Fitch Ratings, in a new report has affirmed that Egyptian banks are still facing the brunt of the pandemic one-year on. Particularly, the banks are struggling with asset-quality deterioration and pressure on profitability.
According to the Ratings Agency, these problems heightened during the onset of the pandemic and are further deteriorating this year, amid the economic fallout of the pandemic. Albeit, support measures toward banks have largely been dominated by monetary policy measures.
The report notes that bank capitalization continues to remain a credit weakness. Additionally, foreign-currency liquidity still remains vulnerable to external shocks. Nonetheless, Egypt’s banking sector can benefit from growth and revenue opportunities, Fitch asserts.
This benefit can translate into more profound levels since Egypt’s lockdowns are less stringent than those in many jurisdictions, and consumer consumption and public investment more resilient.
The sector average Stage 3 loans ratio (high-risk assets) reached 3.4% at the end of third quarter of 2020. This was due to the Central Bank of Egypt’s (CBE) large interest rate cuts to stimulate bank lending, a six-month deferral of loan repayments and flexibility on how banks classify loans.
This notwithstanding, the Ratings Agency believes that these actions aforementioned have postponed rather than out rightly prevented asset-quality deterioration.
Fitch Ratings expects the sector average Stage 3 loans ratio to increase to about 4% by year-end 2021. However, the main indicators that determine asset quality pressures are likely to be at higher levels of restructured exposures and the transfer of stage 1 loans to stage 2 loan category.
Furthermore, the stage 2-type loans are widely varied across banks. Thus, largely attributed to the ability of some of the banks distributing their loan provisions. This is by classifying performing loans as Stage 2 despite forbearance measures
Other strains on Egypt’s Banking Sector
Moreover, Fitch Ratings expects continued pressure on bank’s profitability due to lower interest rates and higher loan impairment charges. This is mostly likely going to be the case as support measures to cushion borrowers comes to an end.
However, the Ratings Agency is quite doubtful that the pressure on profitability will lead to the erosion of banks’ capital.
However, Fitch asserts that capitalization remains a credit weakness given banks’ high exposure to the sovereign and large debtors. More so, regulatory capital ratios are bloated by the zero risk-weighting on local currency sovereign debt.
Also, banks’ foreign-currency liquidity has picked up once again off after the large sell offs and capital outflows in March and April 2020 when the pandemic began. Yet they remain vulnerable to foreign investors’ confidence in emerging market and exchange rate fluctuations.
On a broader economic perspective, Egypt’s bank sectors’ weaknesses reflect that of the economy. Fitch Ratings expects real GDP growth to slow to 3% in the fiscal year to end-June 2021 from 5.6% in fiscal year end-2019.
This slowdown in growth is undergirded by the negative impact on key sectors; tourism, transportation and the Suez Canal, which represent about 23% of GDP.
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