Fitch Ratings-London / Dubai: Egyptian banks face deteriorating asset quality and continued pressure on profitability until 2021 amid the economic fallout from the pandemic, Fitch Ratings says in a new report. Capitalization remains a weak credit and liquidity in foreign currency is still vulnerable to external shocks. However, the sector could benefit from growth and income opportunities, with Egyptian lockdowns less stringent than those in many jurisdictions, and consumer consumption and public investment more resilient.
The sector’s average Phase 3 loan ratio was stable at 3.4% at the end of 3Q20, supported by significant interest rate cuts by the Central Bank of Egypt (CBE) to stimulate lending, a six-month deferral of loan repayments and flexibility on how banks classify loans. However, we believe that these measures have delayed rather than prevented the deterioration in asset quality.
We expect the industry’s average Phase 3 loan ratio to increase to around 4% by the end of 2021. However, the main indicators of asset quality pressures are likely a higher level of restructured exposures and a migration of phase 1 to phase 2 loans. 2 despite the abstention measures.
We expect continued pressure on operating profitability from falling interest rates and rising loan impairment charges as borrower support measures end. We don’t expect this to lead to capital erosion, but capitalization remains credit weakness given the high exposure of banks to government and large individual debtors. Regulatory capital ratios are inflated by the zero risk weighting on local currency sovereign debt.
Banks’ foreign currency liquidity recovered after the massive sell-offs and portfolio outflows in March and April 2020, but remains vulnerable to foreign investor confidence in emerging market debt and exchange rate fluctuations.
The above article originally appeared as a post on Fitch Wire’s credit market commentary page. The original article is available on www.fitchratings.com . All opinions expressed are those of Fitch Ratings.
© Press release 2021