Moody’s expects better performance of Egypt’s bank sector in 2018

Moody’s Corporation anticipated a better performance of the banking sector in Egypt in 2018. Despites, its negative outlook for the African banking system in 2018 that reflects high macroeconomic risks  exposing banks to asset quality pressures, reduced government support and sovereign credit risk.

In its report “Banks — Africa, 2018 Outlook”, Moody’s said, “Challenging conditions will most affect banks based in South Africa, Kenya and Tunisia. Those in Nigeria, Morocco and Egypt will fare better.”

Moody’s Investors Service has  also affirmed the Government of Egypt’s long-term issuer and senior unsecured bond ratings at B3. The outlook remains stable.

 The rating affirmation is based on Moody’s view that the B3 rating appropriately captures Egypt’s credit risk profile which maintains a staible outlook.

“Although African banks will maintain solid capital and local currency liquidity buffers in 2018, macroeconomic conditions will remain difficult in a majority of African countries,” said Constantinos Kypreos, a Moody’s Senior Vice President and the report’s co-author. “Economic growth will remain below historical levels, while political uncertainty will dampen confidence and governments’ capacity for fiscal stimulus will be limited.”

African banks face the risk of macroeconomic contagion through a range of channels, including their large holdings of government securities, which link their credit profiles to the sovereign. Risks also stem from the authorities’ reduced capacity to support banks in case of need, while problem loans are expected to edge higher as ongoing structural issues expose banks to unexpected shocks. However, gradual GDP growth suggests non-performing loans will peak in 2018.

 Banks’ capital buffers will be maintained reflecting their low balance-sheet leverage, while profitability will be stable as high provisioning charges will be compensated by income growth in line with nominal GDP and resilient margins. African banks are expected to deliver an estimated pre-tax return on equity of around 17% and return on assets of 2% in 2017, with a similar outcome forecast for 2018.