Cairo 14 Mar 2024:
Fitch Ratings-Dubai/London/Hong Kong-14 March 2024: The banking sector’s foreign-currency (FC) liquidity should improve significantly following Egypt’s USD35 billion deal with the United Arab Emirates (UAE), the Egyptian pound’s (EGP) devaluation of almost 40% and the announcement of an agreement on an enhanced IMF support programme worth USD8 billion, Fitch Ratings says. However, we expect pressure on banks’ capital ratios following the EGP devaluation. Overall, these developments should be neutral for Egyptian banks’ ratings, which are constrained by the sovereign’s ‘B-/Stable rating.
Egypt will receive substantial inflows of fresh financing over the next few months from UAE’s FDI package and subsequent commitments from the IMF and other multilateral and bilateral partners. This, along with the devaluation, will relieve external liquidity strains. Accordingly, we believe the banking sector’s net foreign liability (NFL) position of USD17.6 billion at end-January 2024 represents a trough and that the position will narrow significantly in 2024.
Remittances were down 30% in 2023, to USD22 billion, but if recent developments increase confidence that further large-scale devaluations are unlikely in the near term, as we expect, remittance inflows could rise, further supporting banks’ FC liquidity.
A sustained improvement in investor confidence could arise if the authorities demonstrate continued commitment to structural reform, and a durable move towards a flexible exchange-rate regime. This would be important for foreign portfolio investment (FPI). Non-resident holdings of local-currency treasury bills.
stood at USD12.6 billion at end-11M23, and we expect higher FPI inflows in 2024- 2025 should the authorities advance market-friendly structural reforms under the IMF deal. This should further support a narrowing in the banking sector’s NFL position, given the correlation between the position and non-resident holdings of domestic securities.
Better FC liquidity should support credit growth and overall credit performance, as corporates have been facing higher input costs and tight FC liquidity since 2022. We believe asset-quality risks following the devaluation are contained, due to a low share of FC lending, low currency mismatches and regulatory forbearance on SME impaired exposures. We also expect yields on local-currency sovereign securities to trend higher after the Central Bank of Egypt hiked policy interest rates by 600bp on 6 March. This should boost banks’ profitability and internal capital generation in 2024- 2025.
However, banks’ capital ratios remain highly sensitive to EGP depreciation. The sector’s common equity Tier 1 ratio declined by 140bp, partly driven by currency depreciation, when the EGP weakened by around 40% against the US dollar in 2022.
We estimate a 10% move in the exchange rate (to US dollar) results in about a 30bp change in Fitch-rated banks’ average capital ratios. Accordingly, we believe private- sector banks’ capital ratios have declined following the devaluation, but we expect them to maintain reasonable buffers above minimum regulatory requirements. Improved profitability should also support a recovery in banks’ regulatory capital ratios during 2024. Our analysis assumes a broadly stable US dollar/EGP exchange rate for the rest of 2024.
Profitability at the two largest public-sector banks – National Bank of Egypt (B- /Stable) and Banque Misr (B-/Stable), which are both weakly capitalised – improved significantly in 9M23, supporting core capital build-up. We expect their capital ratios to have been hurt by the EGP devaluation, but believe they remain compliant with minimum regulatory capital requirements.
We believe government support would be forthcoming to bolster the capital buffers of both banks and prevent capital breaches, if necessary, based on the strong record of ordinary capital support from the government in the form of subordinated EGP loans, which qualify as Tier 1 and Tier 2 regulatory capital. This is notwithstanding their Government Support Ratings (GSRs) of ‘no support’, reflecting the sovereign’s weak ability to provide FC support to banks.
