Moody's maintains positive outlook on Egyptian banks as economy improves

Operating conditions are improving for lenders in the most populous Arab country, rating agency says

Banks in Downtown Cairo. Moody's maintains positive outlook on Egyptian lenders as operating conditions improve. Dana Smillie for The National

Moody's Investors Service maintained its positive outlook for Egypt’s banking sector as North Africa's largest economy strengthens and operating conditions improve for lenders in the country.

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 said in its latest report on Egyptian banks. The inter-linkages with the country's improving credit profile amid a buoyant economy also drive Moody's positive view of the banking system.

"Accelerating growth in Egypt reflects increased public and private-sector investment, higher exports and a recovery in tourism," said Constantinos Kypreos, a senior vice president at Moody’s. "We expect balance sheet growth of around 15 per cent in 2019 and for banks to maintain ample local currency funding, high liquidity, and strong and stable profitability."

Real gross domestic product in the most populous Arab country is forecast to reach 5.5 per cent in 2019 and 5.8 per cent in 2020 fiscal years, while banking penetration is expected to expand, supporting deposit and loan growth. The Egyptian economy, which along with its banks suffered in the aftermath of the popular uprising that ousted former president Hosni Mubarak, is now recovering as foreign direct investment increases, exports rise and tourism – the main source of foreign currency for the country – improves.

Egypt’s main exporting sectors – petrochemicals, fertilisers and textiles – expanded in 2018, with exports rising 19 per cent to $25.8 billion (Dh94.7bn) during the year. Tourist arrivals rose 48 per cent to 9.8 million in 2018. Hotel occupancy in Cairo averaged 71 per cent in September 2018 from 49 per cent in December 2015, according to Moody’s.

Non-performing loan levels within the banking system are expected to remain broadly stable in view of a strong economic momentum. NPLs at Egyptian banks dropped to 4.4 per cent of total loans as of September 2018, from 19.3 per cent in 2007. However, NPL levels remain vulnerable to a future turn in the economic cycle due to large volumes of untested new loans and ongoing security risks.

Moody’s expects that credit demand and deepening financial inclusion will be supported by government schemes promoting a shift to digital from cash-based banking transactions, primarily via mobile payment services. The central bank’s initiatives to promote small business and mortgage lending, including by exempting these loans from central bank reserve requirements, will also drive growth.

“Egyptian banks' high exposure to government securities – at 32 per cent of their assets as of October 2018 – also links their creditworthiness to the sovereign's,” Moody's said.

“However, although foreign-currency funding and liquidity remains adequate, it [the banking system] is under pressure from global financial tightening as already evident by a fall in banks' foreign assets.”