Fitch noted that interest income is highly dependent on sovereign yields, which represent about 65% of the sector’s total interest income.
Fitch’s report said that the impact would vary depending on each bank's asset pricing power, funding structure and ability to re-price liabilities downwards.
The current overnight deposit rate, overnight lending rate, the rate of the main operation, and the discount rate are 8.25%, 9.25%, 8.75%, and 8.75%, respectively.
Egypt’s banks' NIMs are expected to come under pressure in 2021-2022 driven by the extent of potential policy rate cuts, changes in yields on sovereign debt, and any likely shifts in banks' balance-sheet structures.
The sector-average NIM was 4.1 percent in 2020 and has been resilient despite the CBE cutting policy rates by a cumulative 4% (400 base points).
NIMs were supported by yields on the 90-day treasury bills, which were kept high in 2020 at about 13% to attract back foreign portfolio investors following the global market volatility caused by the pandemic, which led to a $17 billion of capital outflows in March-April 2020.
“If yields on treasury bills fell by up to 1.5 percent (150bp), we would expect NIM compression of up to 0.7 percent (70bp). Inflation-adjusted returns on Egyptian sovereign debt are among the highest in emerging market economies. While there may be room for a reduction in yields if inflation remains broadly stable, we believe the CBE will seek to maintain positive real interest rates to retain portfolio inflows," Fitch added.
Furthermore, Fitch expected high single-digit loan growth in the Egyptian banking system in 2021, supported by lower interest rates and the CBE’s measures to boost lending.
Such measures include the CBE extending its EGP100 billion 5 percent-8 percent subsidized rates lending programme to engage more sectors and asking banks to increase small and medium-sized enterprises (SME) loans to 25 percent of their loan portfolios, which was 20 percent previously," Fitch Ratings said.
The agency also predicted low double-digit loan growth in 2022 in case that capex financing raises with recovering GDP growth.
Egyptian banks have higher profitability ratios than other peers in the region, which gives them more room to maintain adequate profitability margins and internal capital generation if interest rates are cut.
“The sector-average return on equity was 23 percent in 2020. For comparison, Gulf Cooperation Council (GCC) banking sectors have average returns on equity of 10 percent up to 17 percent and average NIMs of 2.3 percent up to 3.5 percent. Profitability is a rating strength for Egyptian banks and NIM compression, provided it is moderate, is unlikely to trigger viability ratings downgrades," Fitch concluded.