LIMASSOL —

Moody’s Investors Service has changed the outlook for Egypt’s banking system to positive from stable, as economic growth picks up, supporting credit growth, banks’ profitability and internal capital generation.

The positive outlook also reflects the strong links between the banks’ and the government of Egypt’s (B3 positive) improving credit profile. This is due to the large exposure that Egypt’s banks have to the country’s government through investments in securities and loans, which stood at 40% of total banking system assets as of June 2018.

Moody’s report, “Banking system outlook: Egypt--Accelerating economy and strong loan demand drive our positive outlook”, said one of the key drivers of Moody’s positive outlook for the Egyptian banking system is the improving operating environment, following the implementation of structural reforms that put the country on a path of sustainable and inclusive growth. Moody’s expects real GDP growth to reach 5.5% in 2019 from 4.2% in 2017, while ongoing economic and fiscal reforms will slowly nudge GDP higher.

“Increased domestic private sector investment, large infrastructure projects, as well as higher exports will drive economic growth and credit demand”, says Moody’s Assistant Vice President Melina Skouridou.

— SG

Loan quality will remain stable, as new lending is tested. Moody’s expects the formation of non-performing loans (NPL) to remain steady, and the NPL ratio to remain broadly unchanged from current levels of around 4.5% of of total loans as of March 2018, as the improvement in asset quality from legacy exposures dwindles.

Profitability will remain strong, as rising fees and commissions on new lending will support banks pre-provision profit. Loan-loss provisioning will be broadly stable for rated banks.

Egyptian banks’ capital buffers will improve only modestly as internally generated capital finances loan growth.

The largest Egyptian banks all exceed their regulatory minimum capital requirement, but their capital position is weaker than global peers. Banks’ capital will improve modestly under Moody’s base-case scenario but, is more vulnerable under the rating agency’s high-stress scenario due to losses assumed on government securities.

The banks’ funding and liquidity profiles will remain strong. The two largest government-owned banks, National Bank of Egypt SAE and Banque Misr SAE, have increased their market funding significantly, but their large liquidity buffers already offset refinancing risk. Egyptian banks will maintain high levels of liquid assets to ensure coverage of liquidity needs and deposit movements. Stable deposit funding and low loan-to-deposit ratios also support liquidity. — SG