COVID-19 impact: Egyptian banks face pressure on asset quality, profitability

Regulatory capital ratios are inflated by zero risk-weighting on local-currency sovereign debt, says Fitch

  
A customer exchanges U.S. dollars to Egyptian pounds in a foreign exchange office in central Cairo, Egypt, March 7, 2017. Image used for illustrative purpose.

A customer exchanges U.S. dollars to Egyptian pounds in a foreign exchange office in central Cairo, Egypt, March 7, 2017. Image used for illustrative purpose.

REUTERS/Mohamed Abd El Ghany

Egyptian banks face asset-quality deterioration and continued pressure on profitability through 2021 amid the economic fallout of the pandemic, Fitch Ratings said in a new report.

Banks’ 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,” Zeinab Abdalla, analyst at Fitch, said.

The ratings agency also expects continued pressure on operating profitability due to lower interest rates and higher loan impairment charges as borrower support measures end. Fitch said while this may not to lead to capital erosion, 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.

The average Stage 3 loans ratio for Egyptian banks was stable at 3.4 percent 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.”

Fitch expects the sector average Stage 3 loans ratio to increase to about 4 percent 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.

Meanwhile, 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.

The north African country’s economy is largely dependent on the travel and tourism, which has been severely hit by the pandemic.

The Suez Canal is a major source of hard currency as about 12 per cent of the world's trade volume passes through the canal.

(Writing by Brinda Darasha; editing by Seban Scaria)

brinda.darasha@refinitiv.com

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