International ratings agency Moody’s Investors Service maintained its positive outlook on the Egyptian banking system, driven by an improving operating environment, and accelerating economy, the credit rating agency announced on Monday.
According to Moody’s, Egypt’s buoyant economy will support banking penetration, deposit, and loan growth.
The credit rating agency forecasts GDP growth to reach 5.5% in fiscal year (FY) 2018/19, and 5.8 in FY 2019/20, on the back of tourism recovery and increase in investments and exports.
Furthermore, the report indicated that the ongoing economic reforms, such as new investment and bankruptcy legislation and an improved land allocation process, have contributed to Egypt’s higher World Economic Forum competitiveness ranking.
Additionally, Egypt witnessed improvements in the ease of doing business, sound domestic consumption, and confidence in the exchange rate will support corporate expansion projects.
The report indicated that exports to continue their growth trend, on the back of low labour costs, citing Egypt’s main exporting sectors (petrochemicals, fertilisers, and textiles) expanded in 2018, with exports rising 19% to $25.8bn during the year.
Tourist arrivals rose 48% to 9.8 million people in 2018. Hotel occupancy in Cairo averaged at 71% in
September 2018, up from 49% in December 2015. Continued growth, however, will depend on domestic security.
“Accelerating growth in Egypt reflects increased public and private-sector investment, higher exports,
and a recovery in tourism,” says Constantinos Kypreos, senior vice president at Moody’s Investors
However, the report indicated that economic progress is still under risk for various reasons, including high interest rates (policy interest rate at 17.25%), are depressing private-sector appetite for capital expenditure.
Additionally, tighter global financial conditions, such as rising US interest rates and investment outflows, could pressure the Egyptian pound and weaken foreign currency liquidity.
Moreover, Moody’s forecast balance sheet sees a growth of around 15% in 2019 and for banks to maintain ample local currency funding, high liquidity, and strong and stable profitability.
Consequently, banks will continue to have good access to stable, deposit-based funding, and hold large volumes of liquid assets, especially in local currency.
Moody’s expects non-performing loan (NPL) levels to remain broadly stable in view of strong economic growth, NPLs at Egyptian banks dropped to 4.4% of total loans in September 2018 (2007:19.3%).
Nevertheless, according to the credit rating agency, NPL levels remain vulnerable to a future turn in the economic cycle due to large volumes of untested new loans and ongoing security risks. Egyptian banks’ high exposure to government securities – at 32% of their assets as of October 2018 – also links their creditworthiness to the sovereign’s.
Moody’s also noted that although foreign-currency funding and liquidity remains adequate, it is under pressure from global financial tightening as already evident by a fall in banks’ foreign assets.
In regard to profitability, the report indicated that profitability in 2018 was weakened by high funding costs at state-owned banks, which had issued 18-month savings certificates paying an annual return of 20% following the currency devaluation. Nonetheless, an estimated return on equity of 21.5% still compares well with peers.
In terms of funding, Moody’s believe that deposits to remain a key funding source, citing that stable and low-cost domestic deposits, which account for 67% of bank’s total assets. Deposits from households accounted for a high 67% of total deposits as of October 2018, a credit strength.
“For 2019, we expect deposits to rise more than 12% as electronic transactions, mobile technology, and agency banking encourage new customers and higher remittances. Remittances from a loyal Egyptian diaspora increased to $26.4bn in 2018. Dollar deposits will remain broadly stable at 23%,” the report added.