of Egypt (CBE) data, compared with a net foreign assets position of EGP 107 billion at end-February 2021.
The deterioration was mainly driven by declining foreign assets. If the trend continues, the banks foreign-currency (FC) liquidity and debt service capacity could be constrained.
The sectors NFL were even wider at end-November 2021 than immediately after the surge of capital outflows in April 2020 at the start of the Covid-19 pandemic.
The deterioration in February-November 2021 was driven by a drawdown of foreign assets despite a strong recovery in foreign portfolio balances, which had increased to $32 billion at end-October 2021 from a low of $7 billion at end-April 2020.
The sector's FC lending increased modestly, which does not fully explain the drawdown on FC assets. We believe the drawdown may have been partly due to foreign assets being used to help meet the CBEs external debt obligations as the CBE drew down on some of its FC deposits at domestic banks.
At end-July 2021, the CBE had $6.8 billion maturing in three months or less, including $3 billion of Saudi deposits that were subsequently renewed.
Egypts ongoing current account deficit may have added to the pressure on banks foreign assets.
In contrast to the pressure on banks foreign assets, the CBEs official FC reserves gradually strengthened to $40 billion at end-November 2021 from $37 billion at end-June 2020, supported by the return of non-resident investments, the issuance of a $3 billion Eurobond and Egypts $3 billion special drawing rights allocation from the IMF in August 2021.
Egyptian banks balance sheets are not highly dollarised (we estimate FC liabilities account for less than 20% of sector liabilities) and are well matched by currency.
The sectors net short FC position was only 2.2% of capital at end-September 2021, well below the CBEs cap of 20%, and the average FC loans-to-deposits ratio was comfortable at 72%.
However, we believe the stock of foreign assets is a better indicator of the sectors FC liquidity as these are largely short-term placements with foreign banks and can be easily liquidated when needed.
The coverage of FC debt obligations by foreign assets was 24% at end-September 2021, down from 33% at end-2020, and is likely to have dropped further by end-November 2021.
According to the report, further pressure on banks foreign assets could develop if there is a renewed wave of sell-offs by foreign portfolio investors due to higher inflation eroding the carry trade on sovereign securities or a flight to quality away from emerging market debt triggered by Fed tapering and rising US yields.
Foreign holdings of local-currency sovereign securities dropped by $2 billion in October 2021 from an all-time high of $34 billion at end-September 2021, partially explaining the continued pressure on banks NFL positions.
Egyptian banks funding and liquidity scores, and ultimately their VRs, could come under pressure if FC liquidity tightens further. This is particularly the case for public sector banks as they are the main providers of FC for the government and public sector.
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