The banking sector outlook in Egypt has seen a steady improvement over the last one year, largely due to the strong revival in the domestic economy, according to rating agencies and analysts.
Egypt’s sovereign credit rating was upgraded by Moody’s to B3 from Caa1, earlier this month, with the ratings agency Moody’s citing a stronger growth performance, a reduction in external vulnerabilities, and a commitment to reform as the reasons behind the improved outlook.
Following the sovereign upgrade, Moody’s also upgraded to B3 from Caa1 the local-currency deposit ratings of National Bank of Egypt, Banque Misr, Banque Du Caire and Commercial International Bank (Egypt), as well as the local currency deposit ratings of Bank of Alexandria to B2 from B3. The stand-alone ratings of all five banks were also upgraded by one notch.
The improving macro data and the operating environment have boosted the banking and financial sector outlook.
“Importantly, from Moody’s perspective the stabilisation in the macroeconomic environment will be enduring, while the recent pledges of aid and investment that materialised at the development conference in March will help mitigate balance of payments risks,” said Jean-Paul Pigat, Senior Economist at Emirates NBD.
The recent foreign investments and aid pledges last month, especially the $6.5 billion in GCC aid is expected to strengthen the external position of Egyptin economy. From a balance of payments perspective, the more important issue is the speed with which FDI inflows associated with the newly announced investment projects will begin to materialise, and provide Egypt with a more stable form of long-term financing.
The International Monetary Fund has increased its forecast for Egypt’s economic growth in 2015 to 4 per cent, from 3.8 per cent in its previous assessment, it said in its World Economic Outlook (WEO) released last week.
The fund forecasts Egypt’s economy to grow by 4.3 per cent in 2016, noting that lower oil prices will reduce Egypt’s vulnerabilities as a main oil importer in the Middle East.
“Egypt’s macroeconomic stabilisation plans and wide-ranging structural reforms are expected to increase confidence, and growth is expected to rise to 4 per cent this year,” the IMF aid in the report.
It added that maintaining macroeconomic stability, generating sustainable growth and jobs require continued fiscal consolidation, steady implementation of reforms, and external financing.
“Market sentiment in Egypt has improved markedly following greater political stability and the recent implementation of several reforms, including steps to reduce subsidies, tax reform measures, approval of the new investment law, and other structural reforms to improve the business environment. Growth is picking up, although the fiscal deficit remains very wide,” said Garbis Iradian, Chief Economist, Middle East and Africa at Institute of International Finance.
Moody’s said the rating upgrades of Egyptian banks follow the improved operating environment in the country, which will benefit the banks’ business prospects and asset quality; the improved quality of the banks’ liquidity buffers; and the government’s improved capacity to support these banks, in case of need.
Moody’s expects Egypt’s improving macroeconomic performance and easing external vulnerabilities will support increased lending opportunities and sees mid-double-digit loan growth for the system over 2015.
The reduced credit risk associated with the government of Egypt has improved the quality of the banks’ government-related assets, including their liquidity reserves.
The Egyptian banks’ large exposures to government securities imply a high convergence between their credit risk profile and the sovereign’s credit quality. According to the latest available financial statements, government securities accounted for 11.2 times of NBE’s tangible common equity, 8.3 times for Banque Misr, 6.7 times for Banque Du Caire, 5.1 times for CIB, and 2.3 times for Bank of Alexandria.
From a liquidity standpoint, the linkage between the quality of the reserves and the sovereign creditworthiness is also high, with a ratio of liquid assets to total tangible assets ranging between 50 per cent and 70 per cent at the five banks. The bulk of these liquid assets are government securities.
Source : gulfnews