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Egypt’s central bank in Cairo. Pressures on Egyptian banks’ credit profiles have eased on improvements in the country’s operating environment since end, Q3 2020. Image Credit: Bloomberg

Cairo: Pressures on Egyptian banks’ credit profiles have eased on improvements in the country’s operating environment since end, Q3 2020, according to Fitch Ratings.

“We revised our outlook on the Egyptian banking sector’s operating environment to stable from negative in July, largely due to the improvement in foreign-currency (FC) liquidity,” Fitch said in a note.

Egyptian banking sector had had net foreign assets of $1.7 billion at end-June 2021. Banks’ foreign liabilities shrank to $5.3 billion at end-April 2020 after foreign investors sold their holdings of local-currency government securities at the start of the pandemic, causing $17 billion worth of portfolio outflows.

Foreign currency liquidity improved as foreign holdings of Egyptian treasuries increased to $29 billion at end-May 2021 from $10 billion at end-June 2020 and the sovereign issued $4.55 billion of Eurobonds between September 2020 and February 2021. A $5.2 billion IMF stand-by arrangement helped to restore investors’ confidence. Foreign currency remittances were also resilient in 2020, increasing 10 per cent year on year to $30 billion.

The banking sector’s net foreign assets of $1.7 billion at end-June 2021 were still below pre-pandemic levels (end-February 2020: $7.3 billion) due to higher foreign liabilities as banks borrowed more from international development finance institutions to support their foreign currency liquidity.

Repayment risks

The increase in foreign liabilities poses some repayment risks as banks’ debt-servicing capacity could come under renewed pressure from another wave of sell-offs by foreign investors. However, about 70 per cent of the sector’s external debt is long-term and banks hold adequate stocks of foreign currency liquid assets against their short-term foreign currency liabilities. Some banks have started to pre-pay their foreign currency term loans given their comfortable liquidity buffers and weak demand for FC loans, with lending geared towards working capital financing rather than capex.

We also expect banks’ foreign currency liquidity in 2021-2022 to be supported by Egypt’s expected stable current account deficit (3.2% in FY22), higher FX reserves ($40.6 billion at end-May 2021 from $36 billion at end-May 2020) and a gradual pick-up in tourism

- Fitch

Asset quality risks

Trade, textiles and tourism are among the sectors most affected by the pandemic. Banks’ asset quality has been resilient despite exposure to these sectors, and deterioration in loan quality following the expiry of the six-month credit moratorium in September 2020 has been largely contained. The sector’s Stage 3 (in IFRS 9 classification) loans ratio was stable at 3.4 per cent at end Q3 2020, although the Stage 2 loans ratio varied significantly among banks, ranging from 2 per cent to more than 30 per cent.

Some banks significantly front-loaded their provisions in 2020, leading to stronger impaired loans coverage ratios. We believe the higher Stage 2 loans ratios for some banks indicate more conservative loan classification policies rather than weaker underlying asset quality. Banks’ asset quality is also underpinned by high exposure to the sovereign through investments in treasuries and lending to public-sector entities (together representing 49 per cent of total sector assets at end-1Q21).